Washington, D.C. 20549
FORM 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12 (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR |
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007 OR |
For the fiscal year ended December 31, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OR |
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) Comission file number: 001-14862 |
Commission file number: 001-14862
(Exact Name of Registrant as Specified in its Charter)
N/A
(Translation of Registrant’sRegistrant's name into English)
Federative Republic of Brazil
(Jurisdiction of Incorporation or Organization)
Av. das Nações Unidas, 4777
São Paulo, SP—CEP 05477-000 Brazil
(Address of principal executive offices) (Zip code)
Carlos Fadigas
Braskem S.A.
Av. das Nações Unidas, 4777
São Paulo, SP—CEP 05477-000 Brazil
Telephone: + (55 11) 3576-9531
Fax: + (55 11) 3576-9532
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person
Title of each class | Name of Each Exchange on which Registered | |
Preferred Shares, Class A, no par value per share, each | New York Stock Exchange | |
represented by American Depositary Receipts |
Securities registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
The total number of issued shares of each class of stock of BRASKEMBraskem S.A. as of December 31, 20052007 was: 120,860,099149,810,870 Common Shares, no par value per share, 240,855,683298,818,675 Preferred Shares, Class A, no par value per share, and 803,066 Preferred Shares, Class B, no par value per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP | International Financial Reporting Standards as issued by the International Accounting Standards Board | |||
Other |
Indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
INTRODUCTION
All references herein to the ““real,” “reais”“reais” or “R$” are to the Brazilianreal, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “US$” are to U.S. dollars.
All references herein (1) to “we,” “us” or “our company” are references to Braskem S.A. and, its consolidated subsidiaries and jointly controlled entities, and (2) to “Braskem” are references solely to Braskem S.A.
On June 22, 2006,27, 2008, the exchange rate forreaisinto U.S. dollars was R$2.2391.6077 to US$1.00, based on the selling rate as reported by the Central Bank of Brazil (Banco Central do Brasil), or the Central Bank. The selling rate was R$1.7713 to US$1.00 at December 31, 2007, R$2.138 to US$1.00 at December 31, 2006 and the commercial selling rate was R$2.341 to US$1.00 at December 31, 2005, and the commercial selling rate was R$2.654 to US$1.00 at December 31, 2004 and R$2.889 to US$1.00 at December 31, 2003, in each case, as reported by the Central Bank. Thereal/U.S. dollar exchange rate fluctuates widely, and the selling rate at June 22, 200627, 2008 may not be indicative of future exchange rates. See “Item 3. Key Information—Exchange Rates” for information regarding exchange rates for the Brazilian currency since January 1, 2001.2003.
Solely for the convenience of the reader, we have translated some amounts included in “Summary—Summary financial and other information,” “Capitalization,” “Selected financial and other information”“Item 3. Key Information—Selected Financial Information” and elsewhere in this annual report fromreaisinto U.S. dollars using the selling rate as reported by the Central Bank at December 31, 20052007 of R$2.3411.7713 to US$1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate. Such translations should not be construed as representations that therealamounts represent or have been or could be converted into U.S. dollars as of that or any other date.
Financial Statements
Braskem Financial Statements
We maintain our books and records inreais.
Our consolidated financial statements at December 31, 20052007 and 20042006 and for each of the three years ended December 31, 2005, 2004 and 20032007 have been audited, as stated in the report appearing herein, and are included in this annual report.
We prepare our consolidated financial statements in accordance with accounting practices adopted in Brazil, or Brazilian GAAP, which are based on:
Brazilian GAAP differs in certain respects from accounting principles generally accepted in the United States, or U.S. GAAP. For a discussion of certain differences relating to these financial statements, see note 31 to our audited consolidated financial statements included elsewhere in this annual report.
Consistent with Brazilian GAAP, our audited consolidated financial statements at December 31, 20052007 and 20042006 and for the three years ended December 31, 2005, 2004 and 20032007 have been prepared in accordance with Brazilian Securities CommissionCVM Instruction No. 247/96, as amended, by Brazilian Securities Commission Instruction Nos.
269/97, 285/98 and 319/99, which we refer to collectively asor Instruction 247. Instruction 247 requires our company to proportionally consolidate jointly controlled companies that are not our subsidiaries but which we jointly control with one or more other shareholders.
Our consolidated financial statements reflect reclassifications in 2004 and 20032005 of the following items to provide a better comparison among 2005, 20042006 and 2003:2005:
Prior to March 31, 2006, we own in Petroflexproportionally consolidated the results of Politeno Indústria e Comércio S.A., or Petroflex, including the possible sale of this capital stock. In 2005,Politeno, in our management decided to maintain its investment in Petroflex. At December 31, 2005, we owned 20.1% of the total and voting share capital of Petroflex.consolidated financial statements. As a result of the Politeno Acquisition described under “Item 4. Information On The Company—History and Development of Our Company—Developments Since January 1, 2005,” we have proportionallyfully consolidated PetroflexPoliteno’s results in our consolidated financial statements at and for the year ended December 31, 2005. In previous years, we recorded our investment in Petroflex as an investment in an associated company. In order to provide a better comparison among 2005, 2004 and 2003, we have proportionally consolidated Petroflexincluded Politeno’s results in our consolidated financial statements at December 31, 2004Polyolefins segment as from April 1, 2006. Politeno merged with and for the years ended December 31, 2004 and 2003.
For U.S. GAAP purposes the effects of proportional consolidation for those companies that are not jointly controlled by all voting shareholders were eliminated.
Copesul Financial Statements
We have included separate consolidated financial statementsresults of Copesul—Companhia Petroquímica do Sul, or Copesul, in our consolidated financial statements. As a result of the Ipiranga Transaction described under “Item 4. Information on the Company—Ipiranga Transaction,” we have fully consolidated Copesul’s results in our consolidated financial statements and included Copesul’s results as a separate segment as from April 1, 2007.
Copesul and Ipiranga Química S.A., or Ipiranga Química, maintain their books and records inreais and prepare their consolidated financial statements in accordance with Brazilian GAAP.
Copesul Financial Statements
Prior to April 1, 2007, Copesul’s consolidated financial statements were proportionally consolidated into the Braskem’s consolidated financial statements under Brazilian GAAP, as described above under “—Braskem Financial Statements.” As a result of the Ipiranga Transaction and our obtaining effective management control over the 29.5% of the share capital of Copesul then owned by Ipiranga Petroquímica, we have fully consolidated the results of Copesul and its subsidiaries into our financial statements as from April 1, 2007. As a result of the completion of the first phase of the Petrobras Transaction, the minority interest in Copesul represents only 0.8% of the total share capital of Copesul.
We have included separate consolidated financial statements of Copesul in this annual report because Copesul constitutesconstituted a “significant” jointly controlled company, accounting for 49.5%85.0% of our income from continuing operations before income taxes in 2005.the three months ended March 31, 2007 and 96.6% in 2006. Copesul maintains its books and records inreais and prepares its financial statements in accordance with Brazilian GAAP.
Copesul’s consolidated financial statements at December 31, 20052007 and 20042006 and for each of the years ended
December 31, 2005, 20042007, 2006 and 20032005 included in this annual report have been audited, as stated in the report appearing herein. Copesul’s consolidated financial statements are proportionally consolidated intoat March 31, 2008 and for each of the Braskem’s consolidated financial statements under Brazilian GAAP, as described above under “—Braskem Financial Statements.”three month periods ended March 31, 2008 and 2007 included in this annual report have not been audited.
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Share Splits
Share Splits
On October 20, 2003, we authorized the split of all of our issued common shares, class A preferred shares and class B preferred shares into 20 shares for each issued share. This 20-for-one share split was effective on October 21, 2003. As a result of this share split, the ratio of our class A preferred shares to American Depository Shares, or ADSs, changed from 50 class A preferred shares per ADS to 1,000 class A preferred shares per ADS.
On March 31, 2005, we authorized the reverse split of all of our issued common shares, class A preferred shares and class B preferred shares into one share for each 250 issued shares. This reverse share split became effective on May 16, 2005. In connection with this reverse share split, we authorized a change in the ratio of our ADSs. Upon the effectiveness of our reverse share split and the ratio change, the ratio of our class A preferred shares to ADSs changed from 1,000 class A preferred shares per ADS to two class A preferred shares per ADS.
All references to numbers of shares and dividend amounts in this annual report have been adjusted to give effect to the 20-for-one share split and the one-for-250 reverse share split.
Market Share and Other Information
We make statements in this annual report about our market share in the petrochemical industry in Brazil and our production capacity relative to that of other petrochemical producers in Brazil and Latin America. We have made these statements on the basis of information obtained from third-party sources that we believe are reliable. We have calculated our Brazilian market shares with respect to specific products by dividing our domestic net sales volumes of these products by the total Brazilian domestic consumption of these products estimated by the Brazilian Association of Chemical Industry and Derivative Products (Associação Brasileira de Indústrias Químicas e de Produtos Derivados). We derive information regarding the production capacity of other companies in the Brazilian petrochemical industry and the estimated total Brazilian domestic consumption of petrochemical products principally from reports published by the Brazilian Association of Chemical Industry and Derivative Products. Although we have no reason to believe that any of this information is inaccurate in any material respect, neither we nor the initial purchasers have independently verified the production capacity, market share, market size or similar data provided by third parties or derived from industry or general publications. We derive information regarding the size of the chemical distribution industry and our market share in this industry principally from reports published by the Brazilian Chemical and Petrochemical Distributors Association (Associação Brasileira dos Distribuidores de Produtos Químicos e Petroquímicos).
Production Capacity and Sales Volume
As used in this annual report:
Rounding
We have made rounding adjustments to reach some of the figures included in this annual report. As a result, numerical figures shown as totals in some tables may not be arithmetic aggregations of the figures that precede them.
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CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements. Some of the matters discussed concerning our business operations and financial performance include forward-looking statements within the meaning of the Securities Act or the U.S. Securities Exchange Act of 1934, or the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” and similar expressions are forward-looking statements. Although we believe that these forward-looking statements are based upon reasonable assumptions, these statements are subject to several risks and uncertainties and are made in light of information currently available to us.
Our forward-looking statements may be influenced by factors, including the following:
Our forward-looking statements are not guarantees of future performance, and our actual results or other developments may differ materially from the expectations expressed in the forward-looking statements. As for forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainty of estimates, forecasts and projections. Because of these uncertainties, potential investors should not rely on these forward-looking statements.
We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.
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ITEM 1. IDENTITY OF DIRECTOR, SENIOR MANAGEMENT AND ADVISER
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
Selected Financial Information
The following selected financial data hashave been derived from our consolidated and combined financial statements.
The selected financial data at December 31, 20052007 and 20042006 and for the three years ended December 31, 20052007 have been derived from our consolidated financial statements included in this annual report. The selected financial data at December 31, 2003, 20022005, 2004 and 20012003 and for the years ended December 31, 20022004 and 2001 has2003 have been derived from our audited consolidated and combined financial statements that are not included in this annual report.
Prior to the Ipiranga Transaction, we owned 29.5% of the voting and total share capital of Copesul, and we were required, under Brazilian GAAP, to account for our interests in Copesul in our consolidated financial statements using the proportional consolidation method, including for the first three months of 2007. As a result of the Ipiranga Transaction and our obtaining effective management control over the 29.5% of the share capital of Copesul then owned by Ipiranga Petroquímica, we have fully consolidated the results of Copesul and its subsidiaries into our financial statements as from April 1, 2007. In addition, as a result of the Ipiranga Transaction, we have consolidated the results of Ipiranga Química and Ipiranga Petroquímica in our consolidated financial statements as from April 1, 2007.
Our consolidated and combined financial statements are prepared in accordance with Brazilian GAAP, which differs in certain respects from U.S. GAAP. For a discussion of certain differences relating to these financial statements, see note 31 to our audited consolidated financial statements included in this annual report.
At and for the Year Ended December 31, | ||||||||||||
2007(1) | 2007 | 2006 | 2005 | 2004 | 2003(2) | |||||||
(in millions of | (in millions ofreais, except financial ratios) | |||||||||||
US$, except | ||||||||||||
financial | ||||||||||||
ratios) | ||||||||||||
Statement of Operations Data | ||||||||||||
Brazilian GAAP: | ||||||||||||
Net sales revenue | US$9,981.0 | R$17,679.4 | R$12,992.7 | R$13,075.1 | R$12,389.5 | R$10,300.2 | ||||||
Cost of sales and services rendered | (8,152.8) | (14,441.0) | (10,792.1) | (10,361.7) | (9,223.0) | (8,224.6) | ||||||
Gross profit | 1,828.2 | 3,238.4 | 2,200.6 | 2,713.4 | 3,166.5 | 2,075.6 | ||||||
Selling, general and administrative expenses | (699.2) | (1,238.5) | (951.5) | (787.1) | (677.0) | (488.4) | ||||||
Depreciation and amortization | (270.5) | (479.1) | (385.0) | (355.6) | (359.7) | (193.5) | ||||||
Other operating income, net | 74.2 | 131.5 | 186.1 | 22.8 | 43.0 | 55.5 | ||||||
Operating income before equity accounting and financial income (expense) | 932.7 | 1,652.3 | 1,050.2 | 1,593.5 | 2,172.8 | 1,449.2 | ||||||
Results from equity accounting(3) | (60.6) | (107.3) | (28.8) | (109.8) | (107.6) | (170.5) | ||||||
Financial expenses | (101.7) | (180.1) | (1,097.9) | (675.8) | (1,307.2) | (720.8) | ||||||
Financial income | (64.1) | (113.5) | 159.5 | (33.6) | 68.6 | 9.2 | ||||||
Operating income | 706.3 | 1,251.4 | 83.0 | 774.3 | 826.6 | 567.1 | ||||||
Non-operating expenses, net | (37.9) | (67.2) | 7.1 | (25.2) | (29.8) | (4.5) | ||||||
Income before income tax and | 668.4 | 1,184.2 | 90.1 | 749.1 | 796.8 | 562.6 |
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This financial information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements in this annual report.Table of Contents
At and for the Year Ended December 31, | ||||||||||||
2007(1) | 2007 | 2006 | 2005 | 2004 | 2003(2) | |||||||
(in millions of | (in millions ofreais, except financial ratios) | |||||||||||
US$, except | ||||||||||||
financial | ||||||||||||
ratios) | ||||||||||||
social contribution (current and deferred) and minority interest | ||||||||||||
Income tax and social contribution (current and deferred) | (212.8) | (377.0) | 12.8 | (177.3) | (85.1) | (121.3) | ||||||
Income before profit sharing and minority interest | 455.6 | 807.2 | 102.9 | 571.8 | 711.7 | 441.3 | ||||||
Profit sharing | (10.6) | (18.7) | — | — | — | — | ||||||
Income before minority interest | 445.0 | 788.5 | 102.9 | 571.8 | 711.7 | 441.3 | ||||||
Minority interest | (136.0) | (240.9) | (1.6) | 54.0 | (24.6) | (226.2) | ||||||
Net income | US$309.0 | R$547.6 | R$101.3 | R$625.8 | R$687.1 | R$215.1 | ||||||
Number of shares outstanding at year end, excluding treasury shares (in thousands): | ||||||||||||
Common shares | 149,810 | 123,492 | 120,860 | 120,860 | 102,432 | |||||||
Class A preferred shares | 282,223 | 231,744 | 240,393 | 240,373 | 170,379 | |||||||
Class B preferred shares | 803 | 803 | 803 | 842 | 916 | |||||||
Net income (loss) per share at year end | 0.71 | 1.27 | 0.28 | 1.73 | 1.90 | 0.79 | ||||||
Net income (loss) per ADS at year end | 1.42 | 2.53 | 0.57 | 3.46 | 3.80 | 1.57 | ||||||
Dividends declared per share: | ||||||||||||
Common shares | 0.36 | 0.64 | — | 0.90 | 0.56 | — | ||||||
Class A preferred shares | 0.36 | 0.64 | 0.16 | 0.90 | 0.56 | — | ||||||
Class B preferred shares | 0.36 | 0.64 | 0.16 | 0.56 | 0.56 | — | ||||||
Dividends declared per ADS | 0.73 | 1.29 | 0.32 | 1.80 | 1.12 | — | ||||||
U.S. GAAP: | ||||||||||||
Net income (loss) for the year | US$ 82.2 | R$ 145.6 | R$161.6 | R$741.2 | R$843.1 | R$378.1 | ||||||
Basic earnings (loss) per share (weighted average): | ||||||||||||
Common shares | 1.51 | 2.68 | 0.13 | 2.05 | 2.63 | 1.41 | ||||||
Class A preferred shares | 1.58 | 2.79 | 0.59 | 2.05 | 2.69 | 1.37 | ||||||
Class B preferred shares | 1.55 | 2.75 | 0.63 | 0.63 | 0.56 | 0.44 | ||||||
Basic earnings (loss) per ADS | ||||||||||||
(weighted average) | 3.15 | 5.58 | 1.18 | 4.10 | 5.38 | 2.74 | ||||||
Diluted earnings (loss) per share | ||||||||||||
(weighted average): | ||||||||||||
Common shares | 1.56 | 2.76 | 0.13 | 1.95 | 2.40 | 1.41 | ||||||
Class A preferred shares | 1.58 | 2.79 | 0.59 | 1.95 | 2.40 | 1.37 | ||||||
Class B preferred shares | 1.55 | 2.75 | 0.63 | 0.63 | 0.56 | 0.44 | ||||||
Diluted earnings (loss) per ADS (weighted average) | 3.03 | 5.36 | 1.18 | 3.90 | 4.80 | 2.40 | ||||||
Balance Sheet Data | ||||||||||||
Brazilian GAAP: | ||||||||||||
Cash, cash equivalents and other investments | US$1,207.5 | R$2,138.8 | R$1,961.0 | R$2,281.5 | R$1,815.6 | R$1,221.2 | ||||||
Short-term trade accounts receivable | 845.1 | 1,497.0 | 1,594.9 | 1,493.3 | 1,630.6 | 1,241.0 | ||||||
Short-term inventories | 1,278.3 | 2,264.3 | 1,767.3 | 1,567.4 | 1,562.4 | 1,092.3 | ||||||
Property, plant and equipment, net | 4,744.6 | 8,404.1 | 6,688.7 | 6,364.4 | 5,830.4 | 5,090.9 | ||||||
Total assets | 11,794.7 | 20,892.0 | 16,304.3 | 15,590.8 | 15,050.4 | 14,005.6 |
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At and for the year ended December 31, | ||||||||||||||||||||||||
2005(1) | 2005 | 2004 | 2003(2) | 2002(2)(3) | 2001(2)(3) | |||||||||||||||||||
(in millions of US$, except financial ratios) | (in millions ofreais, except financial ratios) | |||||||||||||||||||||||
Statement of Operations Data | ||||||||||||||||||||||||
Brazilian GAAP: | ||||||||||||||||||||||||
Net sales revenue | US$ | 5,585.3 | R$ | 13,075.1 | R$ | 12,389.5 | R$ | 10,300.2 | R$ | 7,576.6 | R$ | 4,459.5 | ||||||||||||
Cost of sales and services rendered | (4,426.2 | ) | (10,361.7 | ) | (9,223.0 | ) | (8,224.6 | ) | (6,175.5 | ) | (3,637.6 | ) | ||||||||||||
Gross profit | 1,159.1 | 2,713.4 | 3,166.5 | 2,075.6 | 1,401.1 | 821.9 | ||||||||||||||||||
Selling, general and administrative expenses | (336.2 | ) | (787.1 | ) | (677.0 | ) | (488.4 | ) | (577.7 | ) | (210.3 | ) | ||||||||||||
Investment in associated companies, net(4) | (46.9 | ) | (109.8 | ) | (107.6 | ) | (170.5 | ) | (251.7 | ) | (214.3 | ) | ||||||||||||
Depreciation and amortization | (151.9 | ) | (355.6 | ) | (359.7 | ) | (193.5 | ) | (222.4 | ) | (111.3 | ) | ||||||||||||
Financial expenses | (288.7 | ) | (675.8 | ) | (1,307.2 | ) | (720.8 | ) | (3,481.5 | ) | (801.2 | ) | ||||||||||||
Financial income | (14.4 | ) | (33.6 | ) | 68.6 | 9.2 | 619.6 | 294.7 | ||||||||||||||||
Zero-rated IPI credit | — | — | — | — | 1,030.1 | — | ||||||||||||||||||
Other operating income, net | 9.7 | 22.8 | 43.0 | 55.5 | 102.6 | 103.3 | ||||||||||||||||||
Operating income (loss) | 330.7 | 774.3 | 826.6 | 567.1 | (1,379.9 | ) | (117.2 | ) | ||||||||||||||||
Non-operating expenses, net | (10.8 | ) | (25.2 | ) | (29.8 | ) | (4.5 | ) | (98.0 | ) | (120.8 | ) | ||||||||||||
Income (loss) before income tax and social contribution (current and deferred) and minority interest | 319.9 | 749.1 | 796.8 | 562.6 | (1,477.9 | ) | (238.0 | ) | ||||||||||||||||
Income tax and social contribution (current and deferred) | (75.8 | ) | (177.4 | ) | (85.1 | ) | (121.3 | ) | (89.8 | ) | (77.6 | ) | ||||||||||||
Income (loss) before minority interest | 244.1 | 571.7 | 711.7 | 441.3 | (1,567.7 | ) | (315.6 | ) | ||||||||||||||||
Minority interest | 23.1 | 54.1 | (24.6 | ) | (226.2 | ) | 189.0 | (108.9 | ) | |||||||||||||||
Net income (loss) | US$ | 267.2 | R$ | 625.8 | R$ | 687.1 | R$ | 215.1 | R$ | (1,378.7 | ) | R$ | (424.5 | ) | ||||||||||
Number of shares outstanding at year end, excluding treasury shares (in thousands): Common shares Class A preferred shares Class B preferred shares Net income (loss) per share at year end Net income (loss) per ADS at year end Dividends declared per share: Common shares Class A preferred shares Class B preferred shares Dividends declared per ADS U.S. GAAP: Net sales Gross profit Operating Income Net income (loss) for the year Basic earnings (loss) per share (weighted average): Common shares Class A preferred shares Class B preferred shares Basic earnings (loss) per ADS (weighted average) Diluted earnings (loss) per share (weighted average): Common shares Class A preferred shares Class B preferred shares Diluted earnings (loss) per ADS (weighted average) Balance Sheet Data Brazilian GAAP: Cash, cash equivalents and other investments Short-term trade accounts receivable Short-term inventories Property, plant and equipment, net Total assets Short-term loans and financing (including current portion of long-term debt) Short-term debentures Short-term related party debt Long-term loans and financing Long-term debentures Long-term related party debt Minority interest Share capital Shareholders’ equity U.S. GAAP Total assets Shareholders’ equity Other Financial Information Brazilian GAAP: Cash Flow Data: Net cash provided by (used in): Operating activities Investing activities Financing activities Other Information: Capital expenditures: Property, plant and equipment Investments in other companies At and for the year ended December 31, 2005(1) 2005 2004 2003(2) 2002(2)(3) 2001(2)(3) (in millions of
US$, except
financial
ratios) (in millions ofreais, except financial ratios) 120,860 120,860 102,432 98,087 51,735 240,860 240,373 170,379 168,491 86,371 803 842 916 916 916 0.74 1.73 1.90 0.79 (5.15 ) (3.05 ) 1.48 3.46 3.80 1.57 (10.31 ) (6.11 ) 0.38 0.90 0.56 — — 0.43 0.38 0.90 0.56 — 0.13 0.52 0.24 0.56 0.56 — 0.13 0.52 0.77 1.80 1.12 — — 1.04 US$ 5,129.3 R$ 12,007.8 R$ 11,644.1 R$ 9,454.8 R$ 7,071.8 R$ 4,236.0 1,003.4 2,349.0 2,704.1 1,792.3 1,151.0 717.6 483.2 1,131.2 1,816.9 1,316.9 1,573.3 527.7 314.9 737.1 887.8 378.1 (1,144.0 ) (471.0 ) 0.87 2.04 2.77 1.41 (11.93 ) (6.68 ) 0.87 2.04 2.83 1.37 — — 0.27 0.63 0.56 0.44 — — 1.74 4.08 5.66 2.74 — — 0.83 1.94 2.54 1.41 (11.93 ) (6.68 ) 0.83 1.94 2.54 1.37 — — 0.27 0.63 0.56 0.44 — — 1.66 3.88 5.08 2.40 — — US$ 974.6 R$ 2,281.5 R$ 1,815.6 R$ 1,221.2 R$ 821.0 R$ 513.2 637.9 1,493.3 1,630.6 1,241.0 959.0 484.1 669.6 1,567.5 1,562.4 1,092.3 889.1 667.8 2,547.7 5,964.2 5,457.6 5,090.9 5,296.7 4,429.7 6,659.9 15,590.8 15,050.4 14,005.6 13,898.2 9,555.3 382.3 895.0 1,785.9 2,764.1 2,746.1 1,966.4 4.0 9.3 5.0 353.4 32.1 26.2 1.3 3.1 — 5.5 8.2 88.7 1,220.6 2,857.5 3,059.6 3,628.0 3,891.6 3,101.7 683.2 1,599.3 1,167.9 1,143.0 1,190.2 473.6 1.3 3.0 115.8 177.6 189.3 626.7 51.8 121.2 203.1 554.4 433.1 738.0 1,453.7 3,403.0 3,403.0 1,887.4 1,845.4 1,201.6 1,937.5 4,535.8 4,183.7 2,112.6 1,821.8 1,729.0 US$ 5,886.0 R$ 13,779.2 R$ 12,821.0 R$ 11,058.2 R$ 10,531.7 R$ 7,803.0 1,308.7 3,063.6 2,588.9 7.8 (415.2 ) 291.4 US$ 734.5 R$ 1,719.4 R$ 1,916.0 R$ 596.9 R$ 790.0 R$ 1,453.9 (447.7 ) (1,048.0 ) (1,014.4 ) (469.4 ) (646.7 ) (862.2 ) (140.8 ) (329.7 ) 166.0 379.1 (237.2 ) (404.9 ) US$ 333.5 R$ 780.7 R$ 442.2 R$ 223.7 R$ 419.9 R$ 318.0 14.5 34.0 23.6 71.7 13.1 1,172.3
Operating Data(5): Ethylene: Domestic sales volume (in thousands of tons) Average domestic price per ton (in R$) Propylene: Domestic sales volume (in thousands of tons) Average domestic price per ton (in R$) Polyethylene(6): Domestic sales volume (in thousands of tons) Average domestic price per ton (in R$) Polypropylene(6): Domestic sales volume (in thousands of tons) Average domestic price per ton (in R$) PolyvinylchlorideC(7): Domestic sales volume (in thousands of tons) Average domestic price per ton (in R$) Number of employees (at period end) At and for the Year Ended December 31, 2005 2004 2003 2002 2001 1,169.8 1,098.9 1,047.3 994.8 1,064.8 2,204 2,095 1,655 1,292 1,135 497.5 446.8 403.4 415.2 421.1 2,132 1,833 1,477 1,106 829 502.3 498.7 446.1 491.7 199.3 3,072 2,987 2,567 2,007 2,114 419.9 418.5 374.9 395.1 140.4 3,344 3,155 2,689 1,931 1,969 378.9 394.4 342.4 350.1 125.9 2,747 3,042 2,390 2,034 1,612 3,262 2,996 2,868 2,817 1,424
At and for the Year Ended December 31, | ||||||||||||
2007(1) | 2007 | 2006 | 2005 | 2004 | 2003(2) | |||||||
(in millions of | (in millions ofreais, except financial ratios) | |||||||||||
US$, except | ||||||||||||
financial | ||||||||||||
ratios) | ||||||||||||
Short-term loans and financing (including current portion of long-term debt)(4) | 603.2 | 1,068.4 | 653.9 | 1,120.4 | 1,808.3 | 2,764.1 | ||||||
Short-term debentures | 63.0 | 111.6 | 1,157.7 | 9.3 | 5.0 | 353.4 | ||||||
Short-term related party debt | — | — | — | 3.1 | — | 5.5 | ||||||
Long-term loans and financing(4) | 3,614.2 | 6,401.9 | 3,935.8 | 3,261.6 | 3,261.4 | 3,628.0 | ||||||
Long-term debentures | 451.6 | 800.0 | 982.2 | 1,599.3 | 1,167.9 | 1,143.0 | ||||||
Long-term related party debt | — | — | 4.8 | 3.0 | 115.8 | 177.6 | ||||||
Minority interest | 337.6 | 598.0 | 21.8 | 121.2 | 203.1 | 554.4 | ||||||
Share capital | 2,620.1 | 4,641.0 | 3,508.3 | 3,403.0 | 3,403.0 | 1,887.4 | ||||||
Shareholders’ equity | 3,250.2 | 5,757.0 | 4,311.9 | 4,535.8 | 4,183.7 | 2,112.6 | ||||||
U.S. GAAP | ||||||||||||
Total assets | US$ 13,195.45 | R$ 23,373.1 | R$14,890.7 | R$13,634.0 | R$12,671.7 | R$11,058.2 | ||||||
Shareholders’ equity | 2,840.79 | 5,031.9 | 2,966.8 | 2,918.4 | 2,439.6 | 7.8 | ||||||
Other Financial Information | ||||||||||||
Brazilian GAAP: | ||||||||||||
Cash Flow Data: | ||||||||||||
Net cash provided by (used in): | ||||||||||||
Operating activities | US$1,351.5 | R$2,393.8 | R$405.3 | R$1,719.4 | R$1,916.0 | R$596.9 | ||||||
Investing activities | (2,019.5) | (3,577.1) | (1,213.1) | (1,048.0) | (1,014.4) | (469.4) | ||||||
Financing activities | 861.7 | 1,526.3 | 219.2 | (329.7) | 166.0 | 379.1 | ||||||
Other Information: | ||||||||||||
Capital expenditures: | ||||||||||||
Property, plant and equipment | US$775.9 | R$1,374.4 | R$953.0 | R$930.2 | R$704.4 | R$223.7 | ||||||
Investments in other companies | 650.2 | 1,151.7 | 222.7 | 34.0 | 23.6 | 71.7 |
At and for the Year Ended December 31, | ||||||||||
2007 | 2006 | 2005 | 2004 | 2003 | ||||||
Operating Data(5): | ||||||||||
Ethylene: | ||||||||||
Domestic sales volume (in thousands of tons) | 2,068.4 | 1,108.5 | 1,169.8 | 1,098.9 | 1,047.3 | |||||
Average domestic price per ton (in R$) | 2,333 | 2,282 | 2,204 | 2,095 | 1,655 | |||||
Propylene: | ||||||||||
Domestic sales volume (in thousands of tons) | 945.1 | 413.0 | 497.5 | 446.8 | 403.4 | |||||
Average domestic price per ton (in R$) | 2,164 | 2,110 | 2,132 | 1,833 | 1,477 | |||||
Polyethylene: | ||||||||||
Domestic sales volume (in thousands of tons) | 952.5 | 672.0 | 502.3 | 498.7 | 446.1 | |||||
Average domestic price per ton (in R$) | 3,552 | 3,276 | 3,072 | 2,987 | 2,567 | |||||
Polypropylene: | ||||||||||
Domestic sales volume (in thousands of tons) | 573.3 | 453.2 | 419.9 | 418.5 | 374.9 | |||||
Average domestic price per ton (in R$) | 3,458 | 3,344 | 3,344 | 3,155 | 2,689 | |||||
PVC: | ||||||||||
Domestic sales volume (in thousands of tons) | 464.9 | 400.4 | 378.9 | 394.4 | 342.4 | |||||
Average domestic price per ton (in R$) | 2,616 | 2,518 | 2,747 | 3,042 | 2,390 | |||||
Number of employees (at period end) | 4,783 | 3,494 | 3,262 | 2,996 | 2,868 | |||||
(1) | Translated for convenience only using the selling rate as reported by the Central Bank at December 31, |
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(2) | Does not give effect to reclassification of |
(3) |
(4) | Includes quotas (i.e., shares) subject to mandatory redemption at and prior to December 31, 2006. Prior to January 1, 2006, we recorded quotas subject to mandatory redemption as a separate line item of our balance sheet and not as part of loans and financing. Accordingly, short-term loans and financing (including current portion of long-term debt) at December 31, 2005 and 2004 reflect the reclassification of quotas subject to mandatory redemption in the amount of R$225.4 million and R$22.4 million, respectively, and long-term loans and financing at December 31, 2005 and 2004 reflect the reclassification of quotas subject to mandatory redemption in the amount of R$404.1 million and R$201.8 million, respectively. |
(5) | Including intra-company sales within |
Exchange Rates
Prior to March 14, 2005, there were two principal foreign exchange markets in Brazil:
Most trade and financial foreign-exchange transactions were carried out on the commercial rate exchange market. The floating rate exchange market generally applied to transactions to which the commercial market rate did not apply.
On March 4, 2005, the National Monetary Council (Conselho(Conselho Monetário Nacional)Nacional) enacted Resolution No. 3,265, as well as additional regulations, that consolidated the two foreign exchange markets into a single foreign exchange market, effective as of March 14, 2005, in order to make foreign exchange transactions more straight-forwardstraightforward and efficient. Consequently, all foreign exchange transactions in Brazil are now carried out in this single foreign exchange market through authorized financial institutions. We cannot predict the impact of the enactment of any new regulations on the foreign exchange market.
Foreign exchange rates continue to be freely negotiated, but may be influenced from time to time by Central Bank intervention. From March 1995 through January 1999, the Central Bank allowed the gradual devaluationdepreciation of therealagainst the U.S. dollar. In January 1999, the Central Bank allowed thereal/U.S. dollar exchange rate to float freely. Since then, thereal/U.S. dollar exchange rate has been established mainly by the Brazilian interbank market and has fluctuated considerably. From December 31, 2000 through December 31, 2002, therealdepreciated by 44.6%80.6% against the U.S. dollar. From December 31, 2002 through December 31, 2005,2007, therealappreciated by 50.1%49.9% against the U.S. dollar. At June 22, 2006,27, 2008, the selling rate for U.S. dollars was R$2.2391.6077 per US$1.00. In the past, the Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to allow therealto float freely or will intervene in the exchange rate market through a currency band system or otherwise, or that the exchange market will not be volatile as a result of political or economic instability or other factors. We also cannot predict whether therealwill depreciate or appreciate in value in relation to the U.S. dollar in the future.
8
The following table shows the commercial selling rate or selling rate, as applicable, for U.S. dollars for the periods and dates indicated. The information in the “Average” column represents the average of the exchange rates on the last day of each month during the periods presented.
Reaisper U.S. Dollar | ||||||||
Year | High | Low | Average | Period End | ||||
2003 | R$3.662 | R$2.822 | R$3.071 | R$2.889 | ||||
2004 | 3.205 | 2.654 | 2.909 | 2.654 | ||||
2005 | 2.762 | 2.163 | 2.413 | 2.341 | ||||
2006 | 2.371 | 2.059 | 2.176 | 2.138 | ||||
2007 | 2.156 | 1.733 | 1.948 | 1.771 |
Reaisper U.S. Dollar | ||||
Month | High | Low | ||
December 2007 | R$1.823 | R$1.762 | ||
January 2008 | 1.830 | 1.741 | ||
February 2008 | 1.768 | 1.672 | ||
March 2008 | 1.749 | 1.670 | ||
April 2008 | 1.753 | 1.657 | ||
May 2008 | 1.629 | 1.695 | ||
June 2008 (through June 27) | 1.643 | 1.595 |
Reais per U.S. dollar | ||||||||||||
Year | High | Low | Average | Period end | ||||||||
2001 | R$ | 2.801 | R$ | 1.936 | R$ | 2.353 | R$ | 2.320 | ||||
2002 | 3.995 | 2.271 | 2.998 | 3.533 | ||||||||
2003 | 3.662 | 2.822 | 3.071 | 2.889 | ||||||||
2004 | 3.205 | 2.654 | 2.909 | 2.654 | ||||||||
2005 | 2.762 | 2.163 | 2.413 | 2.341 |
Reais per U.S. Dollar | ||||||
Month | High | Low | ||||
December 2005 | R$ | 2.374 | R$ | 2.180 | ||
January 2006 | 2.346 | 2.211 | ||||
February 2006 | 2.222 | 2.118 | ||||
March 2006 | 2.224 | 2.107 | ||||
April 2006 | 2.154 | 2.089 | ||||
May 2006 | 2.371 | 2.059 |
Source:Central Bank
Risk Factors
Risks Relating to Our Company and the Petrochemical Industry
The cyclical nature of the petrochemical industry may reduce our net sales revenue and gross margin.
The Brazilian petrochemical industry, including the markets in which we compete, is cyclical and sensitive to changes in supply and demand that are, in turn, affected by political and economic conditions in Brazil and elsewhere. This cyclicality may reduce our net sales revenue and gross margin. In particular:
The global petrochemical industry is also cyclical. Historically, the international petrochemical markets have experienced alternating periods of limited supply, which have caused prices and profit margins to increase, followed by expansion of production capacity, which has resulted in oversupply and reduced prices and profit margins. The Brazilian petrochemical industry has become increasingly integrated with the global petrochemical industry for a number of reasons, including increased demand for, and consumption of, petrochemical products in Brazil and the ongoing integration of regional and world markets for commodities. We establish the prices for the products we sell in Brazil with reference to international market prices. Our net sales revenue and gross margin are increasingly linked to global industry conditions that we cannot control.
We face competition from producers of polyolefins, vinyls and other petrochemical products.
We face competition in Brazil from Brazilian and international producers of polyethylene, polypropylene, vinyls and other petrochemical products. In addition, we generally set the prices for our second generation products with reference to the prices charged for these products by foreign producers in international markets. We anticipate that we may experience increasingly intense competition from other producers of polyolefins and vinyls products, both in Brazil and in selected foreign markets in which we sell these products. Many of our foreign competitors are substantially larger and have substantially greater financial, manufacturing, technological and marketing resources than our company.
9
We face significant competition in the polyethylene market. Rio Polímeros S.A., or Rio Polímeros, a Brazilian petrochemical company, commenced operations of a major petrochemical plant in Brazil in 2005. The maximum annual capacity of this plant is 520,000 tons of ethylene, 75,000 tons of propylene and 540,000 tons of polyethylene. In addition, Suzano Petroquímica S.A., or Suzano, expanded its annual polypropylene production capacity by 60,000 tons in July 2006, and Solvay Indupa do Brasil S.A., or Solvay, expanded its annual polyvinylchloride, or PVC, production capacity in Brazil by 35,000 tons in December 2005. Actions by our competitors, including any future increases in their capacity, may make it increasingly difficult for us to maintain our domestic market share in the thermoplastic products we produce (polyethylene, polypropylene and PVC).
Higher naphtha costs would increase our cost of sales and services rendered and may reduce our gross margin and negatively affect our overall financial performance.
Naphtha, a crude oil derivative, is the principal raw material of our Basic Petrochemicals Unit and Copesul and, indirectly, of our other business units. Naphtha accounted, directly and indirectly, for approximately 76.3% of our consolidated cost of sales and services rendered in 2007. The price of naphtha supplied by Petróleo Brasileiro S.A.—Petrobras, or Petrobras, is linked to the Amsterdam-Rotterdam-Antwerp market price of naphtha and to thereal/U.S. dollar exchange rate. The price of naphtha that we purchase from other international suppliers is also linked to the Amsterdam-Rotterdam-Antwerp market price. The Amsterdam-Rotterdam-Antwerp market price of naphtha fluctuates primarily based on changes in the U.S. dollar-based price of crude oil in the international markets.
During 2007, the average price of naphtha in U.S. dollars increased by 19.7% to US$676.05 per ton in 2007 from US$564.74 per ton in 2006. The U.S. dollar price of naphtha was volatile during 2007, ranging from a low of US$509.66 per ton in January 2007 to a high of US$837.53 per ton in December 2007. Since December 31, 2007, the price of naphtha in U.S. dollars has increased to US$1,092.85 per ton at June 27, 2008. The price of naphtha may continue its upward trend or thereal may depreciate significantly in the future. Any increase in naphtha costs would reduce our gross margin and negatively affect our overall financial performance to the extent that we are unable to pass on these increased costs to our customers and could result in reduced sales volumes of our products.
We do not hedge against changes in naphtha prices, so that we are exposed to fluctuations in the price of our primary raw material.
We currently do not hedge our exposure to fluctuations in naphtha prices, which are linked to thereal/U.S. dollar exchange rate. Although we attempt to pass on increases in naphtha prices through higher prices for our products, in periods of high volatility in the U.S. dollar price of naphtha or thereal/U.S. dollar exchange rate, there is usually a lag between the time that the U.S. dollar price of naphtha increases or the U.S. dollar appreciates and the time that we may effectively pass on those increased costs inreaisto our customers in Brazil. As a result, if the U.S. dollar price of naphtha increases precipitously or therealdepreciates precipitously against the U.S. dollar in the future, we may not immediately be able to pass on all of the corresponding increases in our naphtha costs to our customers in Brazil, which would likely reduce our gross margin and net income.
We depend on Petrobras to supply us with the substantial portion of our naphtha requirements.
Petrobras currently is the only Brazilian supplier of naphtha and supplied 61.1% of the naphtha consumed by our company in 2007. Petrobras produces most of the naphtha it sells to us and imports the balance. Our production volume and net sales revenue would likely decrease and our overall financial performance would likely be negatively affected in the event of:
10
In addition, although regulatory changes have ended Petrobras’ monopoly in the Brazilian naphtha market and have allowed us to import naphtha, any reversal in the continuing deregulation of the oil and gas industry in Brazil could increase our production costs.
Our Polyolefins, Ipiranga Petroquímica and Vinyls Units depend on our Basic Petrochemicals Unit and Copesul to supply them with their ethylene and propylene requirements.
Our Basic Petrochemicals Unit is the only supplier of ethylene to our Vinyls Unit; our Basic Petrochemicals Unit and Copesul are the only suppliers of ethylene and propylene to our Polyolefins Unit; and Copesul is the only supplier of ethylene and propylene to Ipiranga Petroquímica. Because the cost of storing ethylene and propylene is substantial and there is inadequate infrastructure in Brazil to permit the importation of large quantities of these products, our production volumes of, and net sales revenue from, vinyls and polyolefins products would decrease, and our overall financial performance would be negatively affected, in the event of:
Any downgrade in the ratings of our company or our debt securities would likely result in increased interest and other financial expenses related to our borrowings and debt securities and could reduce our liquidity.
Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., or Standard & Poor’s, Moody’s Investors Service, or Moody’s and Fitch, Inc., or Fitch, maintain ratings of our company and our debt securities. Currently, Standard & Poor’s, Moody’s and Fitch maintain ratings of our company on a local and a global basis. Standard & Poor’s maintains a rating of our company on a local basis of “br AA+/Stable Outlook,” Moody’s maintains a rating of our company on a local basis of “Aa2.br/Stable Outlook” and Fitch maintains a local rating for our company of “AA (bra)/Positive Outlook.” On a global basis, Standard & Poor’s maintains a local currency rating for our company of “BB+ (stable)” and a foreign currency rating for our company of “BB+ (stable),” Moody’s maintains a local currency rating for our company of “Ba1” and a foreign currency rating for our company of “Ba1” and Fitch maintains a local currency rating for our company of “BB+/Positive Outlook” and a foreign currency rating for our company of “BB+/Positive Outlook.” Any decision by these or other rating agencies to downgrade the ratings of our company or of our debt securities in the future would likely result in increased interest and other financial expenses relating to our borrowings and debt securities and could significantly reduce our ability to obtain such financing on satisfactory terms or in amounts required by us and our liquidity.
11
Some of our shareholders may have the ability to determine the outcome of corporate actions or decisions, which could affect the holders of our class A preferred shares and the ADS.
Odebrecht S.A., or Odebrecht, a member of a group of companies controlled by the Odebrecht family, which we refer to as the Odebrecht Group, holds, directly and indirectly, 60.3% of our voting share capital and Petrobras holds, directly and indirectly, 30.0% of our voting share capital. Designees of Odebrecht constitute a majority of the members of our board of directors, and Petrobras and Petrobras Química S.A., or Petroquisa, a subsidiary of Petrobras, have veto and other rights under the Petrobras Shareholders’ Agreement as described under “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders—Shareholders Agreements.” As a result, Odebrecht, Petrobras and Petroquisa will have the ability to determine the outcome of major corporate actions or decisions requiring the approval of our shareholders or our board of directors, which could affect the holders of the our class A preferred shares and the ADS.
We may face conflicts of interest in transactions with related parties.
We maintain trade accounts receivable and current and long-term payables with some of our affiliates and other related parties, including Petrobras (which is our sole domestic supplier of naphtha). Currently, Petrobras, through Petroquisa, is the indirect holder of 30.0% of our voting share capital and 23.1% of our total share capital. These accounts receivable and accounts payable balances result mainly from purchases and sales of goods, which are at prices and on terms equivalent to the average terms and prices of transactions that we enter into with third parties. We also engage in financial and other transactions with some of our shareholders. These and other commercial and financial transactions between us and our affiliates could result in conflicting interests.
We may make significant acquisitions which, if not successfully integrated with our company, may adversely affect our operating results.
We may make significant acquisitions in the future, in addition to the Ipiranga Transaction, to continue our growth. Acquisitions involve risks, including the following:
If we are unable to integrate or manage acquired businesses successfully, we may not realize anticipated cost savings, revenue growth and levels of integration, which may result in reduced profitability or operating losses.
For a discussion of risks specifically pertaining to the Ipiranga Transaction, see “—Risks Relating to the Ipiranga Transaction.”
Future adjustments in tariffs on imports that compete with our products could cause us to lower our prices.
We currently benefit from tariffs imposed by the Brazilian government on imports that allow us to charge prices for our polyolefins and vinyls products in the domestic market that include a factor based on the tariffs levied on comparable imports of those products. However, the Brazilian government has in the past used import and export tariffs to effect economic policies, with the consequence that tariffs can vary considerably, especially tariffs on petrochemical products. For example, in 2004 the Brazilian government lowered the tariffs applicable to most of the thermoplastic products that we produce by 1.5% . Future adjustments of tariffs could cause us to lower our domestic prices, which would likely result in lower net sales revenue and could negatively affect our overall financial performance.
12
Our business is subject to stringent environmental regulations, and imposition of new regulations could require significant capital expenditures and increase our operating costs.
Our company, like other Brazilian petrochemical producers, is subject to stringent Brazilian federal, state and local environmental laws and regulations concerning human health, the handling and disposal of solid and hazardous wastes and discharges of pollutants into the air and water. Petrochemical producers are sometimes subject to unfavorable market perceptions as a result of the environmental impact of their business, which can have an adverse effect on their results of operations. As environmental laws become more stringent in Brazil and worldwide, the amount and timing of future expenditures required for us to remain compliant could increase substantially and could decrease the availability of funds for other capital expenditures and other purposes.
We manufacture products that are subject to the risk of fire, explosions and other hazards.
Our operations are subject to hazards, such as fires, explosions and other accidents, associated with the manufacture of petrochemicals and the storage and transportation of feedstocks and petrochemical products. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage. A sufficiently large accident at one of our plants or storage facilities could force us to suspend our operations temporarily and result in significant remediation costs and lost net sales revenue. Although we maintain insurance coverage for losses due to fire damage and for losses of income resulting from shutdowns due to fire, explosion or electrical damage, those insurance proceeds may not be available on a timely basis and may be insufficient to cover all losses.
Unfavorable outcomes in pending litigation may reduce our liquidity and negatively affect our financial performance and financial condition.
We are involved in numerous tax, civil and labor disputes involving significant monetary claims. If unfavorable decisions are rendered in one or more of these lawsuits, we could be required to pay substantial amounts, which could materially adversely affect our financial condition and results of operations. For some of these lawsuits, we have not established any provision on our balance sheet or have established provisions only for part of the amounts in question, based on our judgments or opinions of our legal counsel as to the likelihood of winning these lawsuits.
The principal lawsuits for which we have not established provisions include the following:
13
In addition, we believe that our chances of success are remote in a series of lawsuits in which we challenged the constitutionality of an increase in the federal Contribution for Social Security Financing (Contribuição para Financiamento da Seguridade Social—COFINS), or COFINS, tax rate. We had established total provisions of R$50.6 million at December 31, 2007 for all of our lawsuits relating to the Social Integration Program (Programa de Integração Social), or PIS, and COFINS, including separate lawsuits challenging the basis of calculation of PIS and COFINS. Because we have deposited only R$23.8 million of this amount with the courts, we would be required, in the event we receive final, unfavorable decisions, to pay the remaining amounts for which we have not made deposits.
We are also parties to a number of lawsuits seeking tax credits that we believe the Brazilian tax authorities have disallowed or limited in violation of the Brazilian Constitution or applicable law. In some cases in which we have received favorable lower court decisions, we have used these credits to offset other tax obligations and have established provisions in an equivalent amount until a final decision is rendered. These provisions totaled R$1,145.8 million at December 31, 2007, as adjusted based on the SELIC interest rate. If we ultimately lose any of these lawsuits, we would be required to pay the tax obligations we had previously offset with those credits, which could materially reduce our liquidity. We believe that losses related to some of these lawsuits are reasonably possible.
For more information about our legal proceedings, see “Item 8. Financial Information—Legal Proceedings.”
Risks Relating to the Ipiranga Transaction
We may experience difficulties in integrating Copesul, Ipiranga Química and Ipiranga Petroquímica and, therefore, may fail to achieve the anticipated benefits from the Ipiranga Transaction.
On March 18, 2007, we entered into agreements with Ultrapar Participações S.A., or Ultrapar, and Petrobras under which, among other things, we acquired control of Ipiranga Química and Ipiranga Petroquímica, and indirect control of the 29.5% of Copesul’s share capital owned by Ipiranga Petroquímica. To complete the transfer of these shares, we entered into a series of transactions comprising the Ipiranga Transaction. For a discussion of these transactions, see “Item 4. Information on the Company—Ipiranga Transaction.” As a result of the substantial completion of the Ipiranga Transaction:
14
Upon the final completion of the fourth phase of the Ipiranga Transaction, we will own shares of Refinaria de Petróleo Ipiranga S.A., or RPI, representing 33.3% of total share capital and voting share capital of RPI.
Integration of Copesul, Ipiranga Química and Ipiranga Petroquímica with our operations will be a complex, costly and time-consuming process. Risks and challenges that may impair our ability to achieve the anticipated benefits of the Ipiranga Transaction include:
If we are unable to successfully respond to these risks and challenges, we may experience higher than expected operating costs or fail to achieve the anticipated benefits of the Ipiranga Transaction.
We have incurred a substantial amount of indebtedness in connection with the Ipiranga Transaction, which could limit our operating flexibility.
The total purchase price to our company of the shares of Ipiranga Química that we have acquired and the shares of RPI that we will acquire from Ultrapar in the Ipiranga Transaction was R$1,489.1 million. In addition, as part of the Ipiranga Transaction:
To finance the Ipiranga Transaction, we incurred: (1) US$1,200.0 million under an unsecured credit agreement, which we refer to as the Acquisition Credit Agreement, with three financial institutions; (2) US$312.5 million under an export prepayment credit facility; and (3) US$61.0 million under two short-term financing transactions. In addition, as a result of the Ipiranga Transaction, we consolidate the indebtedness of Ipiranga Química and Copesul into our financial statements. As of December 31, 2007, we had R$8,381.9 million of outstanding indebtedness, excluding related party debt.
The substantial increase in our outstanding debt could limit our operating flexibility, including among others, in the following respects:
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In addition, the principal amount of each disbursement under the Acquisition Credit Agreement is payable on or prior to the second anniversary of such disbursement. Any inability to refinance amounts borrowed under this agreement on satisfactory terms, if at all, would have a material adverse effect on our results of operations and financial condition.
The Brazilian antitrust authorities could impose costly or restrictive conditions on the approval of the Ipiranga Transaction.
The Ipiranga Transaction is subject to the final approval of the Brazilian antitrust authorities. However, Brazilian law permits us to consummate these transactions prior to receiving this final approval, unless the Administrative Council for Economic Defense(Conselho Administrativo de Defesa Econômica), or CADE, issues a writ of prevention blocking a transaction or requires the parties to enter into an agreement permitting the effects of the transaction to be reversed which, by its terms, delays the consummation of the transaction. Our company, together with Ultrapar and Petrobras, submitted the terms and conditions of the Ipiranga Transaction for review by the antitrust authorities in April 2007. The antitrust authorities will determine whether these transactions negatively impact competitive conditions in the markets in which we compete or adversely affect consumers in these markets.
In April 2007, CADE issued a writ of prevention relating to the Ipiranga Transaction, which, among other things, prevented our exercise of strategic management control over Ipiranga Química and Ipiranga Petroquímica. In issuing the writ of prevention, CADE stated that the purpose of the writ of prevention was to guarantee that the Ipiranga Transaction could be reversed in the event that CADE so determined following its review of the Ipiranga Transaction. In April 2007, CADE revoked this writ of prevention upon the agreement of our company to execute an agreement designed to preserve the reversibility of the Ipiranga Transaction, which we refer to as the Reversibility Agreement. Under the Reversibility Agreement, we agreed to preserve all of the assets acquired in the Ipiranga Transaction until CADE makes a final determination with respect to the Ipiranga Transaction, and we are permitted to effectively own and manage these assets pending this final determination.
Any action by the Brazilian antitrust authorities to fail to approve the Ipiranga Transaction or to impose conditions or performance commitments on our company as part of the approval process for the Ipiranga Transaction could materially and adversely affect our business, negatively affect our financial performance and prevent our company from achieving the anticipated benefits of the Ipiranga Transaction.
In November 2007, we entered into the Petrobras Investment Agreement relating to the Petrobras Transaction described in “Item 4. Information on the Company—Petrobras Transaction.” Although we believe that the Petrobras Transaction is not subject to the final approval of the Brazilian antitrust authorities, because the Petrobras Transaction is a follow-on transaction to the Ipiranga Transaction and does not involve any change of control of our company or Petrobras, we and Petrobras submitted the terms and conditions of the Petrobras Transaction to the Brazilian antitrust authorities in December 2007. If the Brazilian antitrust authorities do not agree with our analysis, the failure to approve the Petrobras Transaction or any action taken by these authorities to impose conditions or performance commitments on our company as part of the approval process for the Petrobras Transaction prevent our company from achieving the anticipated benefits of the Petrobras Transaction.
We cannot predict when CADE will take final action with respect to the Ipiranga Transaction and the Petrobras Transaction.
Risks Relating to Brazil
Brazilian political and economic conditions, and the Brazilian government’s economic and other policies, may negatively affect demand for our products as well as our net sales revenue and overall financial performance.
The Brazilian economy has been characterized by frequent and occasionally extensive intervention by the Brazilian government and unstable economic cycles. The Brazilian government has often changed monetary, taxation, credit, tariff and other policies to influence the course of Brazil’s economy. The Brazilian government’s actions to control inflation and implement other policies have at times involved wage and price controls, blocking access to bank accounts, imposing capital controls and limiting imports into Brazil.
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Our results of operations and financial condition may be adversely affected by factors such as:
A presidential election will be held in Brazil in October 2006. The President of Brazil has considerable power to determine governmental policies and actions that relate to the Brazilian economy and, consequently, affect the operations and financial performance of businesses, such as our company. The run-up to the presidential election may result in changes in existing governmental policies, and the post-election administration—even if PresidentMr. Luiz Inácio Lula da Silva is reelected—may seek to implement new policies.was reelected in October 2006 for a four-year presidential term commencing on January 1, 2007. We cannot predict what policies will be adopted by the Brazilian government and whether these policies will negatively affect the economy or our business or financial performance.
The Brazilian government’s actions to combat inflation may contribute significantly to economic uncertainty in Brazil and reduce demand for our products.
Historically, Brazil has experienced high rates of inflation. Inflation, as well as government efforts to combat inflation, had significant negative effects on the Brazilian economy, particularly prior to 1995. The inflation rate, as measured by the General Price Index—Internal Availability (ÍndiceGeral de Preços—Disponibilidade Interna), reached 2,708% in 1993. Although inflation rates have been substantially lower since 1994 than in previous periods, inflationary pressures persist. Inflation rates were 10.4% in 2001, 26.4% in 2002, 7.7% in 2003, 12.1% in 2004, and 1.2% in 2005, 3.8% in 2006, 7.9% in 2007 and 2.1% in the three months ended March 31, 2008, as measured by the General Price Index—Internal Availability. The Brazilian government’s measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting availability of credit and reducing economic growth. Inflation, actions to combat inflation and public speculation about possible additional actions also contributed materially to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets.
Brazil may experience high levels of inflation in future periods. Increasing prices for petroleum, the depreciation of therealand future governmental measures seeking to maintain the value of therealin relation to the U.S. dollar may trigger increases in inflation in Brazil. Periods of higher inflation may slow the rate of
growth of the Brazilian economy, which would lead to reduced demand for our products in Brazil and decreased net sales revenue. Inflation is also is likely to increase some of our costs and expenses, which we may not be able to pass on to our customers and, as a result, may reduce our profit margins and net income. In addition, high inflation generally leads to higher domestic interest rates, and, as a result, the costs of servicing ourreal-denominateddenominated debt may increase, causing our net income to be reduced. Inflation and its effect on domestic interest rates can, in addition, lead to reduced liquidity in the domestic capital and lending markets, which could adversely affect our ability to refinance our indebtedness in those markets. Any decline in our net sales revenue or net income and any deterioration in our financial condition would also likely lead to a decline in the market price of our class A preferred shares and the ADSs.ADS.
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Fluctuations in interest rates could raise the cost of servicing our debt and negatively affect our overall financial performance.
Our financial expenses are affected by changes in the interest rates that apply to our floating rate debt. At December 31, 2005,2007, we had, among other debt obligations, R$1,320.9467.8 million of loans and financing and debentures that were subject to the TJLP (Taxa de Juros de Longo Prazo), or TJLP, a long-term interest rate, R$893.11,271.7 million of loans and financing and debentures that were subject to the CDI (Certificado Depositário Interbancário), or CDI, rate, an interbank rate, and R$638.43,070.7 million of loans and financing that were subject to LIBOR. The TJLP includes an inflation factor and is determined quarterly by the Central Bank. In particular, the TJLP and the CDI rate have fluctuated significantly in the past in response to the expansion or contraction of the Brazilian economy, inflation, Brazilian government policies and other factors. For example, in 20052007 the CDI rate increaseddeclined from 17.75%13.17% per annum at December 31, 20042006 to 19.75%11.18% per annum at its peak in July 2005, followed by a decline to 18.00% at December 31, 2005.2007. See “Item 11. Quantitative and Qualitative Disclosures Aboutabout Market Risk.” A significant increase in any of these interest rates could adversely affect our financial expenses and negatively affect our overall financial performance.
Fluctuations in the real/U.S. dollar exchange rate could increase inflation in Brazil, raise the cost of servicing our foreign currency-denominated debt and negatively affect our overall financial performance.
The exchange rate between therealand the U.S. dollar and the relative rates of depreciation and appreciation of therealhave affected our results of operations and may continue to do so.
The Brazilian currency has been devalued often during the last four decades. Throughout this period, the Brazilian government has implemented various economic plans and various exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. From time to time, there have been significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and other currencies. For example, therealappreciated in value against the U.S. dollar by 22.3%18.2% in 2003, 8.9%8.1% in 2004, 11.8% in 2005, 8.7% in 2006 and 13.4%17.2% in 2005.2007.
DevaluationDepreciation of therealrelative to the U.S. dollar also could result in additional inflationary pressures in Brazil by generally increasing the price of imported products and services and requiring recessionary government policies to curb demand. In addition, a devaluationdepreciation of therealcould weaken investor confidence in Brazil and reduce the market price of our class A preferred shares and the ADSs. On the other hand, further appreciation of therealagainst the U.S. dollar may lead to a deterioration of the country’s current account and the balance of payments and may dampen export-driven growth.
We had total foreign currency-denominated debt obligations in an aggregate principal amount of R$2,746.65,878.4 million (US$1,173.33,318.7 million) at December 31, 2005,2007, representing 51.2%70.1% of our indebtedness, excluding related party debt, on a consolidated basis. At December 31, 2005,2007, we had US$548.5551.8 million in U.S. dollar-denominated cash equivalents and other investments. At December 31, 2005, we did not have any foreign currency derivative instruments. A significant devaluationdepreciation of therealin relation to the U.S. dollar or other currencies could reduce our ability to meet debt service requirements of our foreign currency-denominated obligations, particularly as our net sales revenue is primarily denominated inreais.
In addition, any significant devaluationdepreciation of therealwill increase our financial expenses as a result of foreign exchange losses that we must record. For example, the 34.3% devaluationdepreciation of therealin 2002 substantially increased our financial expenses and was a significant factor in our net loss for that year.
The prices of naphtha, our most important raw material, and of some of our other raw materials are denominated in or linked to the U.S. dollar. In 2005, 71.7%Naphtha accounted, directly and indirectly, for 76.3% of our direct and indirect consolidated cost of sales and services rendered represented the cost of naphtha.in 2007. When therealdepreciates against the U.S. dollar, the cost inreaisof our U.S. dollar-linked raw materials increases, and our operating income inreaisdecreases to the extent that we are unable to pass on these cost increases to our customers.
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Brazilian government exchange control policies could increase the cost of servicing our foreign currency-denominated debt and impair our liquidity.
The purchase and sale of foreign currency in Brazil is subject to governmental control. In 1990, the Central Bank centralized certain payments of principal on external obligations. Many factors could cause the Brazilian government to institute more restrictive exchange control policies, including the extent of Brazil’s foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the size of Brazil’s debt service burden relative to the economy as a whole, Brazil’s policy towards the International Monetary Fund and political constraints to which Brazil may be subject. A more restrictive policy could increase the cost of servicing, (andand thereby reduce our ability to pay)pay, our foreign currency-denominated debt obligations and other liabilities. Our foreign-currency denominated debt represented 51.2%70.1% of our indebtedness on a consolidated basis at December 31, 2005.2007. If we fail to make payments under any of these obligations, we will be in default under those obligations, which could reduce our liquidity as well as the market price of our class A preferred shares and the ADSs.
Changes in tax laws may result in increases in certain direct and indirect taxes, which could reduce our gross margin and negatively affect our overall financial performance.
The Brazilian government implements from time to time changes to tax regimes that may increase our and our customers’ tax burdens. These changes include modifications in the rate of assessments and, on occasion, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. In April 2003, the Brazilian government presented a tax reform proposal, which was mainly designed to simplify tax assessments, to avoid internal disputes within and between the Brazilian states, and to redistribute tax revenues. Certain elements of this proposal were adopted, while other elements have been stalled and are unlikely to be enacted. We cannot predict the changes to Brazilian tax law that may be proposed and enacted in the future. However, future changes in Brazilian tax law may result in increases in our overall tax burden, which could reduce our gross margin and negatively affect our overall financial performance.
Risks Relating to Our Company and the Petrochemical Industry
The cyclical nature of the petrochemical industry may reduce our net sales revenue and gross margin.
The Brazilian petrochemical industry, including the markets in which we compete, is cyclical and sensitive to changes in supply and demand that are, in turn, affected by political and economic conditions in Brazil and elsewhere. This cyclicality may reduce our net sales revenue and gross margin. In particular:
The global petrochemical industry is also cyclical. Historically, the international petrochemical markets have experienced alternating periods of limited supply, which have caused prices and profit margins to increase,
followed by expansion of production capacity, which has resulted in oversupply and reduced prices and profit margins. The Brazilian petrochemical industry has become increasingly integrated with the global petrochemical industry for a number of reasons, including increased demand for, and consumption of, petrochemical products in Brazil and the ongoing integration of regional and world markets for commodities. We establish the prices for the products we sell in Brazil with reference to international market prices. Our net sales revenue and gross margin are increasingly linked to global industry conditions that we cannot control.
We face competition from producers of polyolefins, vinyls and other petrochemical products.
We face competition in Brazil from Brazilian and international producers of polyethylene, polypropylene, vinyls and other petrochemical products. In addition, we generally set the prices for our second generation products with reference to the prices charged for these products by foreign producers in international markets. We anticipate that we may experience increasingly intense competition from other producers of polyolefins and vinyls products, both in Brazil and in selected foreign markets in which we sell these products. Many of our foreign competitors are substantially larger and have substantially greater financial, manufacturing, technological and marketing resources than our company.
We face significant competition in the polyethylene market. Rio Polímeros S.A., or Rio Polímeros, a Brazilian petrochemical company, commenced operations of a major petrochemical plant in Brazil in 2005. The maximum annual capacity of this plant is 520,000 tons of ethylene, 75,000 tons of propylene and 540,000 tons of polyethylene. This plant is in the process of ramping up its production towards its annual capacity. In addition, Solvay Indupa do Brasil S.A., or Solvay, expanded its annual polyvinylchloride, or PVC, production capacity in Brazil by 35,000 tons in December 2005. Actions by our competitors, including any future increases in their capacity, may make it increasingly difficult for us to maintain our domestic market share in our thermoplastic products (i.e., polyethylene, polypropylene and PVC).
Higher naphtha costs would increase our cost of sales and services rendered and may reduce our gross margin and negatively affect our overall financial performance.
Naphtha, a crude oil derivative, is the principal raw material of our Basic Petrochemicals Unit and, indirectly, of our other business units. In 2005, naphtha accounted, directly and indirectly, for approximately 70% of our consolidated cost of sales and services rendered. The price of naphtha supplied by Petróleo Brasileiro S.A.—Petrobras, or Petrobras, is linked to the Amsterdam-Rotterdam-Antwerp market price of naphtha and to thereal/U.S. dollar exchange rate. The price of naphtha that we purchase from other international suppliers is also linked to the Amsterdam-Rotterdam-Antwerp market price. The Amsterdam-Rotterdam-Antwerp market price of naphtha fluctuates primarily based on changes in the U.S. dollar-based price of crude oil in the international markets.
During 2005, the price of naphtha in U.S. dollars increased by 28.8%, from US$387.05 per ton in December 2004 to US$498.35 per ton in December 2005. The U.S. dollar price of naphtha was volatile during 2005, increasing substantially through March, declining in April and May, increasing through September, declining through November and increasing again in December. The U.S. dollar price of naphtha remained volatile in the first five months of 2006, increasing sharply in January and April 2006, increasing moderately in May 2006 and decreasing moderately in February 2006. The price of naphtha may continue its upward trend or thereal may devalue significantly in the future. Any increase in naphtha costs would reduce our gross margin and negatively affect our overall financial performance to the extent that we are unable to pass on these increased costs to our customers and could result in reduced sales volumes of our products.
We do not hedge against changes in naphtha prices, so that we are exposed to fluctuations in the price of our primary raw material.
We currently do not hedge our exposure to fluctuations in naphtha prices, which are linked to thereal/U.S. dollar exchange rate. Although we attempt to pass on increases in naphtha prices through higher prices for our
products, in periods of high volatility in the U.S. dollar price of naphtha or thereal/U.S. dollar exchange rate, there is usually a lag between the time that the U.S. dollar price of naphtha increases or the U.S. dollar appreciates and the time that we may effectively pass on those increased costs inreais to our customers in Brazil. As a result, if the U.S. dollar price of naphtha increases precipitously or thereal depreciates precipitously against theU.S. dollar in the future, we may not immediately be able to pass on all of the corresponding increases in our naphtha costs to our customers in Brazil, which would likely reduce our gross margin and net income.
We depend on Petrobras to supply us with the substantial portion of our naphtha requirements.
Petrobras currently is the only Brazilian supplier of naphtha and supplied 69.2% of the naphtha consumed by our company in 2005. Petrobras produces most of the naphtha it sells to us and imports the balance. Our production volume and net sales revenue would likely decrease and our overall financial performance would likely be negatively affected in the event of:
In addition, although regulatory changes have ended Petrobras’ monopoly in the Brazilian naphtha market and have allowed us to import naphtha, any reversal in the continuing deregulation of the oil and gas industry in Brazil could increase our production costs.
Our Polyolefins and Vinyls Units depend on our Basic Petrochemicals Unit and Copesul to supply them with their ethylene and propylene requirements.
Our Basic Petrochemicals Unit is the only supplier of ethylene to our Vinyls Unit, and our Basic Petrochemicals Unit and Copesul are the only suppliers of ethylene and propylene to our Polyolefins Unit. Because the cost of storing ethylene and propylene is substantial and there is inadequate infrastructure in Brazil to permit the importation of large quantities of these products, our production volumes of, and net sales revenue from, vinyls and polyolefins products would decrease, and our overall financial performance would be negatively affected, in the event of:
In addition, any significant expansion of the production capacity of our Polyolefins Unit in the petrochemical complex located in Triunfo in the State of Rio Grande do sul, which we refer to as the Southern Complex, will depend on our ability to obtain additional ethylene and propylene from Copesul.
Any downgrade in the ratings of our company or our debt securities would likely result in increased interest and other financial expenses related to our borrowings and debt securities and could reduce our liquidity.
Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., or Standard and Poor’s, and Fitch, Inc., or Fitch, maintain ratings of our company and our debt securities. Currently, Standard and
Poor’s and Fitch maintain ratings of our company on a local and a global basis. Standard and Poor’s maintains a rating of our company on a local basis of “br AA/Stable Outlook” and Fitch maintains a national rating for our company of “AA- (bra)/Stable Outlook.” On a global basis, Standard and Poor’s maintains a local currency rating for our company of “BB” and a foreign currency rating for our company of “BB,” while Fitch maintains a local currency rating for our company of “BB+/Stable Outlook” and a foreign currency rating for our company of “BB/Positive Outlook.” Any decision by these or other rating agencies to downgrade the ratings of our company or of our debt securities in the future would likely result in increased interest and other financial expenses relating to our borrowings and debt securities and could significantly reduce our ability to obtain such financing on satisfactory terms or in amounts required by us and our liquidity.
Some of our shareholders may have the ability to determine the outcome of corporate actions or decisions, which could affect the holders of our class A preferred shares and the ADSs.
As of June 22, 2006, a group of companies controlled by the Odebrecht family, or the Odebrecht Group, through Odebrecht S.A., or Odebrecht, its wholly-owned subsidiary, ODBPAR Investimentos S.A., or ODBPAR Investments, their subsidiary, Nordeste Química S.A.—Norquisa, or Norquisa, and our subsidiary, Braskem Participações S.A., own 74.6% of our voting share capital. The Odebrecht Group’s designees currently constitute a majority of the members of our board of directors. Petrobras Química S.A., or Petroquisa, a subsidiary of Petrobras, has veto and other rights under a shareholders agreement as described under “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders—Shareholders Agreements.” As a result, the Odebrecht Group and Petroquisa may have the ability to determine the outcome of major corporate actions or decisions requiring the approval of our shareholders or our board of directors, which could affect the holders of our class A preferred shares and the ADSs.
We may face conflicts of interest in transactions with related parties.
We maintain trade accounts receivable and current and long-term payables with some of our affiliates and other related parties, including Petrobras (which is our sole domestic supplier of naphtha), and Copesul in the Southern Complex (which supplies us with ethylene and propylene). As of June 22, 2006, Petrobras, through Petroquisa, is the indirect holder of 9.8% of our voting share capital and 8.3% of our total share capital. These accounts receivable and accounts payable balances result mainly from purchases and sales of goods, which are at prices and on terms equivalent to the average terms and prices of transactions that we enter into with third parties. We also engage in financial and other transactions with some of our shareholders. These and other commercial and financial transactions between us and our affiliates could result in conflicting interests.
We may make significant acquisitions which, if not successfully integrated with our company, may adversely affect our operating results.
We may make significant acquisitions in the future to continue our growth. Acquisitions involve risks, including the following:
If we are unable to integrate or manage acquired businesses successfully, we may not realize anticipated cost savings, revenue growth and levels of integration, which may result in reduced profitability or operating losses.
Future adjustments in tariffs on imports that compete with our products could cause us to lower our prices.
We take into account, when setting the domestic prices for our products, tariff rates imposed by the Brazilian government on imports of similar products and the products of our customers. We currently benefit from tariffs that allow us to charge domestic prices for our polyolefins and vinyls products that include a factor based on the tariffs levied on comparable imports of those products. However, the Brazilian government has in the past used import and export tariffs to effect economic policies, with the consequence that tariffs can vary considerably, especially tariffs on petrochemical products. For example, in 2004 the Brazilian government lowered the tariffs applicable to most of the thermoplastic products that we produce by 1.5%. Future adjustments of tariffs could cause us to lower our domestic prices, which would likely result in lower net sales revenue and could negatively affect our overall financial performance.
Our business is subject to stringent environmental regulations, and imposition of new regulations could require significant capital expenditures and increase our operating costs.
Our company, like other Brazilian petrochemical producers, is subject to stringent Brazilian federal, state and local environmental laws and regulations concerning human health, the handling and disposal of solid and hazardous wastes and discharges of pollutants into the air and water. Petrochemical producers are sometimes subject to unfavorable market perceptions as a result of the environmental impact of their business, which can have an adverse effect on their results of operations. As environmental laws become more stringent in Brazil and worldwide, the amount and timing of future expenditures required for us to remain compliant could increase substantially and could decrease the availability of funds for other capital expenditures and other purposes.
We manufacture products that are subject to the risk of fire, explosions and other hazards.
Our operations are subject to hazards, such as fires, explosions and other accidents, associated with the manufacture of petrochemicals and the storage and transportation of feedstocks and petrochemical products. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage. A sufficiently large accident at one of our plants or storage facilities could force us to suspend our operations temporarily and result in significant remediation costs and lost net sales revenue. Although we maintain insurance coverage for losses due to fire damage and for losses of income resulting from shutdowns due to fire, explosion or electrical damage, those insurance proceeds may not be available on a timely basis and may be insufficient to cover all losses.
Unfavorable outcomes in pending litigation may reduce our liquidity and negatively affect our financial performance and financial condition.
We are involved in numerous tax, civil and labor disputes involving significant monetary claims. If unfavorable decisions are rendered in one or more of these lawsuits, we could be required to pay substantial amounts, which could materially adversely affect our financial condition and results of operations. For some of these lawsuits, we have not established any provision on our balance sheet or have established provisions only for part of the amounts in question, based on our judgments or opinions of our legal counsel as to the likelihood of winning these lawsuits.
The lawsuits for which we have not established provisions or have established only partial provisions include the following:
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In addition, we and some of our subsidiaries believe that our chances of success are remote in a series of lawsuits in which we challenged the constitutionality of an increase in the federal Contribution for Social Security Financing (Contribuição para Financiamento da Seguridade Social—COFINS), or COFINS, tax rate. For a description of the legal bases of these suits, see “Item 8. Financial Information—Legal Proceedings—Tax Proceedings.” We had established total provisions of R$316.1 million at December 31, 2005 for all of our lawsuits relating to the Social Integration Program (Programa de Integração Social), or PIS, and COFINS, including separate lawsuits challenging the basis of calculation of PIS and COFINS. Because we have deposited only R$39.1 million of this amount with the courts, we would be required, in the event we and our subsidiaries receive final, unfavorable decisions, to pay the remaining amounts for which we have not made deposits.
We are also parties to a number of lawsuits seeking tax credits that we believe the Brazilian tax authorities have disallowed or limited in violation of the Brazilian Constitution and/or applicable law. In some cases in which we have received favorable lower court decisions, we have used these credits to offset other tax obligations and have established provisions in an equivalent amount until a final decision is rendered (adjusting these provisions based on theSistema Especial de Liquidação e de Custódia, or SELIC, interest rate). These provisions totaled R$1,332.6 million at December 31, 2005. If we ultimately lose any of these lawsuits, we would be required to pay the tax obligations we had previously offset with those credits, which could materially reduce our liquidity. We believe that losses related to some of these lawsuits are reasonably possible.
For more information about our legal proceedings, see “Item 8. Financial Information—Legal Proceedings.”
Risks Relating to Our Class A Preferred Shares and the ADSs
Our class A preferred shares and the ADSs have limited voting rights.
Under the Brazilian Corporation Law and our by-laws, holders of our class A preferred shares and, consequently, the ADSs are not entitled to vote at meetings of our shareholders, except in very limited circumstances. These limited circumstances directly relate to key rights of the holders of class A preferred shares, such as modifying basic terms of our class A preferred shares or creating a new class of preferred shares with superior rights. Holders of preferred shares without voting rights are entitled to elect one member and his or her respective alternate to our board of directors and our fiscal council. Holders of our class A preferred shares and the ADSs are not entitled to vote to approve corporate transactions, including mergers or consolidations of our company with other companies.
Holders of the ADSs may find it difficult to exercise even their limited voting rights at our shareholders’ meetings.
Holders may exercise the limited voting rights with respect to our class A preferred shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. There are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional steps involved in communicating with ADS holders. For example, we are required to publish a notice of our shareholders’ meetings in certain newspapers in Brazil. To the extent that holders of our class A preferred shares are entitled to vote at a shareholders’ meeting, they will be able to exercise their voting rights by attending the meeting in person or voting by proxy. By contrast, holders of the ADSs will receive notice of a shareholders’ meeting by mail from the depositary following our notice to the ADR depository requesting the ADR depository to do so. To exercise their voting rights, ADS holders must instruct the depositary on a timely basis. This noticed voting process will take longer for ADS holders than for holders of class A preferred shares. If it fails to receive timely voting instructions for all or part of the ADSs, the depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances.
In the limited circumstances in which holders of the ADSs have voting rights, they may not receive the voting materials in time to instruct the depositary to vote our class A preferred shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of the ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of the ADSs may not be able to exercise voting rights, and they will have no recourse if the class A preferred shares underlying their ADSs are not voted as requested.
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Exchange controls and restrictions on remittances abroad may adversely affect holders of the ADSs and the underlying class A preferred shares.
The Brazilian government may impose temporary restrictions on the conversion of Brazilian currency into foreign currencies and on the remittance to foreign investors of proceeds of their investments in Brazil. Brazilian law permits the government to impose these restrictions whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to foresee a serious imbalance. The Brazilian government imposed remittance restrictions for approximately six months in 1990.
These restrictions could hinder or prevent the Brazilian custodian of the class A preferred shares underlying the ADSs or holders who have exchanged the ADSs for the underlying class A preferred shares from converting dividends, distributions or the proceeds from any sale of such shares into U.S. dollars and remitting such U.S. dollars abroad. In such an event, the Brazilian custodian for our class A preferred shares will hold thereais that it cannot convert for the account of holders of the ADSs who have not been paid. Neither the custodian nor the depositary will be required to invest thereais or be liable for any interest.
Holders of the ADSs may face difficulties in protecting their interests because we are subject to different corporate rules and regulations as a Brazilian company and our shareholders may have fewer and less well-defined rights.
Holders of the ADSs are not direct shareholders of our company and are unable to enforce the rights of shareholders under our by-laws and the Brazilian Corporation Law.
Our corporate affairs are governed by our by-laws and the Brazilian Corporation Law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the State of Delaware or New York, or elsewhere outside Brazil. Even if a holder of ADSs surrenders its ADSs and becomes a direct shareholder, its rights as a holder of our class A preferred shares underlying the ADSs under the Brazilian Corporation Law to protect its interests relative to actions by our board of directors may be fewer and less well-defined than under the laws of those other jurisdictions.
Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of our class A preferred shares and the ADSs at a potential disadvantage. Corporate disclosures also may be less complete or informative than for a public company in the United States or in certain other countries.
Holders of the ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.
We are a corporation (sociedade anônima) organized under the laws of Brazil, and all of our directors and executive officers and our independent public accountants reside or are based in Brazil. Most of our assets and those of these other persons are located in Brazil. As a result, it may not be possible for holders of the ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting their interests in the case of actions by us or our directors or executive officers than would shareholders of a U.S. corporation.
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Actual or anticipated sales of a substantial number of class A preferred shares could decrease the market prices of our class A preferred shares and the ADSs.
Sales of a substantial number of our class A preferred shares could negatively affect the market prices of our class A preferred shares and the ADSs. If, in the future, substantial sales of shares are made by the Odebrecht Group,ODBPAR Investimentos S.A., or ODBPAR Investments, Petroquisa or other existing or future holders of class A preferred shares, the market price of our class A preferred shares and, by extension, the ADSs may decrease significantly. As a result, holders of the ADSs may not be able to sell the ADSs at or above the price they paid for them.
Holders of the ADSs may be unable to exercise preemptive rights with respect to our class A preferred shares underlying the ADSs.
Holders of the ADSs will be unable to exercise the preemptive rights relating to our class A preferred shares underlying ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights or to take any other action to make preemptive rights available to holders of the ADSs, and we may not file any such registration statement. If we do not file a registration statement or if we and the depositary decide not to make preemptive rights available to holders of the ADSs, those holders may receive only the net proceeds from the sale of their preemptive rights by the depositary, or if they are not sold, their preemptive rights will be allowed to lapse.
Holders of the ADSs could be subject to Brazilian income tax on capital gains from sales of ADSs.
Historically, any capital gain realized on a sale or other disposition of ADSs between non-Brazilian holders outside Brazil was not subject to Brazilian income tax. However, Brazilian law provides that, commencing on February 1, 2004, “the acquiror, individual or legal entity resident or domiciled in Brazil, or the acquiror’s attorney-in-fact, when such acquirer is resident or domiciled abroad, shall be responsible for the retention and payment of the income tax applicable to capital gains … earned by the individual or legal entity resident or domiciled abroad who disposes of property located in Brazil.” The Brazilian tax authorities have recently issued a normative instruction confirming that they intend to assess income tax on capital gains earned by non-Brazilian residents whose assets are located in Brazil. In our view, ADSs representing class A preferred shares, which are issued by the depositary outside Brazil, will not be deemed to be “property located in Brazil” for purposes of this law. However, we cannot assure holders of our ADSs whether Brazilian tax authorities will attempt to tax any capital gains arising from the sale or other disposition of ADSs, even when the transaction is consummated outside Brazil between non-Brazilian residents.
The relative volatility and liquidity of the Brazilian securities markets may decrease the liquidity and market price of our class A preferred shares and the ADSs.
The Brazilian securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. The São Paulo Stock Exchange (Bolsa de Valores de São Paulo), which is the principal Brazilian stock exchange, had a market capitalization of US$482.1 billion1.4 trillion (or R$1,128.5 billion)2.5 trillion) at December 31, 20052007 and an average daily trading volume of US$666.6 million2.5 billion for 2005.2007. In comparison, theThe New York Stock Exchange had a market capitalization of US$21.227.1 trillion at December 31, 20052007 and an average daily trading volume of US$56.1119.2 billion for 2005.2007. There is also significantly greater concentration in the Brazilian securities markets. The ten largest companies in terms of market capitalization represented approximately 52%56% of the aggregate market capitalization of the São Paulo Stock Exchange at December 31, 2005.2007. The ten most widely traded stocks in terms of trading volume accounted for approximately 51%48% of all shares traded on The São Paulo Stock Exchange in 2005.2007. These market characteristics may substantially limit the ability of holders of the ADSs to sell class A preferred shares underlying ADSs at a price and at a time when they wish to do so and, as a result, could negatively impact the market price of the ADSs themselves.
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Developments in other emerging markets may decrease the market price of our class A preferred shares and the ADSs.
The market price of our class A preferred shares and the ADSs may decrease due to declines in the international financial markets and world economic conditions. Although economic conditions are different in each country, investors’ reaction to developments in one country can affect the securities markets and the securities of issuers in other countries, including Brazil. Brazilian securities markets are, to varying degrees, influenced by economic and market conditions in other emerging market countries, especially those in Latin America. Any return to economic turmoil in Argentina or adverse economic developments in other emerging markets may adversely affect investor confidence in securities issued by Brazilian companies, causing their market price and liquidity to suffer. Any such developments could immediately affect our ability to raise capital when needed and the market price of our class A preferred shares and the ADSs.
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ITEM 4. INFORMATION ON THE COMPANY
We are the leading petrochemical company in Latin America, based on average annual production capacity in 2005.2007. We are also one of the threethird largest Brazilian-owned private sector industrial companies,company, based on net sales revenue.revenue in 2006 (the most recent year for which comparative information is currently available). We recorded net income of R$625.8547.6 million in 20052007 on net sales revenue of R$13,075.117,679.4 million, in each case under Brazilian GAAP. We produce a diversified portfolio of petrochemical products and have a strategic focus on polyethylene, polypropylene and PVC. We have integrated first and second generation petrochemical production facilities, with 1419 plants in Brazil, followingincluding plants that we have acquired in the Politeno acquisition described below.Ipiranga Transaction.
Our registered office is at Rua Eteno, 1561, CEP 42810-000, Camaçari, Bahia, Brazil, and our telephone number at this address is 55-71-3632-5102.55-71-632-5102. Our principal executive office is at Avenida das Nações Unidas, 4777, São Paulo, SP, CEP 05477-000, Brazil, and our telephone number at this address is 55-11-3443-9000.55-11-3576-9999.
History and Development of Our Company
We were founded in 1972 as Petroquímica do Nordeste Copene Ltda. to plan, execute and coordinate the activities of the Northeastern Complex. The construction of the Northeastern Complex formed part of a development policy of the Brazilian government implemented in the early 1970’s to diversify the geographical distribution of industrial assets and to promote economic growth across different regions of Brazil. On June 18, 1974, we were incorporated as a corporation ((sociedade anônima)nima) under the laws of Brazil (with Brazilian company registry No. 29300006939) and were renamed Copene Petroquímica do Nordeste S.A.
Prior to August 1995, Petroquisa, the petrochemical subsidiary of Petrobras, owned 36.2% of our total share capital, representing 48.2% of our voting share capital. At that time, Nordeste Química S.A.—Norquisa, or Norquisa, owned 17.3% of our total share capital, representing 47.6% of our voting share capital, and the remainder of our share capital was owned by various Brazilian private sector groups, pension funds, banks and our employees.
Privatization of Our Company
In August 1995, as part of the Brazilian government’s privatization program, Petroquisa sold 14.8% of our total share capital, representing 32.8% of our voting share capital, through an auction. Norquisa acquired 5.5% of our total share capital, representing 10.8% of our voting share capital, in this auction, and the remaining shares were acquired by various Brazilian pension funds. At the time of this auction, Norquisa was controlled by several second generation producers in the Northeastern Complex. As a result of this auction, Norquisa became our controlling shareholder.
AuctionConsolidation of Banco Econômico’s Petrochemical Assets
On July 25,In 2001, the Central Bank, as liquidator of Banco Econômico S.A., a Brazilian financial institution that collapsed in 1995, or Banco Econômico, conducted an auction of the petrochemical assets that had been owned by Banco Econômico. This auction was part of a broader initiative of the Brazilian government to restructure the Brazilian petrochemical sector.
In order to increase its investment in the Brazilian petrochemical industry, the Odebrecht Group participated in this auction through Conepar—Companhia Nordeste de Participações do Nova Camaçari Participações S.A., or Nova Camaçari, a holding company which acquired the petrochemical assets being auctioned. In addition, Nova Camaçari acquired additional petrochemical assets from the Odebrecht Group,and a group of Companiescompanies controlled by the Mariani family, or the Mariani Group, acquired control of Norquisa through purchases of shares of Norquisa and other entities which were entitledthe contribution to sell assets to Nova Camaçari under the terms of various shareholder agreements.
Immediately following these transactions, we acquired Nova Camaçari from the Odebrecht Group in order to expand the scope of our operations and become a vertically integrated producer of petrochemical products. Following these transactions, we owned indirectly (1) Conepar—Companhia Nordeste de Participações, which,company of:
in turn, held
Acquisition of OPP Química, Nitrocarbono and Interest in Copesul
In order to continue to implement our strategy of vertically integrating our operations and to further expand the scope of our operations, on August 16, 2002, we acquired from the Odebrecht Group and Pronor Petroquímica S.A., or Pronor, a member of the Mariani Group:
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Upon completing these transactions, we changed our corporate name to Braskem S.A.
In connection with these transactions, 2003:
In February 2003, we commencedconducted a public exchange offer for the remaining voting share capital of Nitrocarbono not owned by our company. On February 13, 2003, immediatelycompany and, following our exchangethe completion of the shares tendered in this exchange offer, for 128,973 of our class A preferred shares, we owned 93.8% of the total share capital of Nitrocarbono, including 99.99% of its voting share capital. On March 31, 2003, we merged with Nitrocarbono. In connection with this merger, we issued 5,415 of our class A preferred shares to the holders of shares of Nitrocarbono other than our company.
On March 31, 2003, Nitrocarbono;
On June 30, 2003, we entered into an agreement under which we assumed debt of Copene Participações S.A. (formerly Conepar—Companhia Nordeste de Participações) owed to Polialden in the amount of R$30.2 million as well as debt of Copene Participações S.A. owed to the Brazilian National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social, or BNDES) in the amount of R$38.9 million. In return, we received the shares of Polialden and Politeno owned by Copene Participações S.A. As a result, all of our equity interests in Polialden and Politeno were, and continue to be, held directly by our company, and Copene Participações S.A. no longer owns material assets or conducts any material operations.
Acquisition of Common Shares of Trikem and Polialden Held by Mitsubishi and Sojitz
In order to acquire the remaining outstanding common shares of PolialdenPolialden; and
Under the share purchase and sale agreement, Mitsubishi agreed to sell to us all of the share capital of Trikem and Polialden it owned, consisting of 16.7% of Polialden’s voting share capital and 13.4% of Trikem’s voting share capital for R$44.2 million. We paid a portion of the purchase price in cash, and we were obligated to pay the remaining US$13.5 million to Mitsubishi on July 31, 2007, or earlier if before that date we met certain financial tests. We prepaid the remainder of the purchase price on July 29, 2005. Under this agreement, we are required to make an additional payment to Mitsubishi in an amount that is contingent upon the outcome of pending litigation filed against Polialden by certain of its preferred shareholders. We assumed the defense of this litigation as a result of our merger with Polialden on May 31, 2006. The amount of the additional payment that we are obligated to pay to Mitsubishi is (1) R$21.6 million if we prevail in this litigation or if a definitive settlement is reached, or (2) R$5.4 million if we lose this litigation. In either event, we will convert the amount of this additional payment (as adjusted for inflation at the Indice Geral de Perços—Mercado, or IGP-M, rate from July 31, 2003 until the date that this litigation is finally adjudicated or settled) into U.S. dollars on the final adjudication or settlement date. We are required to make this additional payment, plus interest from the date of this agreement at an annual rate of LIBOR plus 3.0%, within 60 days after the date on which this litigation is finally adjudicated or settled. Odebrecht has guaranteed our obligation to pay Mitsubishi the additional payment in connection with the Polialden shareholders’ rights litigation.
Under the memorandum of understanding with Odebrecht and Sojitz, we agreed to purchase all of the share capital of Trikem and Polialden that Sojitz owned, consisting of 16.7% of Polialden’s voting share capital and 10.1% of Trikem’s voting share capital, in exchange for 4,345,162 of our common shares. As a result of this transaction, which closed on July 31, 2003, and after giving effect to the purchase from Mitsubishi described above, we increased our direct and indirect ownership of Trikem’s voting share capital to 87.9% and increased our ownership of Polialden’s voting share capital to 100%.
Merger of Trikem into Braskem
On November 3, 2003, we commencedconducted a public exchange offer for the remaining voting share capital of Trikem not owned by our company. On December 4, 2003, immediately following our exchange of the
In 2004:
At an extraordinary shareholders’ meeting on January 15, 2004, our shareholders approved our merger with Trikem, an amendment to our by-laws to permit the conversion of our class A preferred shares into common shares upon the approval of the majority of our voting share capital, and the conversion of 487,793 of our class A preferred shares into 487,793 of our common shares in order to maintain the required minimum ratio of our common shares to preferred shares in accordance with the Brazilian Corporation Law after completion of our merger with Trikem. In connection with this merger, we issued 592 of our class A preferred shares in exchange for 514,366 of Trikem’s common shares and 32,544,069 of our class A preferred shares in exchange for 28,260,456,441 of Trikem’s preferred shares.
Exchange of Polialden, Shares for Our Class A Preferred Shares
On December 15, 2004, we exchanged 2,020,201 of our class A preferred shares which were held in our treasury for 47,846,610 preferred shares issued by Polialden held by certain of the shareholders of Polialden. The shareholders of Polialden participating in this exchange were parties to suits brought against Polialden claiming, among other things, that certain dividends were owed to these shareholders. In connection with the exchange of shares, these claims were relinquished by the Polialden shareholders participating in the exchange. As a result of this exchange, we increasedincreasing our interest in the total share capital of Polialden from 56.3% to 63.7%.
Developments Since January 1, 2005
Formation of Paulínia
Petroquímica Paulínia S.A., or Paulínia, was incorporated on September 16, 2005. On that date, we acquired 60.0% of the total and voting share capital of Paulínia. Paulínia is a joint venture between our company and Petroquisa for the construction and operation of a polypropylene plant located in Paulínia, in the State of São Paulo.
Politeno Acquisition
On April 6, 2006, we purchased all of the common and preferred shares of Politeno that were owned by SPQ Investimentos e Participações Ltda., or SPQ, a subsidiary of Suzano, Petroquímica S.A., or Suzano,
Sumitomo Chemical Company Limited, or Sumitomo, and Itochu Corporation, or Itochu. We refer to this transaction as the Politeno acquisition. As a result ofAcquistion. Following the Politeno acquisition,Acquisition, we now ownowned 100% of the voting share capital and 96.2% of the total share capital of Politeno.
Merger of Polialden into Braskem
At an extraordinary shareholders’ meeting onin May 31, 2006, our shareholders approved our merger with Polialden and the conversion of 2,632,043 of our class A preferred shares into 2,632,043 of our common shares in order to maintain the required minimum ratio of our common shares to preferred shares in accordance with the Brazilian Corporation Law after the completion of our merger with Polialden. In connection with this merger, we issued 7,878,825 of our class A preferred shares in exchange for 264,886,083 of Polialden’s preferred shares.
Current Corporate StructureIpiranga Transaction
On March 18, 2007, we entered into an investment agreement with Ultrapar and Petrobras, which we refer to as the Ipiranga Investment Agreement. On the same date, Ultrapar and the controlling shareholders of RPI, Companhia Brasileira de Petróleo Ipiranga, or CBPI, and Distribuidora de Produtos de Petróleo Ipiranga S.A., or DPPI, entered into a share purchase and sale agreement, which refer to as the Purchase Agreement, with our company and Petrobras as intervening parties. We refer to the Ipiranga Investment Agreement and the Purchase Agreement together as the Ipiranga Transaction Agreement, and we refer to the transactions contemplated by the Ipiranga Transaction Agreement and the related transactions described below as, collectively, the Ipiranga Transaction.
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Under the Ipiranga Investment Agreement, Ultrapar, as a commission agent acting on behalf of Braskem and Petrobras, acquired 100% of the share capital of Ipiranga Química. As of March 18, 2007, Ipiranga Química owned 86.9% of the voting share capital and 92.4% of the total share capital of Ipiranga Petroquímica. Ipiranga Petroquímica, in turn, owned 29.5% of the share capital of Copesul. In February 2008, Ultrapar transferred 60.0% of the share capital of Ipiranga Química to our company and 40.0% of the share capital of Ipiranga Química to Petrobras, as required by the Ipiranga Investment Agreement. In addition, under the Ipiranga Investment Agreement, Ultrapar is obligated to transfer 33.3% of the share capital of RPI to our company and 33.3% of the share capital of RPI to Petrobras. Following this transfer, we will jointly and equally control RPI with Petrobras and Ultrapar. The total purchase price to our company of the shares of Ipiranga Química that we have acquired and the shares of RPI that we will acquire from Ultrapar in the Ipiranga Transaction was R$1,489.1 million.
Under the Ipiranga Investment Agreement, Braskem paid Ultrapar R$651.9 million in April 2007, R$156.7 million in October 2007, R$47.0 million in November 2007 and R$633.5 million in February 2008 for the shares of Ipiranga Química that we have acquired and the shares of RPI that we will acquire from Ultrapar in the Ipiranga Transaction. For additional information regarding the Ipiranga Transaction, see “—Ipiranga Transaction.”
Merger of Politeno into Braskem
At an extraordinary shareholders’ meeting in April 2007, our shareholders approved our merger with Politeno and the conversion of 486,530 of our class A preferred shares into 486,530 of our common shares in order to maintain the required minimum ratio of our common shares to preferred shares in accordance with the Brazilian Corporation Law after the completion of our merger with Politeno. In connection with this merger, we issued 1,533,670 of our class A preferred shares in exchange for 412,901,157 of Politeno’s class A preferred shares and 2,126,856,433 of Politeno’s class B preferred shares.
Acquisition of Minority Interests in Ipiranga Petroquímica
In June 2007, EDSP67 acquired the 7.6% of the total share capital of Ipiranga Petroquímica not owned by Ipiranga Química for a purchase price of R$117.9 million. In July 2007, Ipiranga Petroquímica was delisted from the São Paulo Stock Exchange, and in August 2007, EDSP67 merged with and into Ipiranga Petroquímica. As a result of these transactions, Ipiranga Petroquímica is now a wholly-owned subsidiary of Ipiranga Química.
Acquisition of Minority Interests in Copesul
In October 2007, our subsidiary EDSP58 acquired 22.7% of the total and voting share capital of Copesul through a public tender offer for the Copesul shares not then owned by our company, Ipiranga Petroquímica, Petroquisa or Triunfo. The purchase price for these shares was R$1,294.2 million. We owned 60% of the total and voting share capital of EDSP58, and Petrobras owned the remaining share capital of EDSP58. As a result of the Copesul Tender Offer, Copesul was delisted from the São Paulo Stock Exchange in October 2007. In October 2007 and November 2007, EDSP58 purchased additional shares of Copesul at the price per share paid in the Copesul Tender Offer. In November 2007, Copesul redeemed all of its outstanding shares, other than shares held by our company, EDSP58, Ipiranga Petroquímica, Petroquisa and Triunfo at the price per share paid in the Copesul Tender Offer. The aggregate purchase price for the shares purchased and redeemed after the completion of the Copesul Tender Offer was R$124.3 million. In December 2007, EDSP58 merged with and into Copesul. Following this merger, Braskem owns 39.2% of the total and voting share capital of Copesul, Ipiranga Petroquímica owns 39.2% of the total and voting share capital of Copesul and Petroquisa and Triunfo own 21.6% of the total and voting share capital of Copesul.
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Acquisition of Additional Interest in Petroflex and Sale of Interest in Petroflex
In October 2007, we acquired shares of Petroflex Indústria e Comércio S.A., or Petroflex, representing 13.4% of its total and voting share capital from Suzano for an aggregate purchase price of R$61.0 million as a result of our exercise of our preemptive rights in August 2007 following the announcement of the acquisition of control of Suzano by Petrobras. As a result of this acquisition, we owned 33.5% of the total share capital of Petroflex including 33.6% of its voting share capital. In April 2008, we sold all of our share capital in Petroflex to Lanxess Participações Ltda., or Lanxess, for an aggregate price of R$252.1 million. As a result of this transaction, Petroflex registered a non-operational gain of R$115.6 million.
Ipiranga Transaction
On March 18, 2007, we entered into the Ipiranga Investment Agreement with Ultrapar and Petrobras. On the same date, Ultrapar and the controlling shareholders of RPI, CBPI and DPPI entered into the Purchase Agreement, with our company and Petrobras as intervening parties.
Under the Ipiranga Investment Agreement, Ultrapar, as a commission agent acting on behalf of Braskem and Petrobras, acquired 100% of the share capital of Ipiranga Química. As of March 18, 2007, Ipiranga Química owned 86.9% of the voting share capital and 92.4% of the total share capital of Ipiranga Petroquímica. Ipiranga Petroquímica, in turn, owned 29.5% of the share capital of Copesul. In February 2008, Ultrapar transferred 60% of the share capital of Ipiranga Química to our company and 40% of the share capital of Ipiranga Química to Petrobras, as required by the Ipiranga Investment Agreement. In addition, under the Ipiranga Investment Agreement, Ultrapar is obligated to transfer 33.3% of the share capital of RPI to our company and 33.3% of the share capital of RPI to Petrobras. Following this transfer, we will jointly and equally control RPI with Petrobras and Ultrapar. The total purchase price to our company of the shares of Ipiranga Química that we have acquired and the shares of RPI that we will acquire from Ultrapar in the Ipiranga Transaction was R$1,489.1 million.
As part of the Ipiranga Transaction:
Structure of the Transaction
As of the date of the Ipiranga Transaction Agreement, RPI owned:
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In addition, as of the date of the Ipiranga Transaction Agreement, DPPI owned 21.0% of the total share capital of CBPI, including 62.9% of its voting share capital, and CBPI owned 41.5% of the total share capital and voting share capital of Ipiranga Química. Under the Ipiranga Transaction Agreement and applicable law, Ultrapar was obligated to acquire the share capital of RPI, DPPI and CBPI that it did not own as of the date of the Ipiranga Transaction Agreement through a series of transactions as detailed below.
First Phase of Ipiranga Transaction
In April 2007, Ultrapar acquired from the controlling shareholders of RPI, DPPI and CBPI for a purchase price of R$2,113.1 million:
Second Phase of Ipiranga Transaction
In the second phase of the Ipiranga Transaction:
Third Phase of Ipiranga Transaction
In the third phase of the Ipiranga Transaction, in December 2007 the shareholders of Ultrapar, RPI, DPPI and CBPI approved the issuance of preferred shares of Ultrapar in exchange for the outstanding shares of RPI, DPPI and CBPI that Ultrapar did not own through an exchange of shares (incorporação de ações). This exchange was completed in January 2008 and, as a result of the completion of this exchange, Ultrapar became the sole owner of the share capital of RPI, DPPI and CBPI.
Fourth Phase of Ipiranga Transaction
In the fourth phase of the Ipiranga Transaction, in February 2008 Ultrapar delivered:
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The fourth phase of the Ipiranga Transaction will be completed when Ultrapar delivers 33.3% of the total share capital and voting share capital of RPI to our company; and 33.3% of the total share capital and voting share capital of RPI to Petrobras. We expect that Ultrapar will deliver these shares in the third quarter of 2008.
Accounting and Financial Impact of Ipiranga Transaction
As a result of the Ipiranga Transaction, we have fully consolidated the results of Copesul and its subsidiaries and consolidated the results of Ipiranga Química and its subsidiaries, including Ipiranga Petroquímica, into our financial statements as from April 1, 2007. We have accounted for each of Copesul, Ipiranga Química and Ipiranga Petroquímica as separate segments in our financial statements as from April 1, 2007. In addition, we have accounted for our interest in the results of RPI under the equity method in our financial statements as from April 1, 2007.
CADE Review of Ipiranga Transaction
The Ipiranga Transaction is subject to the final approval of the Brazilian antitrust authorities. However, Brazilian law permits us to consummate these transactions prior to receiving this final approval, unless CADE issues a writ of prevention blocking a transaction or requires the parties to enter into an agreement permitting the effects of the transaction to be reversed which, by its terms, delays the consummation of the transaction. Our company, together with Ultrapar and Petrobras, submitted the terms and conditions of the Ipiranga Transaction for review by the Brazilian antitrust authorities in April 2007.
In April 2007, CADE issued a writ of prevention relating to the Ipiranga Transaction, which, among other things, prevented our exercise of strategic management control over Ipiranga Química and Ipiranga Petroquímica. In issuing the writ of prevention, CADE stated that the purpose of the writ of prevention was to guarantee that the Ipiranga Transaction could be reversed in the event that CADE so determined following its review of the Ipiranga Transaction. In April 2007, CADE revoked this writ of prevention upon the agreement of our company to execute the Reversibility Agreement designed to preserve the reversibility of the Ipiranga Transaction. Under the Reversibility Agreement, we agreed to preserve all of the assets acquired in the Ipiranga Transaction until CADE makes a final determination with respect to the Ipiranga Transaction, and we are permitted to effectively own and manage these assets pending this final determination.
Although the terms and conditions of the Ipiranga Transaction were submitted to the Brazilian antitrust authorities in four separate filings reflecting the separate markets affected by the Ipiranga Transaction, on September 19, 2007, CADE decided that the four fillings should be analyzed and submitted for approval together.
The Economic Monitoring Office of the Ministry of Finance(Secretaria de Acompanhamento Econômico), or SEAE, issued a favorable opinion with respect to the Ipiranga Transaction in February 2008. Approval of this transaction by CADE remains pending. There can be no assurance that the Brazilian antitrust authorities will approve the Ipiranga Transaction as currently structured or that these authorities will not impose additional conditions on the Ipiranga Transaction. We cannot predict when CADE will take final action with respect to the Ipiranga Transaction.
Strategic Rationale
Through our participation in the Ipiranga Transaction, we are taking an important step in the consolidation and development of the Brazilian petrochemical industry. We believe the acquisition of control of Copesul and Ipiranga Petroquímica will provide the following strategic and financial benefits to our company:
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Financing of Purchase Price
Under the Ipiranga Investment Agreement, Braskem paid Ultrapar R$651.9 million in April 2007, R$156.7 million in October 2007, R$47.0 million in November 2007 and R$633.5 million in February 2008 for the shares of Ipiranga Química that we have acquired and the shares of RPI that we will acquire from Ultrapar in the Ipiranga Transaction.
In April 2007, we entered into the Acquisition Credit Agreement with three financial institutions in the aggregate amount of US$1.2 billion to finance the Ipiranga Transaction. In April 2007, we received the first disbursement under the Acquisition Credit Agreement in the aggregate amount of US$330.0 million to fund the first payment due under the Ipiranga Investment Agreement. In October 2007, we received the second and third disbursements under the Acquisition Credit Agreement in the aggregate amount of US$468.8 million to fund a portion of the purchase price under the Copesul Tender Offer. In October 2007, we received the fourth and fifth disbursements under the Acquisition Credit Agreement in the aggregate amount of US$150.0 million to fund a portion of the purchase price paid by Ultrapar in tender offers for the common shares of RPI, DPPI or CBPI. In February 2008, we received the sixth and final disbursement under the Acquisition Credit Agreement in the aggregate amount of US$251.2 million to fund the final payment due as part of the Ipiranga Transaction. Each disbursement under the Acquisition Credit Agreement bears interest at the rate of LIBOR plus 0.35% per annum until the first anniversary of such disbursement and thereafter at the rate of LIBOR plus 0.55% per annum, payable in arrears. The principal amount of each disbursement under the Acquisition Credit Agreement is payable on or prior to the second anniversary of such disbursement. The Acquisition Credit Agreement includes limitations on our ability to incur liens, enter into related party transactions or merge with certain other entities.
In June 2007, EDSP67 entered into two short-term financing transactions with Brazilian financial institutions in the aggregate amount of US$61.0 million to finance the acquisition of the 7.6% of the total share capital of Ipiranga Petroquímica not owned by Ipiranga Química.
In September 2007, EDSP58 entered into an export prepayment credit facility with Petrobras International Finance Company – PIFCo, or PIFCo, under which EDSP58 is permitted to borrow an aggregate principal amount of up to US$323.0 million. In October 2007, EDSP58 borrowed an aggregate of US$312.5 million under this facility to fund a portion of the purchase price of the shares tendered in the Copesul Tender Offer.
In order to lengthen the average maturity of our outstanding indebtedness and to reduce our refinancing risks, we are exploring refinancing of the Acquisition Credit Agreement in the near term. In May 2008. we used the proceeds of our offering of US$500.0 million 7.250% Notes due 2018 to repay a portion of the indebtedness outstanding under the Acquisition Credit Agreement. We are analyzing opportunities to refinance the remainder of this indebtedness through bank credit agreements, pre-export financing agreements, offerings of securities in the domestic or international markets or a combination of these instruments. The form, manner and timing of the refinancing of amounts borrowed under the Acquisition Credit Agreement will depend on market conditions.
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Shareholders Agreements
We have entered into the shareholders agreements and memorandum of understanding described below that govern our rights with respect to Copesul, Ipiranga Química, Ipiranga Petroquímica and RPI.
Interim Shareholders Agreement
On April 18, 2007, we entered into a shareholders agreement with Ultrapar and Petrobras, which we refer to as the Interim Shareholders Agreement, under which we obtained effective management control over Ipiranga Química and, consequently, Ipiranga Petroquímica and the interest of Ipiranga Petroquímica in Copesul. Under the Interim Shareholders Agreement, we were granted the right to nominate a majority of the board of directors of Ipiranga Química and Ipiranga Petroquímica, and the right to nominate a majority of the nominees of Ipiranga Petroquímica to the board of directors of Copesul. The Interim Shareholders Agreement terminated in February 2008 upon the transfer of the shares of Ipiranga Química to our company and Petrobras as part of the fourth phase of the Ipiranga Transaction as described above under “—Structure of the Transaction—Fourth Phase of Ipiranga Transaction.”
Ipiranga Memorandum of Understanding
On March 18, 2007, we entered into a memorandum of understanding with Petrobras regarding the interests of Ipiranga Petroquímica in Copesul and the control of Ipiranga Química and Ipiranga Petroquímica, which we refer to as the Ipiranga Memorandum of Understanding. The Ipiranga Memorandum of Understanding granted Petrobras veto rights with respect to certain matters that are subject to the approval of the shareholders and boards of directors of Ipiranga Química, Ipiranga Petroquímica and Copesul. Upon the completion of the first phase of the Petrobras Transaction, Petrobras, Petroquisa, Odebrecht and Norquisa, with Braskem as intervening party, entered into a shareholders’ agreement with a term of 25 years, which we refer to as the Petrobras Shareholders’ Agreement. The Petrobras Shareholders’ Agreement superseded the Ipiranga Memorandum of Understanding.
RPI Shareholders Agreement
As part of the Ipiranga Transaction, we entered into a shareholders agreement with Ultrapar and Petrobras, which we refer to as the RPI Shareholders Agreement, which gives each of Ultrapar, Petrobras and our company the right to nominate one-third of the directors of RPI and establishes that all decisions need to be taken by the unanimous vote of the shareholders.
Petrobras Transaction
On November 30, 2007, Braskem entered into an investment agreement with Odebrecht, Petrobras, Petroquisa and Norquisa. On May 14, 2008, Braskem, Odebrecht, Norquisa, Petrobras and Petroquisa entered into an amendment to this agreement. We refer to this agreement, as amended, as the Petrobras Investment Agreement. We refer to the transactions under the Petrobras Investment Agreement as the Petrobras Transaction. Under the Petrobras Investment Agreement, the Petrobras Transaction will be completed in two phases. In the first phase, Petroquisa through its wholly-owned subsidiary Grust Holdings S.A., or Grust, contributed the following assets to Braskem:
In exchange for these assets, Braskem issued an aggregate of 46,903,320 common shares and 43,144,662 class A preferred shares to Petroquisa.
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As a result of the completion of the first phase of the Petrobras Transaction, Petrobras owns, directly and indirectly, 23.1% of our total share capital, including 30.0% of our voting share capital, and Braskem owns, directly and indirectly:
The first phase of the Petrobras Transaction was implemented on May 30, 2008 through an exchange of shares (incorporação de ações) in which shares of Braskem were issued to Petroquisa in exchange for shares of Grust that, directly and indirectly, owns the interests in Copesul, Ipiranga Química, Ipiranga Petroquímica and Paulínia contributed to Braskem.
Under the Petrobras Investment Agreement, Petrobras has the option in the second phase of the Petrobras Transaction to contribute up to 100% of the share capital of Triunfo to Brasken in exchange for approximately 13,387,197 of our class “A” preferred shares. We refer to this option as the Triunfo Option. Triunfo owns 0.8% of the voting and outstanding share capital of Copesul. If Petrobras exercises this option and contributes 100% of the share capital of Triunfo to Braskem, Copesul will become a wholly-owned subsidiary of Braskem.
The following chart presents the corporate structure of our principal subsidiaries and equity investments following the transactions described above.completion of the first phase of the Petrobras Transaction. The percentages in bold italics represent the percentage of the voting share capital owned directly and indirectly by the parent company of each entity, and the percentages not in bold italics represent the percentage of the total share capital owned directly and indirectly by the parent company of each entity. All of these companies are organized under Brazilian law.
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Strategic Rationale
Through our participation in the Petrobras Transaction, we are taking an important step in the consolidation and development of the Brazilian petrochemical industry. We believe the consolidation of Copesul, Ipiranga Química, Ipiranga Petroquímica, Paulínia and Triunfo into our company will provide the following strategic and financial benefits to our company:
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Our Principal SubsidiaryAccounting and Jointly Controlled CompaniesFinancial Impact of Petrobras Transaction
Our principal subsidiary is Politeno, which is a corporation (sociedade anônima) organized under the laws of Brazil. As a result of the Politeno acquisition on April 6, 2006, we now own 100%completion of the voting share capitalfirst phase of the Petrobras Transaction, we will no longer record minority interests with respect to Ipiranga Química and 96.2%the minority interest in Copesul represents only 0.8% of the total share capital of Politeno. Politeno is engaged in the manufacturing, processing, selling, importing and exporting of low density polyethylene, or LDPE, medium density polyethylene, high density polyethylene, or HDPE, linear low density polyethylene, or LLDPE, linear medium density polyethylene, ethyl vinyl acetate copolymer and other special resins. Politeno operates two industrial units in the Northeastern Complex. For information concerning these operations, see “—Jointly Controlled Companies and Joint Venture—Politeno.”
We hold equity investments in Copesul and Petroflex, which are jointly controlled with third parties. We proportionallyCopesul. In addition, we will fully consolidate the results of these jointly controlled companiesPaulínia into our financial statements as from April 1, 2008. In the event that Petrobras and Petroquisa exercise the Triunfo Option in full, we will fully consolidate the results of Triunfo into our financial statements as from the date of the completion of the Petrobras Transaction.
As a result of our full consolidation of the results of Paulínia into our financial statements, we will fully consolidate the assets and liabilities of Paulínia in our consolidatedbalance sheet, including the indebtedness of Paulínia. At December 31, 2007, Paulínia’s total outstanding debt was R$451.7 million, of which R$271.0 million was reflected in our balance sheet due to the proportional consolidation of the results of Paulínia in our financial statements, which hasstatements.
CADE Review of Petrobras Transaction
Although we believe that the Petrobras Transaction is not subject to the final approval of the Brazilian antitrust authorities, because the Petrobras Transaction is a significant impact on these financial statements. For a descriptionfollow-on transaction to the Ipiranga Transaction and does not involve any change of control of our jointly controlled companies, see “—Jointly Controlled Companiescompany or Petrobras, we and Joint Venture.”Petrobras submitted the terms and conditions of the Petrobras Transaction to the Brazilian antitrust authorities in December 2007. The SEAE and the Economic Law Office of the Ministry of Justice(Secretaria de Direito Econômico), or SDE, issued favorable opinions with respect to the Petrobras Transaction in April 2008. Approval of the filing by CADE remains pending.
There can be no assurance that the Brazilian antitrust authorities will agree with our analysis or that these authorities will not impose additional conditions on the Petrobras Transaction. We cannot predict when CADE will take final action with respect to the Petrobras Transaction.
Petrochemical Industry Overview
Structure
The petrochemical industry transforms crude oil by-products, principally naphtha, or natural gas into widely used industrial and consumer goods. The Brazilian petrochemical industry is generally organized into first, second and third generation producers based on the stage of transformation of various petrochemical raw materials, or feedstocks.
First Generation Producers
Brazil’s first generation producers, which are referred to as “crackers,” break down or “crack” naphtha or natural gas, their principal feedstock, into basic petrochemicals. There are four crackers in Brazil. Three of these crackers purchase naphtha, which is a by-product of the oil refining process, primarily from Petrobras, as well as from other suppliers located outside of Brazil. The fourth, Rio Polímeros, purchases natural gas from Petrobras. The basic petrochemicals produced by the crackers include:
We, Copesul, Petroquímica União and Rio Polímeros operate Brazil’s four crackers and sell basic petrochemicals to second generation producers, including, in our case, second generation producers that are part of our company. The basic petrochemicals, which are in gaseous or liquid form, are transported primarily via pipelines to the second generation producers’ plants, generally located near the crackers, for further processing.
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Second Generation Producers
Second generation producers process the basic petrochemicals obtained from the crackers to produce intermediate petrochemicals. These petrochemicals include:
There are 36 second generation producers operating in Brazil. Intermediate petrochemicals are produced in solid form as plastic pellets or powders and are transported primarily by truck to third generation producers, which generally are located far from the second generation producers. We and Rio Polímeros are the only integrated first and second generation petrochemical companycompanies in Brazil.
Third Generation Producers
Third generation producers, known as transformers, purchase the intermediate petrochemicals from second generation producers and transform them into final products including:
Third generation producers manufacture a variety of consumer and industrial goods, including containers and packaging materials, such as bags, film and bottles, textiles, detergents, paints, automobile parts, toys and consumer electronic goods. There are over 6,000more than 11,200 third generation producers operating in Brazil.
Petrochemical Complexes
The production of first and second generation petrochemicals in Brazil centers around four major complexes. These complexes include:
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Each complex has a single first generation producer, also known as the “raw materials center,” and several second generation producers that purchase feedstock from the raw materials center.
The Northeastern Complex began operations in 1978. The Northeastern Complex consists of 1513 second generation producers situated around the raw materials center operated by our company. At December 31, 2005,2007, our raw materials center had an annual ethylene production capacity of 1,280,000 tons, which we estimate accounted for approximately 37.3%36.6% of Brazil’s ethylene production capacity.
The Southern Complex began operations in 1982. Copesul in which we have a 29.5% equity interest, is the raw materials center at the Southern Complex and supplies first generation petrochemicals to seven second generation producers, including our Polyolefins Unit.Unit and Ipiranga Petroquímica. At December 31, 2005,2007, Copesul had an annual ethylene production capacity of 1,135,000 tons.1,200,000 tons, which we estimate accounted for approximately 34.3% of Brazil’s ethylene production capacity.
The São Paulo Complex, which is the oldest petrochemical complex in Brazil, began operations in 1972. Petroquímica União is the raw materials center at the São Paulo Complex and supplies first generation petrochemicals to 20 second generation producers located at the São Paulo Complex and elsewhere, including our company. At December 31, 2005,2007, Petroquímica União had an annual ethylene production capacity of 500,000 tons.
The Rio de Janeiro Complex commenced operations in 2005. Rio Polímeros, a Brazilian petrochemical company, is the raw materials center at the Rio de Janeiro Complex and supplies first generation petrochemicals to two second generation producers. At December 31, 2005,2007, Rio Polímeros had a maximum annual ethylene production capacity of 520,000 tons. This plant is in the process of ramping up its production towards its annual capacity.
Role of the Brazilian Government
The current structure of the Brazilian petrochemical industry reflects the Brazilian government’s plan, developed during the 1970’s, to establish a domestic petrochemical industry to serve Brazilian markets. First and second generation producers, including our company, are located within close proximity of each other to allow the common use of facilities, such as utilities, and to facilitate the delivery of feedstocks. Prior to their privatization by the Brazilian government, the expansion of production capacity at the crackers and the second generation producers was coordinated to ensure that the supply of petrochemicals met expected demand. The infrastructure developed around the complexes fostered the interdependence of first and second generation producers, as limited facilities were constructed for purposes of transportation and storage of feedstocks for import or export. Following their privatization, this interdependence has increased as second generation producers, which continue to rely upon the crackers for feedstocks and utilities, have increased their ownership of, and participation in the management of, the crackers.
The Brazilian government developed the Brazilian petrochemical industry generally by promoting the formation of three-way joint ventures among the Brazilian government, foreign petrochemical companies and private Brazilian investors. In these joint ventures, Petrobras’ subsidiary, Petroquisa, participated as the representative of the Brazilian government, with Petrobras as the supplier of naphtha; a foreign petrochemical company provided technology; and a Brazilian private sector company provided management.
In 1992, the Brazilian government began a privatization program to reduce significantly its ownership of the petrochemical industry. This program was designed to increase private investment in the petrochemical industry and to improve its efficiency. As a result of the privatization program, the Brazilian government’s ownership of our common shares, and of the common shares of Copesul and Petroquímica União, was significantly reduced, replaced by private sector entities. As a result of a similar privatization process, private ownership of the second generation producers increased.
The following table sets forth the percentage of the indirect ownership interests held in the crackers’ voting shares by Petroquisa, private sector entities and other investors before the privatization of the crackers and at December 31, 2005.2007.
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Before privatization | At December 31, 2005 | |||||||||||||||||||
Date of | Petroquisa | Private sector groups | Other investors(1) | Petroquisa | Private sector groups | Other investors(1) | ||||||||||||||
Copesul | May 15, 1992 | 67.2 | % | 2.1 | % | 30.7 | % | 15.6 | % | 58.9 | % | 25.4 | % | |||||||
Petroquímica União | January 24, 1994 | 67.8 | 31.9 | 0.3 | 17.4 | 60.8 | 21.8 | |||||||||||||
Braskem | August 15, 1995 | 48.2 | 50.4 | 1.4 | 10.0 | 74.1 | 15.9 | |||||||||||||
Rio Polímeros | — | — | — | — | 16.7 | 66.6 | 16.7 |
Before Privatization | At December 31, 2007 | |||||||||||||
Private | Private | |||||||||||||
Date of | Sector | Other | Sector | Other | ||||||||||
Privatization | Petroquisa | Groups | Investors(1) | Petroquisa | Groups | Investors(1) | ||||||||
Copesul | May 15, 1992 | 67.2% | 2.1% | 30.7% | 20.8% | 79.2% | —% | |||||||
Petroquímica União | January 24, 1994 | 67.8 | 31.9 | 0.3 | 17.4 | 60.8 | 21.8 | |||||||
Braskem | August 15, 1995 | 48.2 | 50.4 | 1.4 | 8.1 | 84.5 | 7.4 | |||||||
Rio Polímeros | — | — | — | — | 16.7 | 66.6 | 16.7 |
(1) Pension funds, banks and individual investors.
Role of Petrobras
Prior to 1995, Brazil’s Constitution granted a monopoly to the Brazilian government, exercised through Petrobras, over the research, exploration, production, refining, importing and transporting of crude oil and refined petroleum products (excluding petrochemical products) in Brazil. The Brazilian Constitution also provided that by-productsbyproducts of the refining process, such as naphtha, could only be supplied in Brazil by or through Petrobras. Naphtha is the principal feedstock used in Brazil for the production of basic petrochemicals such as ethylene and propylene. In 1995, the Brazilian Constitution was amended to allow petroleum and petroleum related activities to be carried out by private companies, by concession or authorization from the Brazilian government. Since 1995, the Brazilian government has taken several measures to liberalize the petrochemical industry in Brazil.
In 1997, Law No. 9,478/97 implemented the 1995 constitutional amendment by creating the Brazilian Energy Policy Council (Conselho Nacional de Política Energética) and the National Petroleum Agency (Agência Nacional de Petróleo), which were charged with regulating and monitoring of the oil industry and the Brazilian energy sector. Following the creation of the National Petroleum Agency, new rules and regulations have been implemented, aimed at gradually ending Petrobras’ monopoly. Since 1997, ourOur company and Copesul havehas imported naphtha from trading companies and oil and gas producers located abroad.
abroad since 1997 and Copesul has done so since 2000. During 2005,2007, Petrobras produced and sold approximately 72%61.1% of the naphtha consumed by our company and Copesul, and the remaining naphtha consumed by our company and Copesul was imported.
Tariffs
We set prices for a majority of the ethylene, the principal first generation petrochemical product, that we sell to third–partythird-party second generation producers using a margin sharing system.by reference to international market prices. See “Basic“Item 4. Information On The Company—Basic Petrochemicals Unit—Unit and Copesul—Sales and Marketing of Ourour Basic Petrochemicals Unit.” Prices paid by second generation producers for imported first generation petrochemical products partly reflect transportation and tariff costs. We establish the prices of ethylene by-products, such as butadiene, by reference to several market factors, including the prices paid by second generation producers for imported products, which also take into account transportation and tariff costs.
Second generation producers, including our company, generally set prices for their petrochemical products by reference to several market factors, including the prices paid by third generation producers for imported products. Prices paid for such imports also reflect transportation and tariff costs.
The Brazilian government has frequently used import tariffs to implement economic policies. As a result, import tariffs generally vary significantly, especially those imposed on petrochemical products. Imports and exports within the free trade area composed of Argentina, Brazil, Paraguay and Uruguay in South America or Mercosul (Mercado Comum do Sul), or Mercosul, have not been subject to tariffs since December 2001. The following table shows the fluctuation of the tariffs on certain basic petrochemicals and second generation petrochemicals from 19961998 through 2005.2007. The tariff rates shown are those applicable at the end of the respective years, except where indicated.
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(%) | 2005 | 2004 | 2003 | 2002(1) | 2001(2) | 2000 | 1999 | 1998 | 1997(3) | 1996 | ||||||||||
First generation petrochemicals: | ||||||||||||||||||||
Ethylene | 2.0 | 2.0 | 3.5 | 3.5 | 4.5 | 5.0 | 5.0 | 5.0 | 5.0 | 2.0 | ||||||||||
Propylene | 2.0 | 2.0 | 3.5 | 3.5 | 4.5 | 5.0 | 5.0 | 5.0 | 5.0 | 2.0 | ||||||||||
Caustic soda | 8.0 | 8.0 | 9.5 | 9.5 | 10.5 | 11.0 | 11.0 | 11.0 | 11.0 | 8.0 | ||||||||||
Second generation petrochemicals: | ||||||||||||||||||||
Polyethylene | 14.0 | 14.0 | 15.5 | 15.5 | 16.5 | 17.0 | 17.0 | 17.0 | 17.0 | 14.0 | ||||||||||
Polypropylene | 14.0 | 14.0 | 15.5 | 15.5 | 16.5 | 17.0 | 17.0 | 17.0 | 17.0 | 14.0 | ||||||||||
PVC(4) | 14.0 | 14.0 | 15.5 | 15.5 | 16.5 | 17.0 | 17.0 | 17.0 | 17.0 | 14.0 | ||||||||||
Caprolactam | 12.0 | 12.0 | 13.5 | 13.5 | 14.5 | 15.0 | 15.0 | 15.0 | 15.0 | 12.0 |
2007 | 2006 | 2005 | 2004 | 2003 | 2002(1) | 2001(2) | 2000 | 1999 | 1998 | |||||||||||
(%) | ||||||||||||||||||||
First generation petrochemicals: | ||||||||||||||||||||
Ethylene | 2.0 | 2.0 | 2.0 | 2.0 | 3.5 | 3.5 | 4.5 | 5.0 | 5.0 | 5.0 | ||||||||||
Propylene | 2.0 | 2.0 | 2.0 | 2.0 | 3.5 | 3.5 | 4.5 | 5.0 | 5.0 | 5.0 | ||||||||||
Caustic soda | 8.0 | 8.0 | 8.0 | 8.0 | 9.5 | 9.5 | 10.5 | 11.0 | 11.0 | 11.0 | ||||||||||
Second generationpetrochemicals: | ||||||||||||||||||||
Polyethylene | 14.0 | 14.0 | 14.0 | 14.0 | 15.5 | 15.5 | 16.5 | 17.0 | 17.0 | 17.0 | ||||||||||
Polypropylene | 14.0 | 14.0 | 14.0 | 14.0 | 15.5 | 15.5 | 16.5 | 17.0 | 17.0 | 17.0 | ||||||||||
PVC (3) | 14.0 | 14.0 | 14.0 | 14.0 | 15.5 | 15.5 | 16.5 | 17.0 | 17.0 | 17.0 | ||||||||||
Caprolactam | 12.0 | 12.0 | 12.0 | 12.0 | 13.5 | 13.5 | 14.5 | 15.0 | 15.0 | 15.0 |
(1) | In 2002, the official tariff was 1.5% less than the rate shown. An additional surcharge of 1.5% assessed on imported products is included in the rate shown. |
(2) | In 2001, the official tariff was 2.5% less than the rate shown. An additional surcharge of 2.5% assessed on imported products is included in the rate shown. |
(3) |
Imports of suspension PVC from the |
Source:Brazilian Association of Chemical Industry and Derivative Products.
Operating Environment
The Brazilian markets in which we compete are cyclical and are sensitive to relative changes in supply and demand. Demand for petrochemical products is significantly affected by general economic conditions in Brazil and other countries in Mercosul, particularly Argentina. The Brazilian markets are also impacted by the cyclical nature of international markets as prices for petrochemical products in Brazil are determined in part with reference to international market prices for these products and by the prices, including tariff and transportation costs, paid by importers of petrochemical products into Brazil. Reductions in tariffs and other trade barriers have increasingly exposed the Brazilian petrochemical industry to price competition in the international markets.
Traditionally, the second and third calendar quarters have been the periods of the year with the highest sales for the petrochemical industry in the Brazilian market. The increase during this six-month period is tied in part to the production of consumer goods for sale during the year-end holiday season.
Brazilian GDP increased by 2.3%5.4% in 2005. The2007. This moderate growth of Brazilian GDP in 2005 contributed to a 2.9%8.1% increase in domestic polypropylenepolyolefins consumption slight(excluding consumption of ethyl vinyl acetate copolymer, or EVA) and a 16.0% increase in domestic PVC consumption. The strong growth in civil construction sector positively affected domestic PVC consumption of PVC and a 4.9% declinethe significant growth in other industrial sectors, such as durable goods, automotive and beverage, positively affected domestic consumption of polyethylene. Domestic consumption of thermoplastic resins increased
for certain applications, such as automotive parts and durable goods, including cellular phones and home appliances.generally. Although imports represent a small percentage of total Brazilian domestic consumption, in 2005,2007, imports of polyolefins increased by 7.2%19.9% and imports of PVC increased by 26.5%39.6% . In 2005,2007, Brazil’s exports of polyolefins increased by 1.2%, while exports of PVC increased by 75.7% and its exports of polyolefins increased by 27.9%21.3% . As a result of increased production capacity of Brazilian producers, including our company, higher rates of capacity utilization, and the continuing appreciation of therealagainst the U.S. dollar in 2005,2007, Brazilian petrochemical producers significantly improved their sales in 2005.2007.
We anticipate that demand for our products in Brazil may grow due to increasing consumption of plastic-based products, as well as population growth and expected general economic growth in Brazil. In addition, Brazilian per capita consumption of second generation petrochemicals has been modest compared to per capita consumption in many other more developed countries, which we believe suggests a potential for future growth in demand in Brazil. However, that growth could be hindered by the factors described in “Item 3. Key Information—Risk Factors—Risks Relating to Brazil” and “Item 3. Key Information—Risk Factors—Risks Relating to Our Company and the Petrochemical Industry.”
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The following table sets forth information relating to our production, the estimated production of other Brazilian companies and exports and imports of the products included therein for the years indicated.
Total | Estimated | |||||||||||
Total | Production of | Total Brazilian | ||||||||||
Brazilian | Our Total | Other Brazilian | Total | Total | Domestic | |||||||
Production | Production | Companies | Imports | Exports | Consumption | |||||||
(thousands of tons) | ||||||||||||
Olefins(1) | ||||||||||||
2007(2) | 5,417.8 | 3,799.0 | 1,618.7 | 9.1 | 155.5 | 5,271.5 | ||||||
2006 | 5,288.1 | 1,778.6 | 3,509.5 | 3.2 | 166.1 | 5,125.2 | ||||||
2005 | 4,775.2 | 1,889.9 | 2,885.2 | 18.5 | 120.0 | 4,672.7 | ||||||
Aromatics(3) | ||||||||||||
2007(2) | 1,486.2 | 1,172.9 | 313.3 | 55.3 | 621.1 | 920.4 | ||||||
2006 | 1,433.3 | 704.9 | 728.4 | 87.5 | 388.1 | 1,132.8 | ||||||
2005 | 1,518.0 | 733.7 | 784.3 | 47.6 | 453.8 | 1,111.8 | ||||||
Polyolefins(4) | ||||||||||||
2007(2) | 3,760.3 | 2,358.2 | 1,402.0 | 498.8 | 1,036.9 | 3,222.2 | ||||||
2006 | 3,669.9 | 1,629.6 | 1,940.1 | 415.2 | 1,031.3 | 3,025.4 | ||||||
2005 | 3,204.5 | 1,289.2 | 1,859.1 | 392.0 | 806.5 | 2,789.9 | ||||||
PVC | ||||||||||||
2007(2) | 686.5 | 465.4 | 221.0 | 176.7 | 43.2 | 820.0 | ||||||
2006 | 676.3 | 447.4 | 228.9 | 126.6 | 35.6 | 767.3 | ||||||
2005 | 640.3 | 449.3 | 191.0 | 119.5 | 65.6 | 694.2 | ||||||
PET(5) | ||||||||||||
2007(2) | 484.5 | 25.6 | 458.9 | 112.0 | 52.4 | 544.1 | ||||||
2006 | 307.4 | 65.1 | 242.3 | 172.5 | 30.6 | 449.2 | ||||||
2005 | 352.6 | 69.7 | 282.9 | 178.4 | 32.6 | 498.3 | ||||||
Caprolactam | ||||||||||||
2007(2) | 46.1 | 46.1 | — | 9.3 | 26.6 | 28.8 | ||||||
2006 | 44.9 | 44.9 | — | 6.7 | 17.8 | 33.8 | ||||||
2005 | 49.7 | 49.7 | — | 4.1 | 16.2 | 37.5 |
(thousands of tons) | Total Brazilian production | Our total production | Total production of other Brazilian companies | Total Imports | Total exports | Estimated total Brazilian domestic consumption | ||||||
Olefins(1) | ||||||||||||
2005 | 4,775.2 | 1,889.9 | 2,885.2 | 18.5 | 120,0 | 4,672.7 | ||||||
2004 | 4,779.0 | 1,809.6 | 2,969.4 | 19.9 | 121.5 | 4,677.3 | ||||||
2003 | 4,444.0 | 1,678.6 | 2,765.4 | 24.0 | 127.8 | 4,340.2 | ||||||
Aromatics(2) | ||||||||||||
2005 | 1,518.0 | 733.7 | 784.3 | 47.6 | 453.8 | 1,111.8 | ||||||
2004 | 1,562.4 | 714.8 | 847.6 | 100.4 | 317.8 | 1,345.0 | ||||||
2003 | 1,475.4 | 638.3 | 837.1 | 105.2 | 345.5 | 1,235.1 | ||||||
Polyolefins(3) | ||||||||||||
2005 | 3,148.3 | 1,289,2 | 1,859.1 | 379.9 | 782.8 | 2,745.4 | ||||||
2004 | 3,042.6 | 1,175.1 | 1,867.5 | 354.4 | 651.4 | 2,745.7 | ||||||
2003 | 2,854.4 | 1,101.7 | 1,752.7 | 324.4 | 717.6 | 2,461.1 | ||||||
PVC | ||||||||||||
2005 | 640.3 | 449.3 | 191.0 | 119.5 | 65.6 | 694.2 | ||||||
2004 | 629.7 | 420.7 | 209.1 | 94.5 | 44.1 | 680.1 | ||||||
2003 | 604.1 | 392.1 | 212.0 | 86.4 | 75.7 | 614.8 | ||||||
PET | ||||||||||||
2005 | 352.6 | 69.7 | 282.9 | 178.4 | 32.6 | 498.3 | ||||||
2004 | 357.6 | 72.6 | 285.0 | 137.1 | 62.0 | 432.7 | ||||||
2003 | 339.0 | 55.3 | 283.6 | 136.2 | 44.5 | 430.6 | ||||||
Caprolactam | ||||||||||||
2005 | 49.7 | 49.7 | — | 4.1 | 16.2 | 37.5 | ||||||
2004 | 50.5 | 50.5 | — | 6.4 | 7.6 | 49.3 | ||||||
2003 | 48.8 | 37.6 | 11.3 | 4.9 | 8.1 | 45.6 |
(1) | Includes ethylene, propylene and butadiene. |
(2) | Preliminary data. |
(3) | Includes benzene, toluene |
Includes polyethylene, | |
(5) | On May 16, 2007, we temporarily closed our PET plant. |
Sources:Brazilian Association of Chemical Industry and Derivative Products and Braskem.
The above estimates of total domestic consumption assume that all domestic production is immediately sold in the market and that there has been no change in total domestic inventory.
Overview of Our Company’s Operations
We are the leading petrochemical company in Latin America, based on average annual production capacity in 2005.2007. We are also one of the threethird largest Brazilian-owned private sector industrial companies,company, based on net sales revenue in 20042006 (the most recent year for which comparative information is currently available). We recorded net income of R$625.8 million in 2005 on net sales revenue of R$13,075.1 million.17,679.4 million and net income of R$547.6 million in 2007. We produce a diversified portfolio of petrochemical products in our 1419 plants in Brazil and have a strategic focus on polyethylene, polypropylene and PVC. We were the first Brazilian company with integrated first and second generation petrochemical production facilities.
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We have grown over the past five years primarily as the result of the integration of the operations of sixnine Brazilian petrochemical companies: our company;company, which was formerly named Copene Petroquímica do Nordeste S.A.; OPP Química; Polialden; Politeno; Trikem; Proppet; Nitrocarbono; Copesul and Nitrocarbono.Ipiranga Petroquímica. We have merged with all of these companies other than Copesul and Ipiranga Petroquímica.
Our business operations are organized into fourseven business units, which correspond to our principal production processes and products:products. Three of these business units (Copesul, Ipiranga Petroquímica and Ipiranga Química) were created in April 2007 as a result of the Ipiranga Transaction described above under “—Ipiranga Transaction.” Our business units are as follows:
We believe the integration of the operations of the companies that formed our company has produced, and will continue to provide,produce, significant synergies and cost savings from reductions in taxes, procurement and logistics expenses, production expenses, general and administrative expenses and other operating expenses.
Strategy
Our vision is to strengthen our position as a world-class petrochemical company. We seek to reinforce our leading position in the Latin American petrochemical market, with a focus on polyethylene, polypropylene and PVC and integration with our production of ethylene and propylene. Our business model focuses on enhancing shareholder value, with strategic drivers consisting of market leadership, cost competitiveness and technological autonomy.
We arewere the first Brazilian company to integrate first and second generation petrochemical production facilities. Our competitive advantages are derived from our leadership position in the Latin American market and on our favorable cost structure, resulting from our production scale and synergies realized from integration of the companies that formed our company.
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We are committed to providing technological support to our customers through the Braskem Center for Technology and Innovation and Ipiranga Petroquímica’s Technology and Innovation Center, which developsdevelop processes, products and applications for the sector.
The formation of our company marked a milestone in the restructuring of an industrial sector that is vital to Brazil’s economic development. We supply petrochemical products with application in a wide variety of industries, such as food packaging, automotive parts, paints, construction, agriculture, fabrics and personal care products.
The key elements of our strategy include:
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Braskem+ Program
We are in the process of implementing an operational excellence program named “Braskem+”. This program is designed to build upon the experience that Braskem has accumulated through the process of capturing operational synergies during its integration process. The Braskem+ program seeks to:
In connection with the development of the Braskem+ program, we engaged a leading consulting firm to analyze our industrial practices and compare them to benchmarking practices in the global petrochemical sector. Through this analysis, we have identified 210 initiatives designed to further improve, among other things, our capacity utilization and variable and fixed costs.
The implementation of the Braskem+ program is being performed by several teams, including:
We monitor the ongoing results of our implementation of the Braskem+ program, to determine our success in meeting scheduled milestones, perform follow-up activities and determine our progress in meeting the objectives of this program.
Formula Braskem
In 2005, we commenced a new program named “Formula Braskem” to implement a comprehensive integrated management system. Formula Braskem is intended to incorporate the best practices in the international petrochemical industry in our management systems and the most recent technological developments available in the marketplace. This program, together with the Braskem+ program, is designed to support our expansion andinto strategic export markets.
future internationalization,
We anticipate that Formula Braskem will be operational by October 2006. We have engaged SAP Brasil Ltda., or SAP, and Accenture do Brasil Ltda., or Accenture, to assist us in implementing Formula Braskem under agreements that provide for (1) the payment of bonuses to SAP and Accenture in the event that we achieve identified annual cost savings asOperating Efficiencies.As a result of the implementationintegration of Formula Braskemour facilities and large production scale, we believe that we are a low-cost producer of second generation petrochemicals. We have completed a program—the Braskem+ Program—to increase operating efficiencies and to reduce operating costs. We also continue to realize synergies from our integration process.
Our cost reduction program is linked to initiatives to purchase feedstocks at competitive prices. We began to import lower-cost naphtha in excess2002, and during 2007, we imported approximately 38.9% of those identified in our calculationsfeedstock requirements, primarily from North Africa.
Basic Petrochemicals Unit and Copesul
At December 31, 2005,2007, our Basic Petrochemicals facilities had one of the largest average annual production capacities of all first generation producers in Latin America. Our Basic Petrochemicals Unit accounted for R$7,226.77,220.7 million, or 53.5%31.9%, of the net sales revenue of all segments in 2005,2007, including net sales to our other business units, and Copesul accounted for R$5,516.1 million, or 24.4%, of the net sales revenue of all segments in 2007, including net sales to our other business units.
On April 18, 2007, the first phase of the Ipiranga Transaction was completed. As a result of our obtaining effective management control over Copesul, we have fully consolidated the assets, liabilities and results of operations of Copesul as from April 1, 2007. We account for Copesul as a segment separate from our Basic Petrochemicals segment.
Our Basic Petrochemicals Unit produces:and Copesul produce:
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The products of our Basic Petrochemicals Unit and Copesul are used primarily in the manufacture of intermediate second generation petrochemical products, including those manufactured by our other business units. WeOur Basic Petrochemicals Unit and Copesul also supply utilities to other plants located in the Northeastern Complex and the Southern Complex and render services to the operators of those plants.
In 2005, 87.5%2007, 88.5% of our Basic Petrochemicals Unit’s sales (including intra-company sales) were derived from the sale of basic petrochemicals, 6.8%7.3% from the sale of utilities and services, and 5.7%4.2% from the sale of fuels, and 93.8% of Copesul’s sales (including intra-company sales) were derived from the sale of basic petrochemicals, 1.7% from the sale of utilities and services, and 4.5% from the sale of fuels.
In 2007, 40.3% of our Basic Petrochemicals Unit’s net sales revenue from sales of basic petrochemicals were derived from sales made to our other business units and 48.4% of Copesul’s net sales revenue from sales of basic petrochemicals were derived from sales made to our other business units.
We believe that our Basic Petrochemicals Unit isand Copesul are well positioned to take advantage of increasing demand for basic petrochemicals products in Brazil, both by our other business units and by third parties. We anticipate that long-term growth for these products in Brazil will continue due to increasing demand for consumer products.
Products of Our Basic Petrochemicals Unit and Copesul
The following chart shows some of the majorprimary products produced by our Basic Petrochemicals Unit their derivative intermediateand Copesul and some of the second generation products and their most common end uses.
that use these products as raw materials.
Products of Our |
|
| ||
| ||||
Petrochemicals Unit and Copesul | Second Generation Products | |||
Olefins: | ||||
Ethylene | LDPE | |||
Propylene (polymer and chemical grade) | ||||
Butadiene | Synthetic rubber, elastomers, resins | |||
| ||||
| Aromatics: | |||
Benzene | Cyclohexane and cyclohexanone (3) | |||
Caprolactam (3) | ||||
Ammonium sulfate (3) | ||||
Ethylbenzene (used to make styrene monomer/ | ||||
Cumene | ||||
Linear alkyle benzene | ||||
| ||||
| ||||
Para-xylene | Purified terephthalic acid and | |||
Ortho-xylene | Phthalic anhydride and plasticizers | |||
Mixed xylenes | ||||
| ||||
| ||||
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| ||||
| ||||
| ||||
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(1) | Produced by our Polyolefins |
(2) | Produced by our Vinyls Unit. |
(3) | Produced by our Business Development Unit. |
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The following table sets forth a breakdown of the sales volume and net sales revenue of our Basic Petrochemicals Unit and Copesul (including our intra-company sales) by product line and by market for the yearsperiods indicated.
Years Ended December 31, | ||||||||||||||||||
2007(1) | 2006 | 2005 | ||||||||||||||||
Quantities | Quantities | Quantities | ||||||||||||||||
Sold (2) | Net Sales Revenue | Sold (2) | Net Sales Revenue | Sold (2) | Net Sales Revenue | |||||||||||||
(thousands | (millions of | (thousands | (millions of | (thousands | (millions of | |||||||||||||
of tons) | reais) | (%) | of tons) | reais) | (%) | of tons) | reais) | (%) | ||||||||||
Domestic net sales: | ||||||||||||||||||
Ethylene | 2,068.4 | R$4,826.5 | 41.8% | 1,108.5 | R$2,530.6 | 42.2% | 1,169.8 | R$2,578.2 | 40.8% | |||||||||
Propylene | 945.1 | 2,045.3 | 17.7 | 413.0 | 871.6 | 14.5 | 497.5 | 1,060.9 | 16.8 | |||||||||
Benzene | 341.3 | 723.0 | 6.3 | 203.0 | 398.0 | 6.6 | 199.9 | 439.8 | 7.0 | |||||||||
Butadiene | 195.6 | 449.3 | 3.9 | 140.9 | 341.9 | 5.7 | 150.2 | 331.3 | 5.2 | |||||||||
Para-xylene | 18.4 | 40.9 | 0.4 | 82.8 | 201.7 | 3.4 | 171.0 | 385.0 | 6.1 | |||||||||
Ortho-xylene | 65.8 | 142.8 | 1.2 | 61.7 | 136.0 | 2.3 | 41.3 | 87.0 | 1.4 | |||||||||
Mixed xylenes | 56.2 | 126.2 | 1.1 | 34.1 | 78.0 | 1.3 | 35.4 | 61.7 | 1.0 | |||||||||
Toluene | 63.0 | 122.2 | 1.1 | 34.8 | 62.5 | 1.0 | 29.5 | 48.0 | 0.7 | |||||||||
Others | 521.0 | 458.2 | 9.7 | 178.6 | 379.9 | 6.3 | 203.8 | 380.1 | 6.0 | |||||||||
Total domestic net sales of basic petrochemicals | 4,274.8 | 8,934.4 | 83.0 | 2,257.4 | 5,000.1 | 83.4 | 2,498.4 | 5,372.0 | 85.0 | |||||||||
Total export net sales of basic petrochemicals | 866.2 | 839.9 | 17.0 | 544.4 | 953.4 | 16.6 | 535.0 | 950.0 | 15.0 | |||||||||
Total net sales of basic petrochemicals | 5,141.0 | 10,774.3 | 100% | 2,801.8 | 5,953.4 | 100% | 3,033.4 | 6,322.0 | 100% | |||||||||
Condensate | 788.7 | — | — | — | — | |||||||||||||
Automotive gasoline and utilities (3) | 1,173.8 | 930.2 | 904.7 | |||||||||||||||
Total Basic Petrochemicals Unit net sales revenue (4) | R$12,736.8 | R$6,883.6 | R$7,226.7 | |||||||||||||||
Years ended December 31, | ||||||||||||||||||||||||
2005 | 2004 | 2003 | ||||||||||||||||||||||
Quantities sold(1) | Net sales revenue | Quantities sold(1) | Net sales revenue | Quantities sold(1) | Net sales revenue | |||||||||||||||||||
(thousands oftons) | (millions ofreais) | (%) | (thousands oftons) | (millions ofreais) | (%) | (thousands oftons) | (millions ofreais) | (%) | ||||||||||||||||
Domestic net sales: | ||||||||||||||||||||||||
Ethylene | 1,169.8 | R$ | 2,578.2 | 40.8 | % | 1,098.9 | R$ | 2,302.2 | 40.1 | % | 1,047.3 | R$ | 1,733.1 | 41.9 | % | |||||||||
Propylene | 497.5 | 1,060.9 | 16.8 | 446.8 | 819.1 | 14.3 | 403.4 | 595.9 | 14.4 | |||||||||||||||
Para-xylene | 171.0 | 385.0 | 6.1 | 148.7 | 319.6 | 5.6 | 117.3 | 195.5 | 4.7 | |||||||||||||||
Benzene | 199.9 | 439.8 | 7.0 | 216.7 | 522.6 | 9.1 | 217.9 | 298.3 | 7.2 | |||||||||||||||
Butadiene | 150.2 | 331.3 | 5.2 | 160.0 | 296.0 | 5.2 | 150.3 | 278.7 | 6.7 | |||||||||||||||
Mixed xylenes | 35.4 | 61.7 | 1.0 | 74.5 | 126.4 | 2.2 | 53.7 | 83.4 | 2.0 | |||||||||||||||
Ortho-xylene | 41.3 | 87.0 | 1.4 | 52.7 | 109.9 | 1.9 | 49.9 | 80.0 | 1.9 | |||||||||||||||
Toluene | 29.5 | 48.0 | 0.7 | 33.2 | 57.4 | 1.0 | 38.9 | 51.4 | 1.2 | |||||||||||||||
Others | 203.8 | 380.1 | 6.0 | 255.3 | 405.0 | 7.1 | 195.8 | 324.6 | 7.9 | |||||||||||||||
Total domestic net sales of basic petrochemicals | 2,498.4 | 5,372.0 | 85.0 | 2,486.8 | 4,958.2 | 86.4 | 2,274.5 | 3,640.9 | 87.9 | |||||||||||||||
Total export net sales of basic petrochemicals | 535.0 | 950.0 | 15.0 | 436.6 | 778.9 | 13.6 | 405.9 | 490.7 | 11.9 | |||||||||||||||
Total net sales of basic petrochemicals | 3,033.4 | 6,322.0 | 100 | % | 2,923.4 | 5,737.1 | 100 | % | 2,680.4 | 4,131.6 | 100 | % | ||||||||||||
Automotive gasoline and utilities(2) | 904.7 | 742.9 | 633.7 | |||||||||||||||||||||
Total Basic Petrochemicals Unit net sales revenue(3) | R$ | 7,226.7 | R$ | 6,480.0 | R$ | 4,765.3 | ||||||||||||||||||
% of the total net sales revenue of all segments | 53.5 | % | 52.1 | % | 47.8 | % | ||||||||||||||||||
(1) | Includes Copesul as from April 1, 2007. |
(2) | Includes the following intra-company sales: |
• approximately 1,644,000 tons of ethylene in 2007, 800,600 tons in 2006 and 588,700 tons in 2005; • approximately 567,800 tons of propylene in 2007, 86,500 tons in 2006 and 89,300 tons in 2005; • approximately 18,400 tons of para-xylene in 2007, 42,300 tons in 2006 and 45,600 tons in 2005; and • approximately 62,800 tons of benzene in 2007, 53,400 tons in 2006 and 60,800 tons in 2005. |
(3) | Utilities include electric power, steam, treated water and compressed air. |
(4) | Includes basic petrochemicals, fuels and utilities. | |
Olefins
Olefins are relatively unstable hydrocarbons characterized by a structure that is chemically active and permits other chemically reactive elements, such as oxygen, to be added. Ethylene and propylene, which are types of olefins, are the chemical “backbone” for many plastic resins used to manufacture consumer products. Our primary olefins products include polymer grade ethylene and propylene, also known as monomers. Different combinations of monomers are polymerized, or linked together, to form polymers or plastic resins with different properties and characteristics.
Aromatics
Aromatics are hydrocarbons identified by one or more benzene rings or by chemical behavior similar to benzene. Aromatics readily react to add other active molecular groups, such as nitrates and sulfonates.
Fuels
Our company has been authorized by the National Petroleum Agency to produce and sell automotive gasoline since August 15, 2000 and LPG since October 2, 2001, both domestically and for export. We have been producing and selling both automotive gasoline and LPG since these dates.
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Utilities
We produce electric power, steam, compressed air and clarified drinking and demineralized water, some of which are by-products of our production of basic petrochemicals. We use these utilities in our own production processes, including those of our Polyolefins Unit, Ipiranga Petroquímica and our Vinyls Unit, and sell these utilities to approximately 40 companies in the Northeastern Complex and eight companies in the Southern Complex. Our utilities facilities include units for thermoelectric power generation, water treatment and the production of steam and compressed air.
We self-generate approximately 70%85% of the Northeastern Complex’s energy consumption requirements, and the remainder is furnished by Companhia Hidro Elétrica do São Francisco—CHESF, or CHESF, a Brazilian government-owned electric power generation company located in the State of Bahia, and by Companhia de Eletricidade do Estado da Bahia—COELBA.
We self-generate approximately 35% of the Southern Complex’s energy consumption requirements, and the remainder is acquired primarily under auction contracts in the free market for energy (Mercado Livre de Energia) from several companies.
Production Facilities of Our Basic Petrochemicals Unit and Copesul
We believe that the technological processes we use at our basic petrochemicals plants are among the most advanced in the world. We currently own and operate five major Basic Petrochemicalsbasic petrochemicals units (Olefins 1, Olefins 2, Aromatics 1, Aromatics 2 and Energy and Services), each of which is located at in the Northeastern Complex and four major basic petrochemicals units (two olefin units, one aromatics units and a utilities unit) located in the Southern Complex. Our Basic Petrochemicals Unit definesWe define the term “unit” to mean several plants that are linked together to produce olefins, aromatics or utilities. As a result, the production capacity of Aromatics units 1 and 2 is the sum of the production capacities of the various plants that form these units. At December 31, 2005,2007, our basic petrochemicals plants had total annual production capacity of 1,280,0002,480,000 tons of ethylene and 550,0001,180,000 tons of propylene.
The table below sets forth the name, primary products, annual production capacity at December 31, 20052007 and annual production for the years presented for each of our principal Basic Petrochemicals units and plants.
Annual | Production | |||||||||
Production | For the Year Ended December 31, | |||||||||
Name | Primary Products | Capacity | 2007 | 2006 | 2005 | |||||
(in tons, except automotive gasoline) | ||||||||||
Olefins units 1 and 2 | Ethylene | 1,280,000 | 1,170,000 | 1,103,969 | 1,165,319 | |||||
Propylene | 550,000 | 561,648 | 520,413 | 562,048 | ||||||
Plants of aromatics units 1 and 2: | ||||||||||
Butadiene plants 1 and 2 | Butadiene | 175,000 | 145,616 | 154,227 | 162,586 | |||||
MTBE plants 1 and 2 | MTBE | 140,000 | 114,979 | 118,691 | 129,345 | |||||
Butene-1 plant | Butene-1 | 35,000 | 27,750 | 24,701 | 25,515 | |||||
Isoprene plant | Isoprene | 26,800 | 13,024 | 12,500 | 16,140 | |||||
Dicyclopentadiene | 24,000 | 25,011 | 16,517 | 25,245 | ||||||
Sulfolane plants 1, 2 and 3 | Coperaf – 1 (1) | 120,000 | 49,933 | 86,773 | 86,066 | |||||
BTX fractionation plants 1 and 2 | Benzene | 427,000 | 409,733 | 400,793 | 428,796 | |||||
Toluene (2) | 42,000 | 47,954 | 44,778 | 38,505 | ||||||
C8+ fractionation plant | Mixed xylenes (2) | 40,000 | 56,197 | 55,853 | 50,487 | |||||
Ortho-xylene | 62,000 | 70,207 | 76,450 | 57,441 | ||||||
Solvent C9 (1) | 30,000 | 36,565 | 23,426 | 20,011 | ||||||
Parex plant | Para-xylene | 203,000 | 141,664 | 128,672 | 158,461 | |||||
Blending plant | Automotive gasoline (3) | 600,000 | 322,266 | 374,504 | 457,334 | |||||
LPG | 25,000 | 8,135 | 15,476 | 15,822 |
Primary products | Annual production capacity | Production year ended December 31, | ||||||||
Name | 2005 | 2004 | 2003 | |||||||
(in tons, except automotive gasoline) | (in tons, except automotive gasoline) | |||||||||
Olefins units 1 and 2 | Ethylene | 1,280,000 | 1,165,319 | 1,105,610 | 1,040,858 | |||||
Propylene | 550,000 | 562,048 | 542,359 | 486,959 | ||||||
Plants of aromatics units 1 and 2: | ||||||||||
Butadiene plants 1 and 2 | Butadiene | 175,000 | 162,586 | 161,616 | 150,719 | |||||
MTBE plants 1 and 2 | MTBE | 140,000 | 129,345 | 130,079 | 113,996 | |||||
Butene-1 plant | Butene—1 | 35,000 | 25,515 | 29,093 | 27,022 | |||||
Isoprene plant | Isoprene | 19,000 | 16,140 | 16,396 | 16,396 | |||||
Dicyclopentadiene | 24,000 | 25,245 | 21,306 | 20,459 | ||||||
Sulfolane plants 1, 2 and 3 | Coperaf—1(1) | 120,000 | 86,066 | 112,249 | 110,769 | |||||
BTX fractionation plants 1 and 2 | Benzene | 427,000 | 428,796 | 393,737 | 364,762 | |||||
Toluene(2) | 42,000 | 38,505 | 58,502 | 41,757 | ||||||
C8+ fractionation plant | Mixed xylenes(2) | 40,000 | 50,487 | 87,208 | 65,932 | |||||
Ortho-xylene | 62,000 | 57,441 | 53,966 | 54,475 | ||||||
Solvent C9(1) | 30,000 | 20,011 | 20,405 | 25,650 | ||||||
Parex plant | Para-xylene | 203,000 | 158,461 | 124,455 | 116,203 | |||||
Blending plant | Automotive gasoline(3) | 600,000 | 457,334 | 394,591 | 365,256 | |||||
LPG | 25,000 | 15,822 | 18,767 | 17,403 |
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(1) | Solvents. |
(2) | Actual production may exceed production capacity based on the quantity of toluene and mixed xylenes consumed in the production of para-xylene. |
(3) | Automotive gasoline in cubic meters per year. |
The table below sets forth the name, primary products, annual production capacity at December 31, 2007 and annual production for 2007 for each of Copesul’s units and plants.
Production | ||||||
For theYear | ||||||
Annual | Ended | |||||
Production | December 31, | |||||
Name | Primary Products | Capacity | 2007 | |||
(in tons, except automotive | ||||||
gasoline) | ||||||
Olefins units 1 and 2 | Ethylene | 1,200,000 | 1,196,063 | |||
Propylene | 630,000 | 621,584 | ||||
Propane | 16,000 | 4,007 | ||||
Low Sulphur Fuel Oil | 169,000 | 176,444 | ||||
Aromatics unit: | ||||||
Butadiene plant | Butadiene | 105,000 | 103,917 | |||
MTBE plant | MTBE | 132,000 | 75,010 | |||
ETBE | 155,000 | 47,358 | ||||
Butene-1 plant | Butene-1 | 40,000 | 40,736 | |||
Heavy C4 | 44,000 | 36,153 | ||||
BTX fractionation plant | Benzene | 275,000 | 311,148 | |||
Toluene (1) | 91,000 | 87,326 | ||||
Mixed xylenes (1) | 77,000 | 49,484 | ||||
Aromatic C7C8 | 95,000 | 22,599 | ||||
Aromatic C9 | 12,000 | 5,031 | ||||
C6C8 Rafinate | 87,000 | 9,553 | ||||
PGH plant | Pyrolysis C9 | 76,000 | 14,834 | |||
Solvent plant | C6 Solvent | 27,000 | 6,599 | |||
Blending plant | Automotive gasoline (2) | 500,000 | 321,668 | |||
LPG | 45,000 | 2,704 |
Actual production may exceed production capacity of certain plants when excess capacity of other plants in the Aromatics units is utilized. |
Automotive gasoline in cubic meters per year. | |
Raw Materials of Our Basic Petrochemicals Unit and Copesul
Naphtha
Naphtha
Naphtha, a crude oil derivative, is the principal raw material that we use to produce our basic petrochemical products and represents the principal production and operating cost of our Basic Petrochemicals Unit.Unit and Copesul. The price of naphtha that we purchase varies primarily based on changes in the U.S. dollar-based international price of crude oil.
BothAll of our olefins plants are capable of using naphtha as a feedstock, and our Olefins 1 unit also uses petroleum condensate.feedstock. Until the early 1980’s, gas oil represented approximately 60%60.0% of the feedstock used by first generation producers in Brazil and naphtha represented the remainder, but the increased use of diesel fuel by trucks and buses in Brazil in the 1980’s reduced the supply of gas oil available to petrochemical producers. Currently, we use naphtha as our primary feedstock, and in 2005,2007, naphtha accounted for (1) 86.6%83.1% of the total cost of sales of our Basic Petrochemicals Unit, (2) 88.9% of the total cost of sales of Copesul, and (2) 71.7%(3) 76.3% of our direct and indirect consolidated cost of sales and services rendered. However, due to the high price
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The following table shows the average Amsterdam-Rotterdam-Antwerp market price of naphtha for the periods indicated.
Amsterdam-Rotterdam-Antwerp | ||||||||
Market Price of Naphtha | ||||||||
2008 | 2007 | 2006 | 2005 | |||||
(in U.S. dollars per ton) | ||||||||
Average(1) | US$841.26 | US$675.48 | US$564.74 | US$476.04 | ||||
Month ended: | ||||||||
January | 827.65 | 509.23 | 561.81 | 394.86 | ||||
February | 832.95 | 550.85 | 529.67 | 416.23 | ||||
March | 863.19 | 603.95 | 528.65 | 477.43 | ||||
April | 902.68 | 655.37 | 588.84 | 471.62 | ||||
May | 989.05 | 685.22 | 601.91 | 421.26 | ||||
June | 1,092.85 (2) | 663.05 | 613.14 | 439.32 | ||||
July | 683.82 | 644.24 | 468.43 | |||||
August | 645.09 | 620.04 | 528.00 | |||||
September | 692.60 | 524.71 | 572.77 | |||||
October | 745.87 | 509.91 | 545.43 | |||||
November | 828.41 | 514.96 | 478.82 | |||||
December | 834.14 | 545.11 | 498.35 |
Amsterdam-Rotterdam-Antwerp market price of naphtha | ||||||||||||
(in U.S. dollars per ton) | 2006 | 2005 | 2004 | 2003 | ||||||||
Average(1) | US$ | 539.48 | US$ | 476.04 | US$ | 377.40 | US$ | 274.63 | ||||
Month ended: | ||||||||||||
January | 561.81 | 394.86 | 329.74 | 319.00 | ||||||||
February | 529.67 | 416.23 | 309.52 | 359.00 | ||||||||
March | 528.65 | 477.43 | 327.26 | 267.00 | ||||||||
April | 588.84 | 471.62 | 333.31 | 203.00 | ||||||||
May | 601.91 | 421.26 | 373.71 | 231.00 | ||||||||
June | 439.32 | 350.16 | 254.00 | |||||||||
July | 468.43 | 373.95 | 253.50 | |||||||||
August | 528.00 | 420.40 | 269.00 | |||||||||
September | 572.77 | 421.39 | 258.00 | |||||||||
October | 545.43 | 469.14 | 275.00 | |||||||||
November | 478.82 | 433.16 | 294.00 | |||||||||
December | 498.35 | 387.05 | 313.00 |
(1) | The information in the “Average” row represents (i) during 2007, 2006 and 2005, the mean average of average monthly naphtha prices during the |
(2) | Through June 27, 2008. |
Source: Bloomberg L.P.
Our Basic Petrochemicals Unit is located:
We use the Madre de Deus Port Terminal to unload naphtha imported by Petrobras or imported from La Société Nationale pour la Recherche, la Production, le Transport, la Transformation et la Commercialisation des Hydrocarbures—SONATRACH (the Algerian national petroleum company), or SONATRACH, or that is shipped from other Petrobras refineries located outside the State of Bahia. A pipeline owned and operated by Petrobras transports naphtha from the Madre de Deus Terminal to Refinaria Landulfo Alves where it interconnects with the
refinery’s naphtha pipeline system. Refinaria Landulfo Alves’ naphtha pipeline system interconnects with the pipeline system of the port terminal of Aratú, through which naphtha and petroleum condensate areis transported to our basic petrochemicals plants.plants in the Northeastern Complex.
At the port terminal of Aratú, we use (1) the Terminal Químico de Aratú (which is owned by Terminal Químico de Aratú S.A.—TEQUIMAR, a subsidiary of Ultrapar, Participações S.A, a Brazilian LPG distribution company) to distribute our products in liquid form, (2) the Terminal de Gases (which is owned by Tegal—Terminal de Gases Ltda., one of our subsidiaries)we own) to distribute our products in gaseous form, and (3) the Raw Materials Terminal (which is owned by our company)we own) to import naphtha and condensate.
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Copesul is located:
Copesul uses the Almirante Soares Dutra Terminal to unload naphtha and petroleum condensate imported by Petrobras or imported from SONATRACH or and Repsol YPF Trading y Transporte S.A., or Ryttsa, or shipped from other Petrobras refineries located outside the State of Rio Grande do Sul. Copesul also uses the Almirante Soares Dutra Terminal to distribute products in liquid and gaseous form. A pipeline owned and operated by Transpetro transports naphtha from the Almirante Soares Dutra Terminal to Refinaria Alberto Pasqualini where it interconnects with the refinery’s naphtha pipeline system. Naphtha and petroleum condensate are transported to Copesul’s basic petrochemicals plants through Refinaria Alberto Pasqualini’s naphtha pipeline system.
Supply Contracts and Pricing of the Basic Petrochemicals Unit
Our Basic Petrochemicals Unit purchased:
On June 22, 1978, we and Petrobras entered into a Naphtha and Gas Oil Purchase and Sale Contract (which was amended in February 1993, February 2003 and May 2005). This contract has a term of 10 years, expiring in June 2008, and is automatically renewable for further 10-year periods, unless either party notifies the other party in writing at least one year prior to the expiration of the contract that it does not intend to renew the contract. In December 2007, Petrobras notified us that it did not intend to renew this contract under its existing terms. We are negotiating a new contract with Petrobras with different terms and expect to continue to receive naphtha from Petrobras and to conclude these negotiations prior to the expiration of the existing contract.
Under the current terms of this contract:
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Petrobras has provided us with a R$570.0 million credit line to purchase naphtha and gas oil that it produces.
On August 9, 2000, regulations issued by the National Petroleum Agency ended Petrobras’ monopoly over the supply of naphtha in Brazil. These regulations also established a policy of free negotiation of naphtha prices. After a series of negotiations, the Brazilian basic petrochemicals producers and Petrobras entered into a pricing agreement for naphtha sales. According to this agreement, the price of naphtha supplied by Petrobras is linked to the Amsterdam-Rotterdam-Antwerp market price for naphtha and to thereal/U.S. dollar exchange rate.
La Société Nationale pour la Recherche, la Production, le Transport, la Transformation et la Commercialisation des Hydrocarbures—SONATRACH (the Algerian national petroleum company), or SONATRACH is our most important supplier of imported naphtha. We and SONATRACH entered into a Contract for the Sale and Purchase of Naphtha, which became effective on January 1, 2002. This contract hashad a one-year term and is renewable based on the mutual agreement of the parties for further one-year periods. We have renewed this contract threefour times and are currently negotiating the fourth renewal of this contract is under negotiation for 2006.2008. Under this contract:
On December 15, 2005, we entered into a purchase and sale agreement with Petróleos de Venezuela, S.A. (the Venezuelan national petroleum company), or PDVSA, which became effective on March 1, 2006. This contract has an initial six-month term and is renewable for one year, unless terminated by one of the parties. Under this agreement:
If our contractscontract with SONATRACH or PDVSA areis not renewed or areis otherwise terminated, we believe that we could purchase sufficient quantities of naphtha from other suppliers, including Petrobras, to meet the supply needs of our supply needs.Basic Petrochemicals Unit.
On April 26, 2005, our company entered into an import note assignment agreement with certain financial institutions. Under this agreement, we issue short-term non-interest bearing promissory notes, or import notes, to designated trading companies outside Brazil (including our subsidiary Braskem Incorporated Limited) to evidence our obligation to pay for purchases of naphtha and petroleum condensate from these trading companies. These designated trading companies had the right through August 31, 2005 to assign up to an aggregate principal amount of US$150.0 million of these import notes to the financial institutions. These assignments were made at a discount based on a rate of LIBOR plus 1.00% per annum, and these companies could use the proceeds of these assignments to purchase imported naphtha or petroleum condensate or refinance existing obligations in respect of imported naphtha or petroleum condensate incurred within 90 days prior to the date of the assignment. The designated trading companies were required to pay participation and commitment fees to the financial institutions, which fees were deducted from the discounted purchase price of the import notes.
On December 15, 2005, our company entered into a revolving import note discount program with certain financial institutions. Under this program, our company and, subject to our guarantee of its obligations and certain other conditions, Copesul are permitted for three years to issue short-term non-interest bearing notes, or import notes, in an aggregate principal amount of up to US$400 million outstanding at any time prior to the expiration of this program to designated trading companies outside Brazil to evidence our and Copesul’s respective obligation to pay for purchases of naphtha and petroleum condensate from these trading companies.
These designated trading companies have the right to assign these import notes to the specified financial institutions during the term of the program. These assignments are made at a discount based on a rate of LIBOR plus 0.75% per annum during the first year of this program, and LIBOR plus 0.85% per annum to 1.25% per annum, based on fluctuations in the Emerging Markets Bond Index—Brazil, therafter.thereafter. These companies may use the proceeds of these assignments to purchase imported naphtha or petroleum condensate. In the event that the aggregate amount of import notes issued during the first year of the program is less than US$30 million multiplied by the number of months elapsed under the program, we are required to pay a commitment fee on the unused amount. In addition, we are required to pay a commitment fee upon the termination of this program in the event that the aggregate amount of import notes outstanding at any time following the first anniversary of the commencement of this program is less than US$350 million.
Supply Contracts and Pricing of Copesul
Copesul purchased:
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On February 23, 1996, Copesul and Petrobras entered into a Naphtha, LPG and Condensate Purchase and Sale Contract. This contract has a term of 16 years, expiring in 2012 and is automatically renewable for further five-year periods, unless either party notifies the other party in writing at least one year prior to the expiration of the contract that it does not intend to renew the contract. Under this contract:
Petrobras has provided Copesul with a R$350.0 million credit line to purchase naphtha and gas oil that it produces.
On March 30, 2005, Copesul and SONATRACH entered into a Condensate Purchase and Sale Contract, which was amended in January 2006, January 2007 and January 2008. This contract, as amended, has a one-year term, expiring in January 2009. The parties meet and negotiate the conditions of renewal of this contract every year. Under this contract:
If Copesul’s contract with SONATRACH is not renewed or is otherwise terminated, we believe that we could purchase sufficient quantities of naphtha from other suppliers, including Petrobras, to meet Copesul’s supply needs.
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On May 1, 2002, Copesul and Ryttsa entered into a Naphtha Purchase and Sale Contract, which was amended in September 2004, April 2005, April 2006 and April 2007. This contract expired in April 2008 and was extended for 30 days. Copesul is currently negotiating an extension of this contract through April 2009. Under this contract:
If Copesul’s contract with Ryttsa is not renewed or is otherwise terminated, we believe that we could purchase sufficient quantities of naphtha from other suppliers, including Petrobras, to meet Copesul’s supply needs.
In addition, Copesul purchases naphtha on the spot market from foreign suppliers located in North Africa and South America.
Technology of Our Basic Petrochemicals Unit and Copesul
We use engineering process technology from a variety of sources that we implemented in constructing or upgrading the manufacturing facilities of our Basic Petrochemicals Unit, including the following technology:
These non-exclusive contracts generally provided for payment to those companies at stages specified in the contracts, but we do not pay ongoing royalties under these contracts.
We also use technology under non-exclusive arrangements from a variety of sources for specific production processes, including the following:
Our Basic Petrochemicals Unit also uses technology developed by our company.processes. We do not pay any continuing royalties under any of these arrangements, except for thearrangements. Our Basic Petrochemicals Unit and Copesul also use technology licensing agreement with Mobil. We paid an initial royalty under these arrangements (excludingdeveloped by our agreement with Mobil).company. If any of these arrangements were terminated or no longer available to us, we believe that we would be able to replace this technology with comparable or better technology from other sources.
Sales and Marketing of Our Basic Petrochemicals Unit and Copesul
We sell our basic petrochemical products principally in Brazil, mainly to second generation petrochemical producers located in the Northeastern Complex and the Southern Complex, including our other business units, as well as to customers in the UnitedtheUnited States, Europe, South America and Europe.Asia. Our Basic Petrochemicals Unit and Copesul also producesproduce utilities for itstheir own use and for sale to approximately 4048 companies, including companies located outside of the Northeastern Complex and the Southern Complex.
As is common with other first generation petrochemical producers, our Basic Petrochemicals Unit hasand Copesul have a high concentration of sales to a limited number of customers. Net sales to our Basic Petrochemicals Unit’s 10 largest customers (excluding intra-company sales) accounted for approximately 64.5%62.1% of our Basic Petrochemicals Unit’s total net sales revenue (excluding intra-company sales) during the year ended December 31, 2005.
As part of our commercial strategy, our Basic Petrochemicals Unit has focusedand Copesul focus on developing longer-term relationships with our customers. We have entered into long-term supply contracts with several second generation producers located in the Northeastern Complex and the Southern Complex, including Oxiteno do Nordeste S.A. and Polibrasil Resinas S.A., or Polibrasil, and Petroflex. These supply contracts generally have an initial 10-year term and are automatically renewable for five-year periods unless one party notifies the other of its intention not to renew. These contracts also provide for minimum and maximum quantities to be purchased and monthly deliveries. We also sell automotive gasoline and LPG to Petrobras and fuel distribution companies.
We determine the prices for our olefins and aromatics products with reference to several market indicators. The price of ethylene that we charged our two largest customers, which represented 90.4% of our ethylene sales to third parties in 2005, was based on a margin sharing system. Under this system, the benefit or burden of higher or lower international market prices for naphtha and for ethylene derivatives, such as polyethylene, is shared with our customers. The margin shared by first and second generation producers is calculated for second generation products based on the market price charged by the second generation producer for its products and its production costs. The market price for ethylene is based on benchmark costs imputed to, and actual costs incurred by, both first and second generation producers for the production of second generation products. The variable-cost portion of these production costs reflects costs effectively incurred, while the fixed-cost portion of these production costs and depreciation expenses is determined based on benchmark costs. The benchmark costs are determined based on costs incurred by leading first and second generation producers located in the United States. This margin is then divided between the relevant first and second generation producers pro rata based on a return on capital invested by each such producer. Accordingly, the price of ethylene for these customers is calculated based on the weighted average price for ethylene obtained in the process of dividing the margin of each of these customers, taking into consideration the amount of ethylene consumed by each customer. The actual margins received by the first and second generation producers vary depending on the degree to which their actual costs compare with the benchmark costs used in the pricing formula to calculate the margin.
Prior to 2005, we used a margin sharing system for all of our ethylene customers, including our other business units. In 2005, we determinedWe determine the prices that we charged ourcharge for ethylene customers, other than our two largest ethylene customers, by reference to international market prices. In addition, we are negotiating with those ethylene customers which still use the margin sharing system to terminate the margin sharing system of ethylene pricing and to institute a market pricing system.
We calculate the monthly price of propylene by multiplying our monthly ethylene price (including Brazilian taxes) by the ratio of the European contract price for propylene to the European contract price for ethylene. We determine the price of butadiene and para-xylene by using thebyreference tothe U.S. contract price for these products, in the United States, and our prices for butadiene and para-xylene, unlike our prices for our other basic petrochemical products, include freight costs. We set the prices of benzene and ortho-xylene monthly by determining the mean average of European contract prices and U.S. contract prices for those products as set forth in specialized trade publications. We set the prices of solvents by reference to international market prices and the prices for fuels withby reference to Brazilian market prices for these products.prices. We set the prices of utilities based on our production costs.
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We are focused on maintaining our leading position in the Brazilian market, while continuing to use our exports to hedge our operations and adjust the imbalances between demand and production. In 2005,2007, export net sales of basic petrochemicals (which exclude utilities and automotive gasoline) represented 15%16.0% of our Basic Petrochemicals Unit’s net sales revenue and 14.6% of Copesul’s net sales revenue. We exported basic petrochemicals mainly to customers in the United States and in Europe.
The following table sets forth our export sales and export volumes of basic petrochemicals for the years indicated:
For the Year Ended December 31, | ||||||
2007 | 2006 | 2005 | ||||
Basic Petrochemicals Unit: | ||||||
Export sales (in millions ofreais) | R$1,157.4 | R$995.0 | R$950.0 | |||
As % of total net sales revenue of Basic Petrochemicals Unit | 16.0% | 14.5% | 15.0% | |||
Export volumes (thousands of tons) | 591.9 | 575.1 | 535.2 | |||
As % of total sales volume of Basic Petrochemicals Unit (excluding automotive gasoline) | 18.4% | 20.3% | 17.6% | |||
Copesul(1): | ||||||
Export sales (in millions ofreais) | R$804.2 | R$— | R$— | |||
As % of total net sales revenue of Copesul | 14.6% | —% | —% | |||
Export volumes (thousands of tons) | 274.3 | — | — | |||
As % of total sales volume of Copesul (excluding automotive gasoline) | 14.2% | —% | —% |
(1) Includes Copesul as from April 1, 2007.
Year ended December 31, | ||||||
2005 | 2004 | 2003 | ||||
Export sales (in millions ofreais) | 950.0 | 778.9 | 490.7 | |||
As % of total net sales revenue of Basic Petrochemicals Unit | 15.0 | 13.6 | 11.9 | |||
Export volumes (thousands of tons) | 535.2 | 436.6 | 405.9 | |||
As % of total sales volume of Basic Petrochemicals Unit (excluding automotive gasoline) | 17.6 | 14.9 | 15.1 |
Since August 15, 2000, we haveOur Basic Petrochemicals Unit has been authorized by the National Petroleum Agency to produce and sell automotive gasoline. Our net sales revenue from automotive gasoline was R$412.9 million in 2005,since August 15, 2000, and our net export sales revenue from automotive gasoline was R$109.9 million in 2005.Copesul has been so authorized since October 11, 2000. We sold approximately 443,900567,800 cubic meters of type “A” automotive gasoline in 2005.2007. Net domestic sales revenue of our Basic Petrochemicals Unit from automotive gasoline was R$269.1 million in 2007, and net export sales revenue of our Basic Petrochemicals Unit from automotive gasoline was R$32.3 million in 2007. Net domestic sales revenue of Copesul from automotive gasoline was R$189.8 million in 2007, and net export sales revenue of Copesul from automotive gasoline was R$61.2 million in 2007.
We set export prices for:
In addition to basic petrochemicals and fuels, we produce electric power, steam, treated water and compressed air for our own use and for sale to other second generation producers in the Northeastern Complex and the Southern Complex. In 2005,2007, our net sales revenue from sales of utilities (including sales to our other business units) was R$491.8621.3 million. We also provide storage services to companies located in the Northeastern Complex through our subsidiary Tegal—Terminal de Gases Ltda., providing storage for gaseous petrochemical products. Tegal—Terminal de Gases Ltda. operates in the port terminal of Aratú in the State of Bahia.
Competition
Although there are currently four major petrochemical complexes in Brazil, our basic petrochemical customers, which are mostly second generation petrochemical producers with plants located in the Northeastern Complex and the Southern Complex, would have difficulty obtaining their feedstocks from other sources at lower prices due to the high cost of transportation of these products, as well as other logistical difficulties. In addition, because Brazil produces sufficient quantities of olefins to meet domestic demand, imports of these products are generally sporadic and usually related to scheduled plant maintenance shutdowns or to meet unsatisfied domestic demand, as is the case with importsdemand.
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Polyolefins Unit and Ipiranga Petroquímica
Polyolefins Unit
At December 31, 2005,2007, our polyolefins production facilities had the largest average annual production capacity of all second generation producers of polyolefins products in Brazil and elsewhere in Latin America. Our Polyolefins Unit accounted for R$3,919.05,669.1 million, or 29.0%25.1%, of the net sales revenue of all segments in 2005.2007 and Ipiranga Petroquímica accounted for R$1,551.4 million, or 6.9%, of the net sales revenue of all segments in 2007.
Our Polyolefins Unit has historically been comprised of the operations conducted by our company and Polialden. On May 31, 2006, Polialden merged with and into our company.
Prior to the Politeno acquisitionAcquisition on April 6, 2006, we owned 35.0% of Politeno’s voting share capital and 34.0% of its total share capital. As a result, at dates and for periods prior to April 6,March 31, 2006, we proportionally consolidated Politenos’Politeno’s results in our consolidated financial statements and did not include Politeno’s results in
our Polyolefins segment. As a result ofFollowing the Politeno acquisitionAcquisition on April 6, 2006, we now ownowned 100% of the voting share capital and 96.2% of the total share capital of Politeno, and willhave fully consolidateconsolidated Politeno’s results in our consolidated financial statements and includeincluded Politeno’s results in our Polyolefins segment at datesas from April 1, 2006. On April 2, 2007, Politeno merged with and for periods following this acquisition.into our company.
On April 18, 2007, the first phase of the Ipiranga Transaction was completed. As a result of our obtaining effective management control over Ipiranga Petroquímica, we have fully consolidated the assets, liabilities and results of operations of Ipiranga Química as from April 1, 2007. We account for Ipiranga Petroquímica as a segment separate from our Polyolefins segment.
Our Polyolefins Unit produces:and Ipiranga Petroquímica produce:
In addition, Ipiranga Petroquímica produces medium density polyethylene, or MDPE.
Approximately two-thirds of the Politeno acquisition, ethyl vinyl acetate copolymer, or EVA; and
Approximately three-fifthssales volume of our Polyolefins Unit’sUnit and three-quarters of the sales volume of Ipiranga Petroquímica in 20052007 was derived from the sale of polyethylene products, and most of the remainder was derived from the sale of polypropylene products.
We manufacture a broad range of polyolefins products for use in consumer and industrial applications, including:
In 2005,2007, we had an approximate 30%52.0% share of the Brazilian polyethylene market and an approximate 42%49.1% share of the Brazilian polypropylene market, based on sales volumes.volumes of our Polyolefins Unit and Ipiranga Petroquímica. We anticipate that domestic growth in demand for these products will continue to increase due to:
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Products of Our Polyolefins Unit and Ipiranga Petroquímica
The following table sets forth a breakdown of the sales volume and net sales revenue of our Polyolefins Unit and Ipiranga Petroquímica by product line and by market for the years indicated.
For the Year Ended December 31, | ||||||||||||||||||
2007(1) | 2006 | 2005 | ||||||||||||||||
Quantities | Quantities | Quantities | ||||||||||||||||
sold | Net Sales Revenue | sold | Net Sales Revenue | sold | Net Sales Revenue | |||||||||||||
(thousands | (millions of | (thousands | (millions of | (thousands | (millions of | |||||||||||||
of tons) | reais) | (%) | of tons) | reais) | (%) | of tons) | reais) | (%) | ||||||||||
Domestic net sales: | ||||||||||||||||||
Polypropylene | 573.3 | R$1,982.5 | 27.5% | 453.2 | R$1,515.5 | 31.7% | 419.9 | R$1,404.2 | 35.8% | |||||||||
LDPE | 249.3 | 863.1 | 12.0 | 196.9 | 635.8 | 13.3 | 143.1 | 443.7 | 11.3 | |||||||||
LLDPE | 272.3 | 976.5 | 13.5 | 211.0 | 703.2 | 14.7 | 156.2 | 476.4 | 12.2 | |||||||||
HDPE | 413.7 | 1,475.2 | 20.4 | 186.6 | 603.2 | 12.6 | 201.9 | 618.1 | 15.8 | |||||||||
Other | 17.2 | 121.1 | 1.6 | 10.3 | 45.4 | 0.9 | 1.0 | 5.1 | 0.1 | |||||||||
Total domestic net sales | 1,525.8 | 5,418.4 | 75.0 | 1,057.9 | 3,503.0 | 73.3 | 922.1 | 2,947.5 | 75.2 | |||||||||
Total export net sales | 660.6 | 1,802.1 | 25.0 | 467.2 | 1,272.8 | 26.7 | 363.6 | 971.5 | 24.8 | |||||||||
Total polyolefins net sales | 2,186.4 | R$7,220.5 | 100% | 1,525.1 | R$4,775.8 | 100% | 1,285.7 | R$3,919.0 | 100% | |||||||||
(1) Includes Ipiranga Petroquímica as from April 1, 2007.
Year ended December 31, | ||||||||||||||||||||||||
2005 | 2004 | 2003 | ||||||||||||||||||||||
Quantities sold | Net sales revenue | Quantities sold | Net sales | Quantities sold | Net sales revenue | |||||||||||||||||||
(thousands of tons) | (millions ofreais) | (%) | (thousands of tons) | (millions ofreais) | (%) | (thousands of tons) | (millions ofreais) | (%) | ||||||||||||||||
Domestic net sales: | ||||||||||||||||||||||||
Polypropylene | 419.9 | R$ | 1,404.2 | 35.8 | % | 418.5 | R$ | 1,320.3 | 37.8 | % | 374.9 | R$ | 1,008.0 | 29.8 | % | |||||||||
LDPE | 143.1 | 443.7 | 11.3 | 134.7 | 404.2 | 11.6 | 120.4 | 314.9 | 9.3 | |||||||||||||||
LLDPE | 156.2 | 476.4 | 12.2 | 148.6 | 444.4 | 12.7 | 119.8 | 311.0 | 9.2 | |||||||||||||||
HDPE | 201.9 | 618.1 | 15.8 | 214.1 | 635.5 | 18.2 | 204.6 | 515.0 | 15.2 | |||||||||||||||
UHMWP | 1.0 | 5.1 | 0.1 | 1.4 | 5.7 | 0.3 | 1.2 | 4.2 | 0.1 | |||||||||||||||
Total domestic net sales | 922.1 | 2,947.5 | 75.2 | 917.3 | 2,810.1 | 80.6 | 820.9 | 2,153.1 | 63.6 | |||||||||||||||
Total export net sales | 363.6 | 971.5 | 24.8 | 248.3 | 679.3 | 19.4 | 288.1 | 1,233.7 | 36.4 | |||||||||||||||
Total polyolefins net sales | 1,285.7 | R$ | 3,919.0 | 100 | % | 1,165.6 | R$ | 3,489.4 | 100 | % | 1,109.0 | R$ | 3,386.8 | 100 | % | |||||||||
% of the total net sales revenue of all segments | 29.0 | % | 28.0 | % | 33.9 | % | ||||||||||||||||||
We provide technical assistance to our customers to meet their specific needs by adapting and modifying our polyethylene and polypropylene products. In particular, we develop customized value-added polypropylene compounds for use by our customers in their specialized applications. We believe that the variety of technological processes at our polyolefins plants provides us with a competitive advantage in meeting our customers’ needs.
Polyethylene Products
Polyethylene has the simplest chemical structure of all commercial polymers and is a very versatile material. Global production volume of polyethylene is the highest among all commercial plastics. Polyethylene is used to manufacture a wide variety of products.
Our customers purchase different polyethylene resins depending on the manufacturing process that they employ and the desired physical characteristics of the end products that they manufacture. LDPE is the most flexible of polyethylene products and is used in a variety of plastic or film applications and in food packaging trash bags and shopping bags.extrusion coating. LLDPE is used in applications that require greater sealing capacity and better mechanical resistance, including plastic films and flexible food packaging. MDPE is used in applications that require impact resistance and stiffness, such as diapers and hygienic articles, water storage tanks, technical parts and industrial containers. HDPE is used for applications that require higher mechanical resistance. UHMWP is used mainly for technical partsresistance, such as high strength films, food packaging, merchandise bags, telecommunications and other applications that require greater mechanical resistance. EVA is used in applications that require greater sealing capacity, flexibility, impact resistancesewage pipes, pails, lids, trash containers, bottles, flasks, safety helmets, sporting goods, pallets and color adherence, including shoe soles, hot melt and film for special applications.toys.
While each form of polyethylene is used for different applications, there is some overlap in the uses of these resins, and with certain modifications, polyethylene resins may be substituted for each other in certain end product manufacturing processes. For example, demand for LLDPE has grown since it was first introduced in 1989 and has resulted in reduced demand for LDPE, as manufacturers of certain containers and plastic film applications have switched their production processes and technology to use LLDPE in a blend with LDPE. We expect that part
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Polypropylene Products
Polypropylene is a versatile polymer with a high strength-to-weight ratio. This thermoplastic resin may be manufactured with a variety of properties that permit its use in different processes, such as injection, extrusion, blow molding and thermoforming. Through these processes, polypropylene may be used as a primary raw material for many applications, including the manufacture of carpet fibers, non-woven fabrics for diapers, injection molded parts for durable packaging and automobiles, medical instruments, flexible packaging for candy, pasta and cookies, as well as bottles for beverages. The balance between the mechanical properties and the high thermal resistance of polypropylene is a primary reason why this thermoplastic resin has begun to replace engineering materials such as acrylonitrile-butadiene-styrene (known as ABS), polycarbonate and nylon in domestic appliances and machinery. The lack of toxicity and high chemical resistance of polypropylene permits it to be used in applications with strict sanitary specifications, including in the food and pharmaceutical industries.
In 2004, we launched Braskem Symbios®, a high-performance flexible packaging sealant. We introduced advances in the use of polypropylene containers as a substitute for glass containers for spreadable cream cheese and launched a polypropylene fiber used to manufacture tiles and fiber-cement water cisterns. We also developed a new resin and patent-protected equipment for the production of disposable polypropylene cups, which have a significant competitive advantage over the same product made from polystyrene. We have licensed this technology to one of our customers. Finally, we introduced a new polypropylene resin for use as a substitute for glass and paper in packaging non-carbonated beverages.
Production Facilities of Our Polyolefins Unit and Ipiranga Petroquímica
At December 31, 2005, we2007, our Polyolefins Unit and Ipiranga Petroquímica owned seven14 polyolefins production facilities. Five of theseOur Polyolefins Unit operates five plants are located in the Southern Complex and two of thesefour plants are located in the Northeastern Complex. During 2004, we expanded the annual production capacity of our polypropyleneIpiranga Petroquímica operates five plants in the Southern Complex by an aggregate of 100,000 tons.Complex. During 2005, we expanded the annual production capacity of one of our polyethylene plants in the Northeastern Complex by 30,000 tons. During 2006, we expanded the annual production capacity of our other polyethylene plants in the Northeastern Complex by 30,000 tons.
The table below sets forth the location, the primary products, annual production capacity at December 31, 2005,2007, and annual production for the years presented of each of our polyolefins plants.
Production | ||||||||||
Annual | For the Year Ended | |||||||||
Production | December 31, | |||||||||
Location (Complex) | Primary Products | Capacity | 2007 | 2006 | 2005 | |||||
(in tons) | (in tons) | |||||||||
Polyolefins Unit: | ||||||||||
Triunfo (Southern) | LDPE | 215,000 | 207,286 | 209,209 | 207,174 | |||||
Polypropylene(1) | 560,000 | 562,399 | 542,781 | 528,980 | ||||||
HDPE/LLDPE(2) | 300,000 | 274,221 | 268,762 | 237,262 | ||||||
Camaçari (Northeastern) | HDPE/LLDPE(2) | 230,000 | 218,671 | 216,822 | 211,625 | |||||
HDPE/LLDPE(2)(3) | 210,000 | 218,622 | 133,088 | — | ||||||
LDPE(4) | 150,000 | 140,971 | 102,684 | — | ||||||
HDPE/UHMWP(2) | 160,000 | 106,741 | 103,034 | 124,382 | ||||||
Ipiranga Petroquímica: | ||||||||||
Triunfo (Southern) | HDPE/LLDPE(2) | 150,000 | 108,419 | — | — | |||||
HDPE(4) | 400,000 | 374,616 | — | — | ||||||
Polypropylene | 180,000 | 146,288 | — | — |
Location (Complex) | Primary products | Annual production capacity | Production year ended December 31, | |||||||
2005 | 2004 | 2003 | ||||||||
(in tons) | (in tons) | |||||||||
Triunfo (Southern) | LDPE | 215,000 | 207,174 | 209,140 | 195,637 | |||||
Polypropylene(1) | 100,000 | — | — | — | ||||||
Polypropylene(2) | 560,000 | 528,980 | 463,077 | 438,746 | ||||||
HDPE/LLDPE(3) | 265,000 | 237,262 | 235,028 | 229,237 | ||||||
Camaçari (Northeastern) | HDPE/LLDPE(3) | 210,000 | 211,625 | 175,436 | 152,087 | |||||
HDPE/UHMWP | 144,000 | 124,382 | 128,312 | 99,720 |
(1) |
Reflects the combined production capacity and annual production of two polypropylene |
(2) | Plant with swing line capable of producing | |
(3) | Reflects the production of Politeno since April 6, 2006, the date of the Politeno Acquisition. | |
(4) | Reflects the combined production capacity and annual production of three polyethylene plants. | |
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As a result of the Politeno acquisition, we now own 96.2% of the total share capital of Politeno, representing 100% of its voting share capital. Politeno owns an LPDE plant in the Northeastern Complex with an annual production capacity of 150,000 tons and a plant with a swing line with a combined annual production capacity of 210,000 tons of LLDPE and HDPE.
Raw Materials of Our Polyolefins Unit and Ipiranga Petroquímica
Ethylene and Propylene
The most significant direct costs associated with our production of polyethylene and polypropylene are the costs of purchasing ethylene and propylene, which together accounted for approximately 90%91.7% of our Polyolefins Unit’s total variable cost of salesproduction in 2005.2007 and approximately 91.6% of Ipiranga Petroquímica’s total variable cost of production in 2007. In 2005,2007, approximately 35%41.9% of these raw materials were supplied by our Basic Petrochemicals Unit and approximately 65%58.1% were supplied by Copesul. Our Polyolefins Unit ispurchases ethylene from our Basic Petrochemicals Unit and ethylene and propylene from Copesul at prices determined by reference to international market prices for ethylene. Ipiranga Petroquímica purchases ethylene and propylene from Copesul at prices determined by reference to international market prices for ethylene. Our Polyolefins Unit and Ipiranga Petroquímica are highly dependent on ethylene and propylene supplied by our Basic Petrochemicals Unit and by Copesul because the costs of storing and transporting ethylene and propylene are substantial and there is inadequate infrastructure in Brazil to import large quantities of ethylene and propylene.
At December 31, 2005, Copesul had an annual ethylene production capacity of 1,135,000 tons and an annual propylene production capacity of 581,000 tons. Copesul is our main supplier of propylene.
Supply Contracts and Pricing
We have entered into a long-term ethylene and propylene supply contract with Copesul that extends through 2007 and is automatically renewable for additional five-year terms. We own 29.5% of the total share capital of Copesul. Under this contract, we are required to purchase an annual minimum of 268,200 tons of ethylene and an annual maximum of 451,000 tons, as well as an annual minimum of 262,200 tons of propylene and an annual maximum of 439,500 tons, in each case subject to daily and monthly limits. In 2005, we purchased 426,500 tons
of ethylene and substantially all of our requirements of propylene (approximately 445,000 tons) from Copesul for our polyolefins operations in the Southern Complex. In 2005, we exceeded our annual maximum propylene purchases as a result of production efficiencies at Copesul.
We negotiate the prices for the feedstocks for our polyolefins products with Copesul, based upon a pricing formula developed by the Brazilian petrochemical industry. The pricing formula provides for full cost margin sharing between the first generation and second generation petrochemical producers located at the respective petrochemical complexes. The prices Copesul charges for ethylene that it supplies to our Polyolefins Unit are calculated based on a formula similar to the formula that our Basic Petrochemicals Unit uses to determine prices for its two largest ethylene customers. See “—Basic Petrochemicals Unit—Sales and Marketing of Our Basic Petrochemicals Unit.” Our Polyolefins Unit purchases ethylene from our Basic Petrochemicals Unit at prices determined by reference to international market prices for ethylene.
The following table sets forth the average prices per ton inreaispaid by our companyPolyolefins Unit and Ipiranga Petroquímica to our Basic Petrochemicals Unit and Copesul for ethylene and propylene for the years indicated:
For the Year Ended December 31, | ||||||
2007(1) | 2006 | 2005 | ||||
(R$ per ton) | ||||||
Ethylene supplied by our Basic Petrochemicals Unit | R$2,425 | R$2,323 | R$2,206 | |||
Ethylene supplied by Copesul | 2,508 | 2,677 | 2,527 | |||
Propylene supplied by Copesul | 2,480 | 2,570 | 2,405 |
(1) Includes Ipiranga Petroquímica as from April 1, 2007.
In March 2007, we entered into a five-year propylene supply contract with Refinaria Alberto Pasqualini—Refap S. A., or Refap, a subsidiary of Petrobras, located in Canoas, Rio Grande do Sul. Under this contract, we will purchase an initial annual supply of 70,000 tons of propylene, representing 70% of Refap’s current annual propylene production capacity of 100,000 tons. As Refap expands its propylene production capacity, we will be obligated to purchase 70% of Refap’s propylene production until Refap’s annual production capacity reaches 162,000 tons. We will have the right to purchase 100% of Refap’s production in excess of 162,000 tons. If we exercise this right, our minimum purchase obligation under this contract will be increased correspondingly. Under this contract:
Year ended December 31, | |||||||||
(R$ per ton) | 2005 | 2004 | 2003 | ||||||
Ethylene supplied by our Basic Petrochemicals Unit | R$ | 2,206 | R$ | 2,350 | R$ | 1,786 | |||
Ethylene supplied by Copesul | 2,527 | 2,313 | 1,769 | ||||||
Propylene supplied by Copesul | 2,405 | 2,017 | 1,608 |
This volume will be used to supply the existing plants of our Polyolefins Unit in the Southern Complex and will be available to meet additional demand that arises through expansion of these plants and acquisition of additional plants. Propylene will be delivered to our plants through a pipeline.
We In March 2007, Ipiranga Petroquímica entered into a five-year propylene supply contract with Refap. Under this contract, Ipiranga Petroquímica has agreed to purchase, and Refap has agreed to sell, a minimum of 22,500 and a maximum of 30,000 tons of propylene annually. Under this contract:
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Under this contract, Ipiranga Petroquímica is obligated to purchase a minimum of 1,875 and a maximum of 2,500 tons of propylene per month.
Our Polyolefins Unit and Ipiranga Petroquímica also use butene and hexene as raw materials in the production of HDPE and LLDPE. Butene is supplied by Copesul and by our Basic Petrochemicals Unit, and we import hexene from suppliers located in South Africa.
Other Materials
In addition to overhead costs such as labor and maintenance, our other costs associated with the production of polyethylene and polypropylene include our purchase of chemical catalysts, solvents and utilities, such as electric power, water, steam and nitrogen.
Our Unipol® PlantUnipol® plant in the Northeastern Complex uses catalysts supplied to us by Univation Technologies under a license that expires in 2007.Technologies. Our HDPE slurry plant in the Northeastern Complex produces its own catalysts, and we purchase the inputs that we need to produce our own catalysts from various suppliers at market prices. We purchase most of the catalysts that we use in our Polyolefins Unit’s polypropylene plants from Basell Polyolefins Company N.V, or Basell, and we also import some catalysts from suppliers in the United States and Europe.
We purchase the catalysts that Ipiranga Petroquímica uses in its swing line LLDPE/HDPE plant and its polypropylene plant from Basell. Ipiranga Petroquímica produces its own catalysts for its HDPE plants using Hoechst technology, and we purchase the inputs that we need to produce these catalysts from various suppliers at market prices.
Our Basic Petrochemicals Unit supplies our Polyolefins Unit’s facilities in the Northeastern Complex with steam and water, and Copesul supplies these utilities to the facilities of our Polyolefins Unit’s facilitiesUnit and Ipiranga Petroquímica in the Southern Complex. In addition, we purchase electric power at both complexes from third parties pursuant to long-term power purchase agreements and, in the Northeastern Complex, from our Basic Petrochemicals Unit. Our polyolefins plants in the Northeastern Complex are able to purchase electric power from alternative sources if our Basic Petrochemicals Unit is unable to meet our total demand for electric power. In general, we believe that there are sufficient alternative sources available at reasonable prices for each of these other inputs used in our polyolefins production process such that the loss of any single supplier would not have a material adverse effect on our operations.
Technology of Our Polyolefins Unit and Ipiranga Petroquímica
Rights to Use technologyTechnology
We have entered into several non-exclusive agreements with a number of leading petrochemical companies to use certain technology and catalysts for our Polyolefins Unit.
We obtained technology from Mitsubishi in 1978, under a licensing agreement we continue to use in our HDPE slurry plant in the Northeastern Complex. Although this technology is our oldest, we have
|
future plants. If any of these licenses were terminated, we believe that we would be able to replace the relevant technology with comparable technology from other sources.
Research and Development
Our Polyolefins Unit coordinates and maintains a research and development program, which includes (1) the Braskem Center for Technology and Innovation, (2) pilot plants, (3) catalysis, polymerization and polymer sciences laboratories, and (4) process engineering and automation centers.
The Braskem Center for Technology and Innovation at the Southern Complex includes a staff of approximately 160150 employees, which seek to:
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We have developed most In 2006, we opened a new development center dedicated to UHMWP, a high value-added resin of our new polyolefins products and applications atwhich we are one of the largest world producers. This center works in coordination with the Braskem Center for Technology and Innovation, including Braskem Flexus® and Braskem Symbios® in 2004. Prior to the development of these products at the Braskem Center for Technology and Innovation, these products were only available in Brazil through imports.Innovation.
Our Polyolefins Unit maintains seven pilot plants located in the Southern Complex and the Northeastern Complex that use Spheripol®Spheripol®, Spherilene®Spherilene®, Unipol® and Unipol®Mitsubishi slurry technology. Two of our Polyolefins Unit pilot plants operate at approximately 1/150 of the scale of our full-scale plants, and our other pilot plants operate at approximately 1/400 of the scale of our full-scale plants. Our Polyolefins Unit uses these pilot plants to (1) produce small quantities of new products to test them in our laboratories and with our customers, (2) develop new conditions and formulations for the creation of new products, and (3) increase the efficiency of our production processes. We believe that these pilot plants give us a competitive advantage over our competitors in Latin America, which do not have similar resources.
Our Polyolefins Unit maintains catalysis, polymerization and polymer sciences laboratories in the Southern Complex and the Northeastern Complex. These laboratories enable us to identify new and to improve existing licensed catalysts. We have developed or improved upon a majority of the polyethylene and polypropylene grades that we sell based on technology that we have created or improved.
Our Polyolefins Unit maintains process engineering and automation centers in the Southern Complex and the Northeastern Complex. These centers assist us in developing advanced process control technology, reducing our variable costs, achieving operational stability and increasing our production of polyolefins.
Our Polyolefins Unit is in regular contact with international process technology licensors to acquire new technologies and improvements. We test new processes on a regular basis, and we follow advances and trends in the petrochemical industry through our relationships with Brazilian and international research universities and consortia. In addition, we maintain ongoing contracts with licensors that permit us to upgrade our technology in order to receive and install improvements developed for our existing processes.
Ipiranga Petroquímica operates a Technology and Innovation Center located in the Southern Complex which is similar to the Braskem Center for Technology and Innovation. Ipiranga Petroquímica’s center includes laboratories and a slurry Hostalen® pilot plant used to develop new high density polyethylene grades, as well as to evaluate and develop catalysts and to test new raw materials. This pilot plant operates at approximately 1/200 of the scale of the industrial plants and complements the pilot plants of our Polyolefins Unit. Ipiranga Petroquímica also operates a process development department and a product development department with a combined staff of approximately 35 employees to coordinate its research and development activities.
Sales and Marketing of Our Polyolefins Unit and Ipiranga Petroquímica
We sell ourOur Polyolefins Unit sells polyethylene and polypropylene products to approximately 1,1001,450 customers and sales by our Polyolefins Unit accounted for 29.0% of our net sales revenue of all segments in 2005.Ipiranga Petroquímica sells its polyethylene and polypropylene products to approximately 300 customers. We have a diversified product mix that allows us to serve a broad range of end users in several industries. OurThe customers of our Polyolefins Unit and Ipiranga Petroquímica generally are third generation petrochemical producers that manufacture a wide variety of plastic-based consumer and industrial goods.
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Net sales revenue to our tenthe 10 largest customers of our Polyolefins Unit accounted for 31.0%20.4% of our Polyolefins Unit’s total net sales revenue during the year ended December 31, 2005.2007. Net sales revenue to the 10 largest customers of Ipiranga Petroquímica accounted for 14.0% of Ipiranga Petroquímica total net sales revenue during the year ended December 31, 2007. No customer of our Polyolefins Unit or Ipiranga Petroquímica accounted for more than 6.0%4.0% of our total net sales revenue during 2005, 2004in 2007, 2006 or 2003.2005.
Domestic Sales
We are focused on developing longer-term relationships with our customers. Given the cyclical nature of the markets for our petrochemical products, we believe that we can strengthen customer loyalty during periods of reduced demand for polyethylene or polypropylene by providing a reliable source of supply to these customers during periods of high demand. We work closely with our customers to determine their needs, to provide technical assistance and to coordinate the production and delivery of our products. Customers submit annual proposals giving their estimated monthly requirements for the upcoming year for each of our polyolefins products,polyolefinsproducts, including technical specifications, delivery terms and proposed payment conditions. We evaluate these proposals on a monthly basis to make any required adjustments and to monitor and attempt to ensure adequate supply for each customer.
In addition to direct sales to our customers, our Polyolefins Unit sells ourand Ipiranga Petroquímica sell products in Brazil through exclusive independent distributors. Our Polyolefins Unit has five distributors (three of which belong to a group of related companies) and have entered into agreements with terms expiring in 2010 with three of these distributors. Ipiranga Petroquímica has two distributors. Ipiranga Petroquímica has entered into an agreement with one of these distributors with a term that expires in 2009 and which is automatically renewable for 18-month periods. Ipiranga Petroquímica’s agreement with the other distributor has an indefinite terms, subject to termination on one year’s notice by either party.
We have selected our distributors based on their ability to provide full service to their customers, including the ability to prepare our products on a customized basis. These distributors sell our polyethylene and polypropylene products to manufacturers with lower production requirements and are able to aggregate multiple orders for production and delivery to customers that would otherwise be uneconomical for us to serve. Furthermore, by serving smaller customers through a network of distributors, our account managers in our Polyolefins Unit focus their efforts on delivering high quality service to a smaller number of large, direct customers. We have selected our distributors based on their ability to provide full service to their customers, including the ability to prepare our products on a customized basis.
In 2005, our Polyolefins Unit concluded the implementation of its new policy concerning distributors, and our distribution network was reorganized. We now have eight distributors (three of which belong to a group of related companies), and have entered into agreements with terms of five years with five of these distributors.
Export Sales
Our volume of export sales has generally varied based upon the level of domestic demand for our products. Export sales represented 24.8%24.5% of our Polyolefins Unit’s net sales revenue in 2005. Our primary export2007. In 2006, our Polyolefins Unit opened sales offices in Argentina and The Netherlands. We are using our Argentine office to consolidate our marketing efforts in Argentina. We are using our office in The Netherlands to support our European customers, improve our knowledge of the European market, optimize our logistics process in this market and develop regional partners. In addition to our offices in Argentina and The Netherlands, our Polyolefins Unit maintains an office in the United States that is focused on further developing the market for polyolefins is other countriesengineering plastics under the UTEC™ brand. Ipiranga Petroquímica maintains sales offices in South America, particularly the Mercosul countries,Chile and we intend to increase our export sales in the Mercosul countries as well as in Chile.Argentina.
We have established a strategic position in the Southern Cone countriespolyolefins business in South America and Europe through regular direct sales, to local distributors and agents who understand their respective markets. Our strategy to increase our presence in the Southern Conethese foreign markets is intended, among other things, to reduce our exposure to the cyclicality of the international spot market for polyolefins through the development of long-term relationships with customers in neighboring countries.
The following table sets forth export sales and export volumes of our Polyolefins Unit and Ipiranga Petroquímica for the yearsperiods indicated.
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Year ended December 31, | ||||||
2005 | 2004 | 2003 | ||||
Net export sales revenue (in millions ofreais) | 971.5 | 678.6 | 1,233.7 | |||
As % of total net sales revenue of Polyolefins Unit | 24.8 | 19.4 | 36.4 | |||
Export volumes (thousands of tons) | 363.6 | 248.5 | 288.1 | |||
As % of total production of Polyolefins Unit | 28.3 | 21.3 | 26.0 |
For the Year Ended December 31, | ||||||
2007 | 2006 | 2005 | ||||
Polyolefins Unit: | ||||||
Net export sales revenue (in millions ofreais) | R$1,391.3 | R$1,272.8 | R$971.5 | |||
As % of total net sales revenue of Polyolefins Unit | 24.5% | 26.7% | 24.8% | |||
Export volumes (thousands of tons) | R$503.9 | R$467.2 | R$363.6 | |||
As % of total production of Polyolefins Unit | 29.2% | 30.6% | 28.3% | |||
Ipiranga Petroquímica(1): | ||||||
Net export sales revenue (in millions ofreais) | R$410.8 | R$— | R$— | |||
As % of total net sales revenue of Ipiranga Petroquímica | 26.5% | —% | —% | |||
Export volumes (thousands of tons) | R$156.7 | R$— | R$— | |||
As % of total production of Ipiranga Petroquímica | 33.9% | —% | —% |
(1) Includes Ipiranga Petroquímica as from April 1, 2007.
The main focus of our Polyolefins Unit and Ipiranga Petroquímica is to maintain our leading position in the Brazilian market while continuing to export in order to manage the relationship between our production capacity and domestic demand for our products. Currently, we target an annual average production that is approximately 20% in excess of anticipated Brazilian market demand in order to meet variations in local demand and to respond to production fluctuations, seasonality and export product sales. As a result, we believe that our continued presence in export markets is essential to help manage any overcapacity in the Brazilian market and to maintain our position as leader in the supply of polyolefins in South America.
Prices and Sales Terms
We determine the domestic prices for ourthe polyethylene and polypropylene products of our Polyolefins Unit and Ipiranga Petroquímica with reference to international market prices.prices and the prevailing balance of supply and demand for these products in Brazil. Our customers in Brazil may pay in full on delivery or elect credit terms that require payment in full within 14seven to 6356 days following delivery. We charge interest based on prevailing market rates to our Brazilian customers that elect to pay on credit.
WeOur Polyolefins Unit and Ipiranga Petroquímica generally conduct our export sales to buyers in countries outside the Southern Cone through the international spot market. Our customer base in these markets consists primarily of trading houses and distributors, most of which have operations in Europe, the United States or in Asia, principally Hong Kong.
Pricing is based on international spot market prices. We make all sales in these markets with letters of credit. Export prices for polyolefins sales in the Southern Cone countries by our Polyolefins Unit are based on regional prices and sales are generally made either with letters of credit or through direct bank collections. Export prices for polyolefins sales in the Southern Cone countries by Ipiranga Petroquímica are made through the international spot market, and pricing is based on international spot market prices. Ipiranga Petroquímica makes export sales in Latin America on the same payment terms as sales made in Brazil.
Competition
We compete with regional polyolefins producers located in Brazil and Argentina and, to a lesser extent, with other importers of these products. In the Brazilian polyethylene market, we compete with a number of companies that produce one or two of the products in our production line. LDPE is produced in Brazil by Polietilenos União S.A. with an annual production capacity of 130,000 tons, Dow Brasil S.A. with 144,000270,000 tons and Petroquímica Triunfo S.A. with 160,000 tons, compared to our annual production capacity of 365,000 tons.
In the HDPE and LLDPE markets, we compete with the following producers in Brazil:
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We have (1) a combined annual production capacity of 695,000890,000 tons at three swing linefour swing-line plants capable of producing LLDPE and HDPE, onetwo of which isare located in the Southern Complex and two of which are located in the Northeastern Complex, and (2) an additional 144,000 tons ofcombined annual HDPE and UHMWP production capacity of HDPE and UHMWP560,000 tons at anotherone plant in the Northeastern Complex. We are currently expanding the production capacity of one of our HDPEComplex and three plants in the Northeastern Complex by an aggregate amount of 30,000 tons annually through efficiency enhancements. See “—Capital Expenditures.”Southern Complex.
In the Brazilian polypropylene market, we compete with Ipiranga and Suzano Petroquímica S.A., or Suzano. Ipiranga has annual production capacity of 150,000 tons and Suzano has annual production capacity of 625,000685,000 tons, compared to our annual production capacity of 660,000 tons.840,000 tons at three plants in the Southern Complex.
We do not have any domestic competitors in the Brazilian UHMWP market. Internationally, our primary competitor in this market is Ticona, which is a member of the Celanese Group, a German chemical company that has approximately 52% of the worldwide production capacity of UHMWP.
Traditionally, we have not faced substantial competition from imports of polyethylene and polypropylene due to tariff rates, transportation costs for imported products and other factors relating primarily to the logistics involved in importing these products. In 2005,2007, imports of polyethylene into Brazil represented 17.8%16.3% of Brazil’s total consumption of polyethylene, and imports of polypropylene into Brazil represented 8.6%13.5% of Brazil’s total consumption of polypropylene. We expect competition from international producers to increase substantially in selected foreign markets in which we intend to attempt to increase our sales of polyolefins products.
Vinyls Unit
Vinyls Unit
We are the leading producer of PVC in Brazil, based on sales volumes in 2005.2007. At December 31, 2005,2007, our PVC production facilities had the largest average annual production capacity in Latin America. Our Vinyls Unit accounted for R$1,794.11,789.4 million, or 13.3%7.9%, of our net sales revenue of all segments in 2005.2007.
Our Vinyls Unit is the only vertically integrated producer of PVC in Brazil. Our PVC production is integrated through our production of chlorine and other raw materials. Our Vinyls Unit also manufactures caustic soda, which is used by producers of aluminum and paper; ethylyneethylene dichloride, or EDC; and chlorine, which we
use to manufacture EDC. In 2005, 64.5%2007, 72.3% of our Vinyls Unit’s net sales revenue was derived from the sale of PVC products, 25.5%21.1% was derived from the sale of caustic soda and 5.4%3.9% from the sale of EDC and the remainder from the sale of other products.
In 2005,2007, we had an approximate 55%54.3% share of the Brazilian PVC market, based on sales volumes.
Products of Our Vinyls Unit
The following table sets forth a breakdown of the sales volume and net sales revenue of our Vinyls Unit by product line and by market for the years indicated.
For the Year Ended December 31, | ||||||||||||||||||
2007 | 2006 | 2005 | ||||||||||||||||
Quantities | Quantities | Net Sales | Quantities | |||||||||||||||
Sold | Net Sales Revenue | Sold | Revenue | Sold | Net Sales Revenue | |||||||||||||
(thousands | (millions | (thousands | (millions | (thousands | (millions | |||||||||||||
of tons) | ofreais) | (%) | of tons) | ofreais) | (%) | of tons) | ofreais) | (%) | ||||||||||
Domestic sales: | ||||||||||||||||||
PVC suspension | 445.5 | R$1,139.0 | 63.7% | 380.6 | R$926.9 | 60.1% | 360.4 | R$959.9 | 53.5% | |||||||||
PVC emulsion | 19.4 | 77.4 | 4.3 | 19.7 | 81.1 | 5.3 | 18.5 | 81.0 | 4.5 | |||||||||
Caustic soda | 450.5 | 373.8 | 20.9 | 423.9 | 357.8 | 23.2 | 455.6 | 449.4 | 25.1 | |||||||||
Others (1) | 129.6 | 47.9 | 2.7 | 121.0 | 55.8 | 3.6 | 125.3 | 82.9 | 4.6 | |||||||||
Total domestic sales | 1,045.0 | 1,638.1 | 91.5 | 945.2 | 1,421.5 | 92.2 | 959.8 | 1,573.2 | 87.7 | |||||||||
Total exports | 148.0 | 151.3 | 8.5 | 142.7 | 120.2 | 7.8 | 194.3 | 220.9 | 12.3 | |||||||||
Total vinyl net sales | 1,193.1 | R$1,789.4 | 100% | 1,087.9 | R$1,541.7 | 100% | 1,154.1 | R$1,794.1 | 100% | |||||||||
Years ended December 31, | |||||||||||||||||||||
2005 | 2004 | 2003 | |||||||||||||||||||
Quantities sold | Net sales revenue | Quantities sold | Net sales revenue | Quantities sold | Net sales revenue | ||||||||||||||||
(thousands of tons) | (millions ofreais) | (%) | (thousands of tons) | (millions ofreais) | (%) | (thousands of tons) | (millions ofreais) | (%) | |||||||||||||
Domestic sales: | |||||||||||||||||||||
PVC suspension | 360.4 | R$ | 959.9 | 53.5% | 372.4 | R$ | 1,116.8 | 60.1% | 323.6 | R$ | 756.5 | 55.1% | |||||||||
PVC emulsion | 18.5 | 81.0 | 4.5 | 22.0 | 82.8 | 4.4 | 18.8 | 61.7 | 4.5 | ||||||||||||
Caustic soda | 455.6 | 449.4 | 25.1 | 444.0 | 342.1 | 18.4 | 426.6 | 290.4 | 21.2 | ||||||||||||
Other(1) | 125.3 | 82.9 | 4.6 | 134.0 | 60.9 | 3.3 | 126.0 | 59.5 | 4.3 | ||||||||||||
Total domestic sales | 959.8 | 1,573.2 | 87.7 | 972.4 | 1,602.6 | 86.2 | 895.0 | 1,168.1 | 85.2 | ||||||||||||
Total exports | 194.3 | 220.9 | 12.3 | 191.0 | 256.2 | 13.8 | 215.6 | 203.7 | 14.8 | ||||||||||||
Total vinyl net sales | 1,154.1 | R$ | 1,794.1 | 100% | 1,163.3 | R$ | 1,858.8 | 100% | 1,110.6 | R$ | 1,371.8 | 100% | |||||||||
% of the total net sales revenue of all segments | 13.3% | 14.9% | 13.7% | ||||||||||||||||||
(1) Includes chlorine, hydrogen, caustic soda flake and sodium hypochlorite.
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PVC and EDC
PVC is a versatile polymer, and global production volume of PVC is the second highest among all commercial plastics. We produce suspension and paste PVC in various grades, which are sold in various sized bags or in bulk to third generation producers and transported by truck, rail or, in some cases, ship.
Approximately 95%95.5% of our PVC production is in the form of suspension PVC. The grades of PVC produced by the suspension production process are the most widely used, including for use in the manufacture of pipes and fittings, laminated products, shoes, sheeting, flooring, cable insulation, electrical conduit, packaging and medical applications. The grades of paste PVC are more specialized products and are used in the manufacture of toys, synthetic leather, flooring materials, bottle caps and seals, automobile corrosion prevention treatments and wallpaper coatings.
Our Vinyls Unit also produces EDC, the principal feedstock used in the production of PVC. We used approximately 72%74.6% of our EDC production in 20052007 for further processing into PVC and exported the remainder to Asia.
In 2004, we launched Plastwood, a product made of PVC and wood for finishing ceilings and special patio decks, in partnership with one of our customers in Brazil. We also developed new PVC applications for the Brazilian construction sector, such as prefabricated house and window frame solutions. In 2005, we launched Vinisol, a paste PVC product for the export market with applications for special paints and varnishes.
Caustic Soda and Chlorine
Our Vinyls Unit also produces caustic soda and chlorine.soda. Caustic soda is a basic commodity chemical that is sold to producers of aluminum, pulp and paper, petrochemicals and other chemicals, soaps and detergents and to
waste treatment plants. Caustic soda is also used in the textile industry to make fabrics more absorbent and to improve the strength of dyes, as well as in food processing and electroplating. We sell to third parties almost all of the caustic soda that our Vinyls Unit produces and consume only approximately 6%2.1% of our caustic soda production.
Chlorine is a basic chemical commodity that is used in a large variety of industries, including applications in water treatment and chemical and pharmaceutical production. We consume approximately 80% of our chlorine production in our production of EDC and sell most of our remaining chlorine to a company located in the Northeastern Complex that is connected to one of our plants via a specialized pipeline.
Production Facilities of Our Vinyls Unit
We own five vinyls production facilities. Two of our facilities are located in the Northeastern Complex, and two others are located in the State of Alagoas. Our fifth facility is located in the City of São Paulo. In December 2005, we expanded the annual production capacity of our PVC plant in Alagoas by 50,000 tons.
The following table sets forth the name and location, primary products, annual production capacity at December 31, 2005,2007, and annual production for the years presented for each of our vinyls plants.
Production | ||||||||||
Annual | For the Year Ended | |||||||||
Primary | Production | December 31, | ||||||||
Location (Complex) | Products | Capacity | 2007 | 2006 | 2005 | |||||
(in tons) | (in tons) | |||||||||
Camaçari (Northeastern) | PVC | 250,000 | 209,312 | 193,089 | 225,563 | |||||
Camaçari (Northeastern) | Caustic Soda | 79,000 | 67,393 | 73,316 | 76,219 | |||||
Chlorine | 64,000 | 65,505 | 59,820 | 66,587 | ||||||
Maceió (Alagoas) | Caustic Soda | 460,000 | 391,164 | 395,572 | 419,673 | |||||
Chlorine | 400,000 | 381,133 | 370,588 | 387,510 | ||||||
EDC | 520,000 | 478,941 | 477,472 | 499,256 | ||||||
Marechal Deodoro (Alagoas) | PVC | 240,000 | 235,154 | 229,079 | 198,125 | |||||
Vila Prudente (São Paulo) | PVC | 26,000 | 20,955 | 21,888 | 23,689 |
Location (Complex) | Primary products | Annual production capacity | Production year ended December 31, | |||||||
2005 | 2004 | 2003 | ||||||||
(in tons) | (in tons) | |||||||||
Camaçari (Northeastern) | PVC | 250,000 | 225,563 | 206,978 | 181,780 | |||||
Camaçari (Northeastern) | Caustic Soda | 73,000 | 76,219 | 76,517 | 72,458 | |||||
Chlorine | 64,000 | 66,587 | 66,644 | 63,857 | ||||||
Maceió (Alagoas) | Caustic Soda | 460,000 | 419,673 | 416,100 | 386,967 | |||||
Chlorine | 400,000 | 387,510 | 381,464 | 360,677 | ||||||
EDC | 520,000 | 499,256 | 495,827 | 475,024 | ||||||
Marechal Deodoro (Alagoas) | PVC | 240,000 | 198,125 | 189,810 | 193,150 | |||||
Vila Prudente (São Paulo) | PVC | 26,000 | 23,689 | 24,830 | 21,897 |
Raw materialsMaterials of Our Vinyls Unit
Ethylene
Ethylene
The most significant direct cost associated with the production of PVC and EDC is the cost of ethylene, which accounted for 68.1%51.6% of our variable cost of PVC sales in 20052007 and 80.9%91.4% of our EDC sales in 2005.2007. Our Basic Petrochemical Unit supplies all of the ethylene required by our Vinyls Unit. Ethylene is delivered to our Alagoas plant via a 477 kilometer477-kilometer pipeline that we own, and to our PVC plant in the Northeastern Complex via a separate pipeline. Because the cost of storing and transporting ethylene is substantial and there is inadequate infrastructure in Brazil to permit the importation of large quantities of ethylene, our Vinyls Unit is highly dependent on ethylene that is supplied by our Basic Petrochemicals Unit. For a description of the pricing of ethylene purchased by our Vinyls Unit from our Basic Petrochemicals Unit, see “—Basic Petrochemicals Unit—Sales and Marketing of Our Basic Petrochemicals Unit.” Our São Paulo plant receives vinylchloride monomer (a raw material used in manufacturing PVC) by ship from our plant in the Northeastern Complex.
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Electric Power
Electric power is a significant cost component in our production of chlorine and caustic soda. Electric power accounted for 69.4%40.8% of our Vinyls Unit’s cost of caustic soda sales in 20052007 and 17.9%11.0% of our Vinyls Unit’s total cost of sales in 2005.2007. Our Vinyls Unit obtains its electric power requirements from various generators under long-term power purchase agreements. Our caustic soda plants at Camaçari and Alagoas and our PVC plant at Camaçari purchase their electric power requirements from CHESF under a long-term contract that expires in 2010. Companhia Energética de Alagoas S.A., or CEAL, distributes electric power to our PVC plant in Alagoas. Our São Paulo plant obtains its electric power from Eletropaulo Metropolitana-Eletricidade de São Paulo S.A., or
Eletropaulo. The power purchase agreements with CEAL and Eletropaulo are renewable contracts with automatic rolling three-year extensions. These agreements provide us with the option to purchase our total electric power requirements based on an annual estimate. The price terms of these contracts are based upon tariffs regulated by the Brazilian National Electrical Energy Agency (Agência Nacional de Energia Elétrica).
Salt
We used approximately 853,000856,100 tons of salt during 20052007 in our production of chlorine and caustic soda. Salt accounted for 4.7%7.5% of our variable costs of caustic soda sales in 20052007 and 1.0%1.1% of our Vinyls Unit’s total cost of sales in 2005.2007. We have exclusive salt exploration rights at a salt mine located near our Alagoas plant. We estimate that the salt reserves of this mine are sufficient to allow us to produce chlorine at expected rates of production for approximately 40 to 50 years. We enjoy significant cost advantages when compared to certain of our competitors due to low extraction costs of rock salt (particularly compared to sea salt), low transportation costs due to the proximity of the salt mine to our production facility and the higher purity of rock salt as compared to sea salt.
Other Utilities
All of our Vinyls Unit’s facilities in the Northeastern Complex are supplied with other required basic utilities, including steam, purified and demineralized water, compressed air and nitrogen, by our Basic Petrochemicals Unit. Most basic utilities are supplied to our Alagoas PVC plant by our subsidiary, Companhia Alagoas Industrial. Our chlorine and caustic soda plants in Alagoas and our PVC plant in São Paulo supply their own utilities requirements.
Technology of Our Vinyls Unit
We have entered into several non-exclusive agreements with a number of leading petrochemical companies to use technology for our Vinyls Unit. We have been granted the right to use vinylchloride monomer manufacturing technology from Oxyvinyls Company and PVC technology from Mitsubishi. We also have chlorine manufacturing technology agreements with Denora (used in Bahia), Eltech (used in Alagoas) and EVC (used to produce ethylene dichloride in Alagoas). In addition, we own 25 patents and six trademarks in Brazil related to our PVC business.
We do not pay any continuing royalties under any of these license agreements, but we paid an initial fee under these agreements. If any of these arrangements were terminated or no longer available to us, we believe that we would be able to replace the relevant technology with comparable or better technology from other sources.
Our plant in the Northeastern Complex uses mercury cell technology to produce chlorine and caustic soda, which technology can no longer be used in new petrochemical production facilities under Brazilian legislation due in part to environmental concerns regarding mercury emissions resulting from this manufacturing process. The Brazilian government may require us to shift to newer diaphragm technology, which we use in our Alagoas plant, or membrane technology. We have not shifted to these newer technologies yet, in part because the return from the capital expenditures associated with this shift would not be as high as those from other potential investments that we may undertake.
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Pilot Plant and Research Center
Our Vinyls Unit maintains a pilot plant for PVC research and development in the State of Bahia and a research center in the State of São Paulo. This center currently employs 11five engineers and ninefour technicians specialized in plastics. At this center and in our pilot plant, we produce new PVC resins, develop and improve PVC production technology, render support services to our customers, train our customers’ personnel and develop new applications for PVC in Brazil, including vertical blinds, coatings for industrial PVC pipes and
resins used in automotive parts and in the manufacture of doors, windows and other building components.
In 2004, our research2005, we launched Vinisol, a paste PVC product for the export market with applications for special paints and development centervarnishes. In 2007, we launched Norvic S80SA, a suspension PVC resin for special applications such as wire and cable, flexible profiles, hoses and films. We have developed Plastwood and new PVC applications for construction systems for houses and industrial facilities that are based on PVC panels, as well as for carpets for automobiles. We launched new resins in 2005, 2006 and 2007, and sales of these resins represented approximately 39% of the Brazilian construction sector.net sales revenue of our Vinyls Unit in 2007.
Sales and Marketing of Our Vinyls Unit
Net sales to our ten10 largest Vinyls Unit customers accounted for approximately 47.2%47.4% of our Vinyls Unit’s total net sales revenue during 2005.2007. One customer accounted for approximately 10.7%11.6% of our Vinyls Unit’s total sales revenue during 2005in 2007, 11.3% in 2006 and 14.6% of our Vinyls Unit’s total sales revenue during 2004. No customer accounted for more than 12% of the total net sales revenue of our Vinyls Unit during 2003.10.7% in 2005. One customer accounted for 95.4%22.8% of our total external EDC sales in 2005, 69.2%2007, 58.1% in 20042006 and 73.0%95.4% in 2003,2005, and our largest caustic soda customer accounted for 14.9%7.7% of total caustic soda sales in 2005, 11.6%2007, 8.6% in 20042006 and 13.4%14.9% in 2003.2005.
There is a structural link between the PVC and caustic soda markets that exists because caustic soda is a by-productbyproduct of the production of chlorine required to produce PVC. When demand for PVC is high, then greater amounts of caustic soda are produced, leading to an increase in supply and generally lower prices for caustic soda. Conversely, when demand for PVC is low, prices for caustic soda tend to rise.
Domestic Sales
In 2005,2007, our Vinyls Unit had domestic net sales revenue of R$1,573.21,638.1 million, which accounted for 87.7%91.5% of our Vinyls Unit net sales revenue. In 2005, 66.2%2007, 74.3% of domestic net sales revenue was attributable to sales of PVC, 28.6%22.8% was attributable to sales of caustic soda and 5.3%2.9% was attributable to sales of other products.
We make most of our domestic sales of PVC and caustic soda directly to customers without the use of third party distributors. However, our Vinyls Unit maintains contractual relationships with three distribution centers located in Paulínia and Barueri, both in the State of São Paulo, and Joinville in the State of Santa Catarina that provide logistical support. In addition, we operate three warehouse facilities for PVC and six terminal tank facilities for caustic soda strategically located along the Brazilian coast to enable us to deliver our products to our customers on a “just-in-time” basis. Our Vinyls Unit develops its business through close collaboration with its customers, working together to improve existing products as well as to develop new applications for PVC. Our marketing and technical assistance groups also advise customers and potential customers that are considering the installation of manufacturing equipment for PVC end products.
Export Sales
In 2005,2007, our Vinyls Unit had export net sales revenue of R$220.9151.3 million, which accounted for 12.3%8.5% of our Vinyls Unit’s total net sales revenue. Our export sales of PVC and EDC vary from year to year, influenced principally by domestic market demand and product availability.
The following table sets forth export sales and export volumes of our Vinyls Unit for the years indicated.
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Year ended December 31, | ||||||
2005 | 2004 | 2003 | ||||
Net export sales revenue (in millions ofreais) | 220.9 | 256.2 | 203.7 | |||
As % of total net sales revenue of Vinyls Unit | 12.3 | 13.8 | 14.8 | |||
Export volumes (thousands of tons) | 194.3 | 191.0 | 215.6 | |||
As % of total production of Vinyls Unit | 16.8 | 16.4 | 19.4 |
For the Year Ended December 31, | ||||||
2007 | 2006 | 2005 | ||||
Net export sales revenue (in millions ofreais) | R$151.3 | R$120.2 | R$220.9 | |||
As % of total net sales revenue of Vinyls Unit | 8.5% | 7.8% | 12.3% | |||
Export volumes (thousands of tons) | R$148.0 | R$142.7 | R$194.3 | |||
As % of total production of Vinyls Unit | 12.4% | 13.1% | 16.8% |
We have an ongoing obligation, which terminates during the first half of 2006, to export PVC and EDC under a supply agreement with Sojitz, which exports accounted for 47.1% of our total export sales PVC and EDC during 2005. Under this supply agreement, we have agreed to supply, and Sojitz has agreed to purchase,
minimum annual volumes of 6,000 tons of PVC during this agreement’s term, and minimum annual volumes of EDC, which decline over time from 100,000 to 80,000 tons. The export receivables generated under this supply agreement are collateral for an export prepayment facility that we have entered into. Any PVC, EDC or caustic soda that is made available by our Vinyls Unit for export is sold in the spot market at the best available prices.
We use a variety of methods to distribute our exports, depending generally on the total size of the export market, including direct sales, independent distributors, negotiations conducted through trading companies and sales on the spot market.
We exported 14.3% of our PVC sales volume in 2005. Our export sales of PVC are focused primarily on the South American, Southeast Asian and United States markets and to a lesser extent on Europe.
Prices and Sales Terms
We determine the domestic prices for our PVC resins with reference principally to the prices paid by third generation producers in Brazil for imports of PVC plus additional service charges. Our export price for PVC is generally equal to the international market price but also takes transportation costs into account. Delivery time, quality and technical service also affect the levels of sales of PVC resins. We establish our domestic price for caustic soda based on international market prices and prices charged by our three domestic competitors, taking into account any import duties and freight costs. Approximately 70%74.5% of our caustic soda sales are effected pursuant to agreements that are generally for one- to three-year terms and may include floor and ceiling prices. As with PVC, our export prices for EDC are generally determined according to international market prices but also take import duties and freight costs into account.
Prices that we charge for our vinyls products in the Brazilian market are traditionally higher than the prices that we obtain for our exports of these products. The difference in prices between the Brazilian and export markets results generally from:
Our customers in Brazil may pay in full on delivery or elect credit terms that require payment in full within seven to 90 days following delivery. We charge interest based on prevailing market rates to our customers in Brazil that elect longer payment options. Sales terms for exports generally require payment between 90 and 120 days following delivery. We usually require irrevocable letters of credit for export sales made on the spot market.
Competition
PVC
PVC
We and Solvay are the only two producers of PVC in Brazil. Solvay’s total Brazilian installed annual production capacity is 270,000 tons, compared to our annual production capacity of 516,000 tons. In December 2005, we expanded our annual PVC production capacity by 50,000 tons, and Solvay expanded its annual PVC production capacity by 30,000 tons. Solvay’s two production facilities are located in São Paulo and, therefore, are closer than our facilities to the primary PVC market in Brazil. However, we believe that our vertical production capabilities, our modern PVC suspension plants, our strong relationship with our customers and our technical assistance programs enable us to compete effectively with Solvay.
We also compete with importers of PVC. Imports accounted for approximately 17.3%21.5% of Brazil’s total PVC consumption in 2005.2007. Domestically produced PVC is currently competitively priced with imported PVC after taking into account transportation costs and import duties. Solvay, which has an additional plant in Argentina, is also our principal competitor in the PVC market both in Brazil and elsewhere in South America.
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In addition, we compete with other producers of thermoplastics that manufacture the same line of vinyls products or products that are substitutes for our vinyls product line. Thermoplastics principally consist of polyethylene and polypropylene and are used in certain applications as substitutes for PVC. Wood, glass and metals also are used in some cases as substitutes for PVC.
Other Products
The four largest Brazilian producers of caustic soda accountaccounted for approximately 72.7%90.9% of Brazilian production.production in 2007. Our company and Dow Chemical operate in this market throughout Brazil, while the other domestic producers of caustic soda generally operate on a local or regional basis. Imports accounted for approximately 27.4%39.6% of Brazil’s total caustic soda consumption in 2005.2007. We do not believe that imports of caustic soda will increase substantially because of the high cost of transporting caustic soda, which is usually sold in suspension form. In the caustic soda market, we compete mainly on the basis of price and timeliness of delivery.
Our principal competitors in the caustic soda market elsewhere in South America are Dow Chemical, Solvay and producers located on the U.S. Gulf Coast.
Business Development Unit
Our Business Development Unit accounted for R$569.0489.7 million, or 4.2%2.2%, of the net sales revenue of all segments in 2005.2007. Our Business Development Unit produces PET resin, dimethyl terephthalate, or DMT, caprolactam, cyclohexane, cyclohexanone and ammonium sulfate. Prior to May 2007, our Business Development Unit also produced polyethylene terephthalate, or PET, resin and dimethyl terephthalate, or DMT. In 2005, 37.1%2007, 36.6% of our Business Development Unit’s net sales revenue was derived from the sale of PET products and 48.2%44.1% was derived from the sale of caprolactam.
In May 2007, we permanently closed the DMT unit in our PET plant as a result of this plant’s high maintenance and operational costs due to its aging technology. DMT is the primary raw material used by our PET plant. As a result, our PET plant was also temporarily closed down in May 2007 in order for us to review the technology used to produce PET. We are reviewing options for resuming PET production, including using purified terephthalic acid, which is widely used by international producers of PET, as a raw material. Pending completion of this review, we are continuing to serve our PET customers with PET purchased from M&G Polimeros Brasil S.A., a subsidiary of M&G Finanziaria Industriale S.p.A., the largest PET producer in Brazil.
In 2005,2007, we estimate that we had an approximate 12%12.6% share of the Brazilian PET market, based on sales volumes.
Products of Our Business Development Unit
The following table sets forth a breakdown of the sales volume and net sales revenue of our Business Development Unit by product and by market for the years indicated.
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Year ended December 31, | ||||||||||||||||||||||||
2005 | 2004 | 2003 | ||||||||||||||||||||||
Quantities sold | Net sales revenue | Quantities sold | Net sales revenue | Quantities Sold | Net sales revenue | |||||||||||||||||||
(thousands of tons) | (millions ofreais) | (%) | (thousands of tons) | (millions ofreais) | (%) | (thousands of tons) | (millions ofreais) | (%) | ||||||||||||||||
Domestic Sales: | ||||||||||||||||||||||||
PET | 56.6 | R$ | 200.7 | 35.3 | % | 66.2 | R$ | 238.5 | 38.4 | % | 55.1 | R$ | 168.3 | 37.0 | % | |||||||||
Caprolactam | 33.0 | 197.2 | 34.7 | 42.9 | 229.9 | 37.0 | 42.5 | 180.1 | 39.6 | |||||||||||||||
Ammonium sulfate | 94.2 | 33.5 | 5.9 | 92.4 | 41.4 | 6.7 | 96.9 | 29.7 | 6.5 | |||||||||||||||
Others | 16.7 | 49.8 | 8.7 | 15.6 | 54.2 | 8.7 | 15.0 | 42.9 | 9.4 | |||||||||||||||
Total domestic sales | 200.5 | 481.2 | 84.6 | 217.1 | 564.0 | 90.8 | 209.5 | R$ | 421.0 | 92.5 | ||||||||||||||
Total exports | 19.1 | 87.8 | 15.4 | 14.3 | 56.8 | 9.2 | 9.1 | 34.3 | 7.5 | |||||||||||||||
Total net sales | 219.6 | R$ | 569.0 | 100 | % | 231.4 | R$ | 620.8 | 100 | % | 218.6 | R$ | 455.3 | 100 | % | |||||||||
% of total net sales revenue of all segments | 4.2 | % | 5.0 | % | 4.6 | % |
For the Year Ended December 31, | ||||||||||||||||||
2007 | 2006 | 2005 | ||||||||||||||||
Quantities | Quantities | Quantities | ||||||||||||||||
sold | Net Sales Revenue | sold | Net Sales Revenue | Sold | Net Sales Revenue | |||||||||||||
(thousands | (millions | (thousands | (millions | (thousands | (millions | |||||||||||||
of tons) | ofreais) | (%) | of tons) | ofreais) | (%) | of tons) | ofreais) | (%) | ||||||||||
Domestic Sales: | ||||||||||||||||||
PET(1) | 60.3 | R$175.9 | 35.9% | 50.6 | R$152.7 | 31.6% | 56.6 | R$200.7 | 35.3% | |||||||||
Caprolactam | 18.2 | 96.2 | 19.6 | 25.7 | 127.5 | 26.4 | 33.0 | 197.2 | 34.7 | |||||||||
Ammonium sulfate | 84.2 | 39.4 | 8.0 | 77.8 | 25.5 | 5.3 | 94.2 | 33.5 | 5.9 | |||||||||
Others | 16.3 | 49.5 | 10.1 | 19.5 | 56.5 | 11.7 | 16.7 | 49.7 | 8.7 | |||||||||
Total domestic sales | 179.0 | 361.0 | 73.7 | 173.6 | 362.2 | 75.0 | 200.5 | 481.2 | 84.6 | |||||||||
Total exports | 30.7 | 128.7 | 26.3 | 34.3 | 120.9 | 25.0 | 19.1 | 87.8 | 15.4 | |||||||||
Total net sales | 209.7 | R$489.7 | 100% | 207.9 | R$483.1 | 100% | 219.6 | R$569.0 | 100% | |||||||||
(1) In May 2007, we temporarily closed our PET plant.
PET is one of the most widely used polymers in industry today and is used in manufacturing packaging for soft drinks, medications, cleaning products, mineral water and food products. Caprolactam is a raw material that
forms the basis for the production of Nylon-6 textile thread, engineering resins and film, and is a structural material in the motor and electronics industries. We also produce DMT for use in PET production, ammonium sulfate for use as a fertilizer, and cyclohexane and cyclohexanone, both for use in paint solvents, pesticides, natural resins, oils and rubber. Prior to May 2007, we also produced DMT for use in PET production.
Production Facilities of Our Business Development Unit
Our Business Development Unit operates two plants at the Northeastern Complex. At December 31, 2005,2007, our Business Development Unit plants had a total annual production capacity of 78,000 tons of PET and 62,000 tons of caprolactam.
The table below sets forth the location, primary products, annual production capacity at December 31, 2005,2007, and annual production for the years presented for each of our Business Development Unit plants.
Annual | Production | |||||||||
Primary | Production | For the Year Ended December 31, | ||||||||
Location (Complex) | Products | Capacity | 2007 | 2006 | 2005 | |||||
(in tons) | (in tons) | |||||||||
Camaçari (Northeastern) | PET (1) | 78,000 | 25,569 | 57,155 | 66,233 | |||||
DMT (2) | — | 34,653 | 76,070 | 70,954 | ||||||
Camaçari (Northeastern) | Caprolactam | 62,000 | 46,087 | 41,615 | 49,981 | |||||
Cyclohexane | 72,000 | 66,793 | 57,764 | 65,057 | ||||||
Cyclohexanone | 55,000 | 44,574 | 40,964 | 46,590 | ||||||
Ammonium sulfate | 114,000 | 89,740 | 78,296 | 94,855 |
(1) | In May 2007, we temporarily closed our PET plant. |
(2) | In May 2007, we permanently closed the DMT unit in our PET plant. |
Primary products | Annual | Production year ended December 31, | ||||||||
Location (Complex) | 2005 | 2004 | 2003 | |||||||
(in tons) | (in tons) | |||||||||
Camaçari (Northeastern) | PET | 78,000 | 66,233 | 72,194 | 56,288 | |||||
DMT | 80,000 | 70,954 | 76,985 | 63,369 | ||||||
Camaçari (Northeastern) | Caprolactam | 62,000 | 49,981 | 50,483 | 48,850 | |||||
Cyclohexane | 72,000 | 65,057 | 66,292 | 63,712 | ||||||
Cyclehexanone | 55,000 | 46,590 | 48,282 | 47,813 | ||||||
Ammonium sulfate | 114,000 | 94,855 | 92,617 | 97,157 |
Raw Materials of Our Business Development Unit
The most significant direct cost associated with the production of caprolactam is the cost of benzene, which accounted for approximately 47.2%47.8% of our Business Development Unit’s variable caprolactam production costscost of sales in 2005.2007. All of the benzene that we use in producing caprolactam is supplied by our Basic Petrochemicals Unit.
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The most significant direct cost associated with our production of PET is the cost of para-xylene, which accounted for approximately 47.1% of our Business Development Unit’s variable PET production costs in 2005. All of the para-xylene that we use in producing PET is supplied by our Basic Petrochemicals Unit.
Technology of Our Business Development Unit
We have entered into several non-exclusive agreements with a number of leading petrochemical companies to use technology for our Business Development Unit. The technology of our Business Development Unit includes:
We do not pay any continuing royalties under any of these license agreements, but we paid an initial fee under these license agreements. If any of these arrangementsagreements were terminated, or no longer available to us, we believe that we would be able to replace the relevant technology covered by these agreements with comparable or better technology from other sources.
Sales and Marketing of Our Business Development Unit
Our Business Development Unit sells its products primarily in northeastern Brazil, mainly to third generation petrochemical producers located in the Northeastern Complex. We determine the prices for the products of our Business Development Unit with reference to several market factors that include the prices paid by third generation producers for imports of these products and prevailing market prices in Brazil.
Our Business Development Unit sells its products to a highly concentrated customer base. Four customers accounted for approximately 71.3%56.0% of our total PET sales during the year ended December 31, 2005. Our Business Development Unit’s2007. As a result of the shutdown of the plant of one of our domestic customers in June 2006, no caprolactam customer base is even more concentrated, as one customerhas accounted for approximately 67%more than 10% of our total caprolactam sales duringsince the year ended December 31, 2005.date of this plant shutdown.
In order to continue serving our PET customers following the temporary closure of our PET plant, we entered into a contract with M&G Polimeros Brasil S.A., a subsidiary of M&G Finanziaria Industriale S.p.A., the largest PET producer in Brazil and one of the two largest producers worldwide, for the supply of not less than 60,000 tons of the resin per year. Our relationships with our PET customers, including the provision of technical assistance, will continue to be conducted under our commercial policy.
Competition
Monomeros Colombo Venezolanos S.A., or Monomeros, is the only manufacturer, other than our company, of caprolactam in South America, with an annual production capacity of 30,000 tons. Monomeros supplied approximately 3,61427,600 tons of caprolactam in 2005,2007, or approximately 9.7%26.2% of the caprolactam sold in Brazil.
The textile industry consumed the most caprolactam in Brazil during 20052007 (approximately 22,2009,600 tons), and the engineering plastics and plastic films segments of the petrochemical industry consumed an aggregate amount of approximately 10,50014,200 tons of caprolactam in 2005.2007.
There are twothree other producers of PET in Brazil: M&G Finanziaria Industriale S.p.A.; Rhodia-ster S.A., or Rhodia-ster (a subsidiary of Mossi & Ghisolfi Group); and Vicunha Têxtil S.A., or Vicunha Têxtil. In 2005, Rhodia-ster and Vicunha Têxtil had annual production capacities of 290,000 tons and 24,000 tons, respectively, as compared to our annual production capacity of 70,000 tons. In addition,At December 31, 2007, M&G Finanziaria Industriale S.p.A. has commenced construction of a PET plant in Ipojuca, Pernambuco, withhad an annual production capacity of 450,000 tons of PET, which is expected to commence operations in late 2006.Rhodia-ster had an annual production capacity of 250,000 tons of PET, and Vicunha Têxtil had an annual production capacity of 12,000 tons of PET. In June 2006, Vicunha Têxtil closed its PET plant temporarily and has not announced when this plant will recommence operations.
We also compete with importers of PET. Imports accounted for approximately 35.8%29.2% of Brazil’s total PET consumption in 2005.2007. Although international producers of PET have greater economies of scale than our company, we are able to compete with these producers due to the high transportation costs and import duties applicable to PET imports. Our PET production issales have been aimed principally at the bottled water segment of the PET market, and we believe that ourthe quality products that we sell will continue to remain competitive in the Brazilian PET market.
Ipiranga Química
Ipiranga Química accounted for R$392.6 million, or 1.7% of the net sales revenue of all segments in 2007. Ipiranga Química owns 100% of the total and voting share capital of Ipiranga Petroquímica. Ipiranga Química is also the largest Brazilian distributor of chemical and petrochemical products with a market share of approximately 10%. As a result of the Ipiranga Transaction, we have consolidated the results of Ipiranga Química and its subsidiaries into our financial statements as from April 1, 2007.
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Ipiranga Química distributes products manufactured by Ipiranga Petroquímica, as well as products from more than 50 domestic and international companies. Ipiranga Química distributes products in a broad range of market segments, including agrochemicals, rubber and general purpose chemicals; cosmetics and pharmaceuticals; household and other industrial segments; plastic transformation; and paints, resins, adhesives and civil construction.
Products Distributed by Ipiranga Química
Ipiranga Química distributes a large and diverse portfolio of products consisting of more than 1,000 products. We classify the products distributed by Ipiranga Química as:
The following table sets forth a breakdown of the sales volume and net sales revenue of Ipiranga Química by product for the nine months ended December 31, 2007.
Nine Months Ended December 31, | ||||||
2007 | ||||||
Quantities | ||||||
sold | Net Sales Revenue | |||||
(thousands | (millions | |||||
of tons) | ofreais) | (%) | ||||
Solvents: | ||||||
Aliphatic solvents | 28.9 | R$57.5 | 14.6% | |||
Aromatic solvents | 20.2 | 42.6 | 10.8 | |||
Synthetic solvents | 12.9 | 36.4 | 9.3 | |||
Ecological solvents | 0.2 | 0.6 | 0.2 | |||
Polymers | 25.7 | 96.6 | 24.6 | |||
General purpose chemicals: | ||||||
Process oils | 27.3 | 40.9 | 10.4 | |||
Chemical intermediates | 10.1 | 32.4 | 8.3 | |||
Blends | 15.5 | 30.9 | 7.9 | |||
Specialty chemicals | 2.7 | 26.5 | 6.8 | |||
Santoprene | 1.2 | 9.6 | 2.4 | |||
Pharmaceuticals | 0.9 | 13.4 | 3.4 | |||
Services | 0.1 | 5.2 | 1.3 | |||
Total net sales | 145.6 | R$392.6 | 100% | |||
Distribution Agreements
Ipiranga Química has commercial relationships with more than 50 domestic and international companies, under which Ipiranga Química distributes specified products, including:
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Ipiranga Química also has entered into distribution agreements that provide it with exclusive rights to distribute specified products in Brazil, including distribution agreements with:
Generally, Ipiranga Química initiates distribution activities for a producer with a letter of intent with a term of one-year and, following this period, extends these commercial relationships or distribution agreements for an indefinite period. Generally, Ipiranga Química’s distribution agreements may be terminated by either party on 30 to 180 days notice.
Ipiranga Química’s distribution agreements are generally local stock agreements, indent sales agreements or agreements that combine the features of both. Under Ipiranga Química’s local stock agreements, Ipiranga Química purchases chemicals for resale to its customers. These agreements do not contain minimum volume or maximum margin requirements. Sales to Ipiranga Química under these agreements are at prices negotiated between Ipiranga Química and the producer. Ipiranga Química’s distribution agreement with Petrobras provides that Ipiranga Química is eligible to receive a discount on purchases based on the volume of products purchased. Under Ipiranga Química’s indent sales agreements, Ipiranga Química acts as a sales agent and receives a commission on the total sales revenue (FOB price) generated for the producer by these sales.
Sales and Marketing by Ipiranga Química
Ipiranga Química distributes products to chemical retailers, third generation petrochemical producers and other manufacturers. We determine the prices for the products distributed by Ipiranga Química by reference to several market factors, including the prices paid by third generation producers for imports of these products and prevailing market prices in Brazil. Ipiranga Química serves 5,000 active clients in more than 50 market segments, through nine business units supported by seven sales offices throughout Brazil. Ipiranga Química operates four distribution centers that include warehouses and tank farms. Ipiranga Química owns its distribution centers in Guarulhos in the State of São Paulo, Canoas in the State of Rio Grande do Sul and Duque de Caxias in the State of Rio de Janeiro, and leases its distribution center in Camaçari in the State of Bahia.
Ipiranga Química distributes products in a broad range of market segments. No customer represented more than 10% of the net sales revenue of Ipiranga Química during 2005, 2006 or 2007. The following table sets forth a breakdown of the net sales revenue of Ipiranga Química by market segment served by its customer for the nine months ended December 31, 2007.
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Nine Months Ended | ||||
December 31, | ||||
2007 | ||||
Net Sales Revenue | ||||
(millions | ||||
ofreais) | (%) | |||
Plastics | R$81.3 | 20.7% | ||
Paints and Coats | 61.6 | 15.7 | ||
Rubber | 47.5 | 12.1 | ||
Pharmaceutical | 34.2 | 8.7 | ||
Agribusiness | 24.3 | 6.2 | ||
Adhesives | 18.1 | 4.6 | ||
Chemicals | 17.7 | 4.5 | ||
Household products | 14.1 | 3.6 | ||
Lubricants | 13.0 | 3.3 | ||
Automobile | 12.2 | 3.1 | ||
Petrochemical | 10.2 | 2.6 | ||
Cosmetics/ Personal Care | 9.4 | 2.4 | ||
Chemical and petrochemical resale | 8.6 | 2.2 | ||
Other | 40.4 | 10.3 | ||
Total net sales | R$392.6 | 100% | ||
Competition
The chemical distribution industry in Brazil had revenues of US$3.4 billion in 2007, representing growth of 15% compared to 2006, according to preliminary data published by the Brazilian Chemical and Petrochemical Distributors Association. The chemical distribution industry in Brazil is highly fragmented, with a small number of large distributors, such as M Cassab, Unipar, Coremal, Makeni Química and Brenntag, and a large number of small distributors. The Brazilian Chemical and Petrochemical Distributors Association estimates that 8% of the companies in this industry have annual sales of more than US$150 million while 74% have annual sales of less than US$50 million. The customer base for chemical distributors is primarily composed of customers that consume small volumes of any distributed product.
Jointly Controlled Companies and Joint VentureSubsidiaries
Petroquímica Paulínia
Copesul
At December 31, 2005,2007, we owned directly and indirectly, 29.5%60.0% of the votingtotal and totalvoting share capital of Copesul,Paulínia. As a result of the cracker based incompletion of the Southern Complex. Copesul,first phase of the Petrobras Transaction on May, 30, 2008, Paulínia is our wholly owned subsidiary. Paulínia, which is a corporation (sociedade anônima) organized under the laws of Brazil, was incorporated on September 16, 2005 and is the second largest petrochemical cracker in Brazil based on production capacity, with approximately 33.0% of Brazilian production capacity of ethylene.
Copesul was formed in 1976 witha joint venture between our company and Petroquisa as its majority shareholder and commenced operations in 1982. In May 1992, as part of the Brazilian government’s efforts to privatize the Brazilian petrochemical industry, Petroquisa auctioned a portion of its interest in Copesul to private investors. At December 31, 2005, a consortium, including the Odebrecht Group and Ipiranga and its affiliates, owned 58.9% of the total share capital of Copesul. Petroquisa continued to own 15.6% of the total share capital of Copesul.
Copesul’s net sales revenue on a consolidated basis was R$5,552.6 million in 2005, R$5,374.1 million in 2004 and R$4,177.9 million in 2003, as adjusted to conform to our accounting policies. Copesul’s net income on a consolidated basis was R$566.0 million in 2005, R$558.4 million in 2004 and R$149.9 in 2003, as adjusted for the effectsconstruction and operation of unrealized tax incentivesa polypropylene plant located in Paulínia, in the State of São Paulo. Prior to conform to our accounting policies. We accountApril 1, 2008, we accounted for our interest in CopesulPaulínia in our Brazilian GAAP financial statements using the proportional consolidation method.
Copesul ismethod as required under Brazilian GAAP. We will fully consolidate the second largest petrochemical cracker in Brazil based on production capacity, with approximately 39%results of Brazilian production capacity of ethylene. It provides petrochemical feedstocks to second generation petrochemical producers located in the Southern Complex, includingPaulínia into our Polyolefins Unit’s plants located there. Copesul’s manufacturing operations in the Southern Complex and the products that it produces are similar to the products of our Basic Petrochemicals Unit.
Copesul’s annual ethylene production capacity is 1,135,000 tons and its annual propylene production capacity is 581,000 tons. In 2005, Copesul produced approximately 1,078,000 tons of ethylene and approximately 581,000 tons of propylene. Actual production of Copesul’s plants, like the plants in our Basic Petrochemicals Unit, may exceed their stated annual production capacity.
Copesul’s main customers are the second generation petrochemical producers located in the Southern Complex, including our company. Copesul has long-term supply contracts with its major customers, including our Polyolefins Unit.
We have entered into a shareholders agreement with Ipiranga relating to our shares of Copesul. Ipiranga owns 29.5% of the voting and total share capital of Copesul. Under the Copesul shareholders agreement, we and Ipiranga jointly control Copesul. We have agreed to consult with Ipiranga prior to any meeting of Copesul’s board of directors or shareholders and to vote our shares together with Ipiranga on specified matters, including policies relating to the allocation of excess amounts of raw materials, policies relating to the distribution of profits, the election of members to Copesul’s board of directors, amendments to Copesul’s by-laws, approval of indebtedness of Copesul in excess of certain limits, sales of assets in excess of specified limits, investments in excess of certain limits, and the merger of Copesul with another company. We have also agreed that neither we nor Ipiranga will vote to approve any of the above matters unless we and Ipiranga vote 75% of the shares collectively held by us in favor of that action at a meeting between Ipiranga and our company or, if no quorum is obtained at such a meeting, of 75% of the shares present at a second meeting called for this purpose.
The Copesul shareholders agreement also provides a right of first refusal for transfers or sales of the voting share capital of Copesul to third parties, except for transfers and sales of Copesul voting share capital to companies directly or indirectly controlled by the selling shareholder.
Third-party purchasers of common shares of Copesulfinancial statements as from our company or Ipiranga also must agree to comply with the Copesul shareholders agreement. The shareholders agreement also includes provisions designed to ensure that each of our company and Ipiranga will continue to own the same proportion of shares of Copesul if either of us so elects.
The Copesul shareholders agreement provides that we will vote with Ipiranga in a manner designed to ensure that both we and Ipiranga are able to elect the maximum possible number of members of Copesul’s board of directors. The shareholders agreement is effective until August 2022. We have agreed with Ipiranga not to enter into another shareholders agreement regarding Copesul with any other shareholders of Copesul.
Politeno
At December 31, 2005, we owned 34.0% of Politeno’s total share capital, including 35.0% of its voting share capital. Politeno, which is a corporation (sociedade anônima) organized under the laws of Brazil, is a second generation petrochemical producer operating in the Northeastern Complex.
On April 6, 2006, we purchased all of the common and preferred shares of Politeno that were owned by SPQ, a subsidiary of Suzano, Sumitomo and Itochu. As1, 2008 as a result of the Politeno acquisition, we now own 100%completion of the voting share capitalfirst phase of the Petrobras Transaction.
The Paulínia plant commenced operations in April 2008 with an initial annual production capacity of 350,000 tons of polypropylene. We contributed the process technology that is being used by this plant under an agreement with a 20-year term. Petrobras is supplying Paulínia with polymer-grade propylene, the primary feed stock used in Paulínia’s production processes, through its refineries in Paulínia and 96.2%Henrique Lage under an agreement with an initial 20-year term. The agreement with Petrobras is automatically renewable for consecutive two-year terms following the initial term, unless terminated by one of the parties.
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Petroflex
At December 31, 2007, we owned 33.5% of the total share capital of Politeno.
Politeno’s net sales revenue was R$1,169.9 million in 2005, R$1,119.4 million in 2004 and R$943.9 million in 2003, as adjusted to conform to our accounting policies. Politeno’s net income was R$63.4 million in 2005,
R$96.5 million in 2004 and R$67.2 million in 2003, as adjusted for the effectsPetroflex, including 33.6% of revaluation of property, plant and equipment to conform to our accounting policies. We account for our interest in Politeno in our Brazilian GAAP financial statements using the proportional consolidation method. We will fully consolidate Politeno’s results in our consolidated financial statements at dates and for periods following the Politeno acquisition.
Politeno produces polyethylene grades which are widely used in the flexible and rigid packaging industries. Politeno produces LDPE, medium density polyethylene, HDPE, LLDPE, linear medium density polyethylene, ethyl vinyl acetate copolymer and other special resins.
The production facility of Politeno is comprised of two industrial plants, a LDPE facility and an linear polyethylene facility. The LDPE facility produces LDPE and ethyl vinyl acetate copolymer, with an annual production capacity of 150,000 tons. The linear polyethylene facility produces LLDPE and HDPE and has an annual production capacity of 210,000 tons.
The principal raw materials used in Politeno’s production processes are ethylene and propylene, which are primarily supplied by our Basic Petrochemicals Unit. Politeno also uses butadiene, benzene and toluene. Politeno’s principal customers are third generation petrochemical producers.
Petroflex
At December 31, 2005, we owned 20.1% of the total andits voting share capital. In April 2008, we sold all of our share capital in Petroflex to Lanxess Participações Ltda. for an aggregate price of Petroflex.R$252.1 million. As a result of this transaction, Petroflex registered a non-operational gain of R$115.6 million.
Petroflex, which is a corporation (sociedade anônima) organized under the laws of Brazil, is the leadinglargest producer of synthetic rubber in Latin America and produces approximately 360,000has an annual production capacity of 442,000 tons of more than 70 types of elastomers per year.
elastomers. Petroflex was formed in 1976 with Petroquisa as its majority shareholder. In 1992, as part of the Brazilian government’s efforts to privatize the Brazilian petrochemical industry, Petroquisa auctioned a portion of its equity interest in Petroflex to private investors. At December 31, 2005,In October 2007, we acquired shares of Petroflex representing 13.4% of its total and voting share capital from Suzano Química Ltda.,for an affiliateaggregate purchase price of R$61.0 million as a result of our exercise of our preemptive rights in August 2007 following the announcement of the acquisition of control of Suzano each owned 20.1% of the voting and total share capital of Petroflex and Unipar—União de Indústrias Petroquímicas S.A. owned 10.1% of Petroflex’s voting share capital.by Petrobras.
Petroflex’s net sales revenue was R$1,417.4 million in 2007, R$1,361.5 million in 2006 and R$1,373.2 million in 2005, R$1,306.0 million in 2004 and R$1,091.8 million in 2003, as adjusted to conform to our accounting policies. Petroflex’s net income was R$88.369.6 million in 2005,2007, R$98.623.0 million in 20042006 and R$60.588.0 million in 2003,2005, as adjusted for the effects of revaluation of property, plant and equipment to conform to our accounting policies. We accountPrior to November 30, 2007, we accounted for our interest in Petroflex in our Brazilian GAAP financial statements using the proportional consolidation method. As a result of our entering into an agreement in December 2007 to sell our interests in Petroflex, we accounted for our interest in Petroflex in our Brazilian GAAP financial statements using the equity method as from December 1, 2007.
Petroflex operates three plants in Brazil located in Duque de Caxias in the State of Rio de Janeiro; Cabo de Santo Agostinho in the State of Pernambuco; and Triunfo in the State of Rio Grande do Sul. Petroflex sells its products to customers in approximately 70 countries. The main customers of Petroflex are manufacturers of tires, shoes, adhesives and sealants.
The major raw materials used in Petroflex’s production process are butadiene and styrene. Petroflex purchases butadiene from us from which it produces styrene-butadiene, polybutadiene, liquid hidroxylated polybutadiene and other elastomers. Due to high naphtha prices in 2005,2007, the price of butadiene increased by 18%3.0% in the Brazilian market and the price of styrene increased by 3%1.4% . However, the recovery of synthetic rubber prices inreais, due to increases in international market prices, allowed Petroflex to pass on most of these increased costs to its customers.
Capital Expenditures
We have entered into a shareholders agreement with Suzano and Unipar—União de Indústrias Petroquímicas, Unipar, with respect to our shares of Petroflex. Suzano owns 20.1% of Petroflex’s total and voting share capital; and Unipar owns 10.1% of Petroflex’s total and voting share capital. Such proportion is required to be maintained even if any of the controlling shareholders acquires new shares issued by Petroflex. The Petroflex shareholders agreement contains provisions governing voting, transfer and preemptive rights. We have the right to elect two of the nine members of Petroflex’s board of directors.
We have agreed in the Petroflex shareholders agreement to reach unanimous decisions with the other parties with respect to certain actions to be taken by Petroflex’s board of directors or shareholders, including: changes to Petroflex’s by-laws, subject to certain exceptions; Petroflex’s dissolution or liquidation; the merger of Petroflex with or into another company; transactions involving the repurchase, amortization and redemption of Petroflex’s shares.
The Petroflex shareholders agreement also provides a right of first refusal for transfers or sales of the controlling shares of Petroflex to third parties, except for transfers and sales of Petroflex share capital to companies affiliated to the selling shareholder. Third-party purchasers of the controlling shares of Petroflex also must agree to enter into and comply with the Petroflex shareholders agreement.
Paulinia
At December 31, 2005, we owned 60.0% of Paulínia’s total and voting share capital. Paulínia, which is a corporation (sociedade anônima) organized under the laws of Brazil, was incorporated on September 16, 2005 and is a joint venture between our companies for the construction and operation of a polypropylene plant to be located in Paulínia, in the State of São Paulo.
We anticipate that Paulínia’s plant will have an initial annual production capacity of 300,000 tons of polypropylene and expect that this plant will commence operations in late 2007. We contributed the process technology that will be used by this plant under an agreement with a 20-year term. Petrobras will supply Paulínia with polymer-grade propylene, the primary feed stock to be used in Paulínia’s production processes, through its refineries in Paulínia and Henrique Lage under an agreement with an initial 20-year term. The agreement with Petrobras is automatically renewable for consecutive two-year terms following the intial term, unless terminated by one of the parties.
We are a party to a shareholders agreement with Petroquisa with respect to our shares of Paulínia. Petroquisa owns 40.0% of Paulínia’s total and voting share capital. The Paulínia shareholders agreement, which has a 20-year term, provides that:
We have agreed with Petroquisa to attempt to reach unanimous decisions with respect to certain actions to be taken by Paulínia’s board of directors or shareholders, including (1) transactions involving the purchase, sale, assignment or encumbrance of fixed assets of Paulínia in excess of specified amounts; (2) Paulínia’s incurrence of indebtedness in excess of certain specified levels; (3) investments in other companies in any form; and (4) the merger, spin-off, consolidation or any other type of reorganization involving Paulínia’s jointly controlled companies, affiliates and subsidiaries, as well the dissolution or liquidation or the declaration of bankruptcy by any of these companies. We have also agreed with Petroquisa to attempt to reach decisions by an 80%
supermajority with respect to certain actions to be approved by Paulínia’s shareholders, including (1) the merger, spin-off, consolidation or any other type of reorganization involving Paulínia; (2) Paulínia’s dissolution or liquidation; (3) the declaration of bankruptcy by Paulínia; (4) the issuance of securities by Paulínia; (5) changes to Paulínia’s by-laws; (6) changes to propylene supply agreement between Petrobras and Paulínia, the technology contribution agreement between Paulínia and our company, or other operating agreements entered into between Paulínia and Petrobras or our company; and (7) any capital increase by our company and Petroquisa to complete the construction and implementation of the polyethylene plant, if construction has already commenced but Paulínia lacks sufficient funds to complete construction.
Under the Paulínia shareholders agreement, we and Petroquisa granted to each other a right of first offer and a right of first refusal in respect of sales, transfers or assignment to unrelated third parties of share capital of Paulínia owned directly or indirectly by either of us. In addition, if an impasse occurs in respect of certain actions that require the approval of a super-majority of Paulínia’s shareholders, both Petroquisa and our company may offer to purchase the shares of the other or may offer to sell the shares to the other. If either Petroquisa or our company offers to sell the shares to the other party and the other party rejects the offer, then the offering party may sell the shares to a third party. If both Petroquisa and our company desire to sell our shares in Paulínia, these shares will be jointly sold (including through an auction process) to one or more third parties. In each case, the sales price will be determined based on an appraisal process specified in the shareholders agreement.
Capital Expenditures
Our capital expenditures on property, plant and equipment and intangible assets were R$780.71,374.4 million in 2005,2007, R$442.2953.0 million in 20042006 and R$223.7930.2 million in 2003.2005. Additionally, our investments in interests in other companies were R$1,151.7 million in 2007, R$222.7 million in 2006 and R$34.0 million in 2005, R$23.6 million in 2004 and R$71.7 million in 2003.2005. Our principal capital expenditures projects during 20032005 through 2005 consisted of2007 included the following:
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Braskem+ Program
In 2004, we began implementation of our Braskem+ program.an operational excellence program named “Braskem+.” This program was designed to build upon the experience that Braskem has accumulated through the process of capturing operational synergies during its integration process. This program identified 210 specific initiatives, each with its own performance goals and implementation schedule. At December 31, 2005, we hadWe made capital expenditures of R$140.7330.2 million between 2004 and 2007 related to the implementation of this program and anticipate that this program will require us to make additional capital expenditures of approximately R$232.7 million in 2006 and R$87.9 million in 2007.program.
Formula Braskem
In 2005, we commenced our Formula Braskem program to implement a new integrated management system intended to incorporate the best practices in the international petrochemical industry in our management systems and the most recent technological developments available in the marketplace. At December 31, 2005, we hadWe made capital expenditures of R$28.4130.0 million between 2005 and 2007 related to the implementation of the first phase of Formula Braskem and anticipate that Formula Braskem will require us to make additionalBraskem. We made capital expenditures of approximately R$101.639.9 million in 2006.2007 related to the implementation of the second phase of Formula Braskem.
Petroquímica Paulínia
In 2005, we approved the expansion of our raw material stocking unit to increase its capacity by 60,000 cubic meters. We expect that this expansion will allow us realize economies of scale in maritime freight by enabling us to increase the quantities of raw material that we can receive in a single shipment and to achieve gains in operational efficiency by allowing us to optimize the operation of our cracker and process higher quality raw materials. We expect to complete this project in the first half of 2007 at a total cost of approximately R$40 million.
On September 16, 2005, we and Petroquisa incorporated Paulínia as a joint venture company for the construction and operation of a polypropylene plant to be located in Paulínia, in the State of São Paulo, with an initial annual production capacity of 300,000350,000 tons. This plant commenced operations in April 2008. We own 60% of the total and voting share capital of Paulínia, and Petroquisa owns the remaining total and voting share capital. The initial total budgeted cost of this plant was approximately US$240R$704.0 million. We expect that 30%In December 2006, Paulínia entered into a credit agreement with Brazilian National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social), or BNDES, in the aggregate amount of R$566.2 million to finance the construction of this plant. The remaining cost of this plant will bewas financed through equity contributions by the shareholders of Paulínia. We have invested R$145.1 million in Paulínia, andwhich corresponds to Braskem’s share in the remaining 70% will be expected to be financed under the terms of a long-term financing arrangement. Our share of these equity contributions is 60%. This plant is expected to commence operationsinvestments made in late 2007. We can provide no assurances that the actual cost of the construction of this plant will not exceed the budgeted cost. The shareholders of Paulínia will finance 30% of any cost overruns in the form of equity contributions.nia’ polypropylene plant.
Politeno Acquisition
OnIn April 6, 2006, we purchased all of the common and preferred shares of Politeno that were owned by SPQ, a subsidiary of Suzano, Sumitomo and Itochu. We paid a portion of the purchase price for these shares in an aggregate amount of thereal-equivalent of US$111.3 million (US$60.6 million to SPQ and a total of US$50.7 to Sumitomo and Itochu) onin April 6, 2006. The remainder of the purchase price for these shares will bewas calculated based on an “earn-out” formula that will taketaking into account Politeno’s operating performance, measured by fluctuations in polyethylene and ethylene margins in the Brazilian petrochemical market during the 18 months following the execution date of this agreement. As a result ofthe agreement under which we acquired these shares. Following the Politeno acquisition,Acquisition, we now ownowned 100% of the voting share capital and 96.2% of the total share capital of Politeno. Politeno merged with and into Braskem on April 2, 2007. In January 2008, we paid the remaining portion of the purchase price of R$247.5 million.
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Ipiranga Transaction
In December 2005,On March 18, 2007, we entered into an action planthe Ipiranga Investment Agreement with Ultrapar and Petrobras. On the same date, Ultrapar and the controlling shareholders of RPI, CBPI and DPPI entered into the Purchase Agreement, with our company and Petrobras as intervening parties.
Under the Ipiranga Investment Agreement, Ultrapar, as a commission agent acting on behalf of Braskem and Petrobras, acquired 100% of the share capital of Ipiranga Química. As of March 18, 2007, Ipiranga Química owned 86.9% of the voting share capital and 92.4% of the total share capital of Ipiranga Petroquímica. Ipiranga Petroquímica, in turn, owned 29.5% of the share capital of Copesul. In February 2008, Ultrapar transferred 60% of the share capital of Ipiranga Química to our company and 40% of the share capital of Ipiranga Química to Petrobras, as required by the Ipiranga Investment Agreement. In addition, under the Ipiranga Investment Agreement, Ultrapar is obligated to transfer 33.3% of the share capital of RPI to our company and 33.3% of the share capital of RPI to Petrobras. Following this transfer, we will jointly and equally control RPI with Petrobras and Ultrapar. The total purchase price to our company of the shares of Ipiranga Química that we have acquired and the shares of RPI that we will acquire from Ultrapar in the Ipiranga Transaction was R$1,489.1 million.
As part of the Ipiranga Transaction:
Under the Ipiranga Investment Agreement, Braskem paid Ultrapar R$651.9 million in April 2007, R$156.7 million in October 2007, R$47.0 million in November 2007 and R$633.5 million in February 2008 for the shares of Ipiranga Química that we have acquired and the shares of RPI that we will acquire from Ultrapar in the Ipiranga Transaction. For additional information regarding the Ipiranga Transaction, see “Item 4. Information on the Company—Ipiranga Transaction.”
Venezuelan Initiatives
Polypropylene Project
In December 2007, we, through our wholly owned Netherlands subsidiary, Braskem Europe B.V., entered into a shareholders agreement, which we refer to as the Propilsur Shareholders Agreement, with Petroquímica de Venezuela, S.A., or Pequiven, the government-owned petrochemical company of the Bolivarian Republic of Venezuela, which supersedes the Project Development Agreement Framework and the Project Development Agreement that we entered into with Pequiven under which our company wouldin April 2006 and April 2007, respectively. Under the Propilsur Shareholders Agreement, we plan to form Propilsur, a joint venture with Pequiven for the development, construction and operation of a polypropylene plant with an integrated propane dehydrogenation unit to be located in the El TablazoJose Petrochemical Complex in the State of Zulia,Anzoategui, Venezuela, with an annual production
capacity of approximately 400,000450,000 tons. This agreementThe Propilsur Shareholders Agreement sets forth the preliminary understanding of the parties on an action plan forregarding the implementation of this project and the project, includingrelationship of Braskem and Pequiven as shareholders of Propilsur. Under the following:Propilsur Shareholders Agreement:
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The Propilsur Shareholders Agreement includes provisions for mediation and arbitration in the new company;
May 13, 2009. We are continuing to negotiate with Pequiven regarding details of the corporate structureimplementation of this project and expect that the new joint venture company will be formed by the end of 2006.project. We can provide no assurances that these negotiations will be successful or that if we reach a final agreement with respect to the implementation of this joint venture with Pequiven,project, such agreement will be upon the terms currently anticipated by our management.
Jose Olefins Project
In December 2007, we, through our wholly owned Netherland subsidiary, Braskem Europe B.V., entered into a shareholders agreement with Pequiven, which we refer to as the Polimerica Shareholders Agreement, which supersedes the memorandum of understanding and the Project Development Agreement that we entered into with Pequiven in April 2006 and April 2007, respectively. Under the Polimerica Shareholders Agreement, we plan to form Polimerica, a joint venture with Pequiven for the development, construction and operation of the Jose Olefins Project, an olefins complex to be located in the Jose Petrochemical Complex. The proposed complex would include an ethylene cracker that would use ethane extracted from natural gas as its raw material, with an annual production capacity of 1.3 million tons, and three polyethylene plants with a combined annual production capacity of 1.1 million tons of HDPE, LDPE and LLDPE. The Polimerica Shareholders Agreement sets forth the understanding of the parties regarding the implementation of this project and the relationship of Braskem and Pequiven as shareholders of Polimerica. Under the Polimerica Shareholders Agreement:
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The Polimerica Shareholders Agreement includes provisions for mediation and arbitration in the event of disputes and a deadlock between our company and Pequiven in matters to be determined by Polimerica’s board of directors and grants rights of first offer and first refusal to our company and Pequiven in the event that we or Pequiven determine to sell our equity interests in Polimerica.
The estimated total cost of this project to Polimerica would be approximately US$2,662 million of which we anticipate that our company and Pequiven will each contribute approximately 15% as equity. We have announced that our board of directors has approved an initial investment of US$80 million for the next phase of this project. We expect that construction of this project will commence in 2010 and this project will begin production by the beginning of 2013.
We expect to form Polimerica during the third quarter of 2008. The Polimerica Shareholders Agreement provides that implementation of this project is contingent upon a final investment decision of each of the parties on or prior to the third anniversary of the Polimerica Shareholders Agreement. We are continuing to negotiate with Pequiven regarding details of the implementation of this project. We can provide no assurances that these negotiations will be successful or that if we reach a final agreement with respect to the implementation of this project, such agreement will be upon the terms currently anticipated by our management.
Research and Development
Our ability to compete in the Brazilian and foreign markets that we serve depends on our ability to integrate new production processes developed by our company and third parties in order to lower our costs and offer new thermoplastic products. In addition, our relationships with our customers are enhanced by our ability to develop new products and customize existing products to meet their needs. To meet these challenges, we maintain a research and development program that is primarily implemented at the Braskem Center for Innovation and Technology in the Southern Complex. We invested R$47.276.5 million, R$59.244.3 million and R$35.547.2 million in research and development duringin 2007, 2006 and 2005, 2004 and 2003, respectively.
2008 Capital Expenditure Budget
We currently are budgeting total capital expenditures of approximately R$900 million1.3 billion for 2006.2008. Our principal capital expenditures for 20062008 consist of, in addition to the projects referred to in the preceding paragraphs, approximately R$202435.2 million for health, environmentalproductivity improvements, approximately R$354.7 million for maintenance stoppages and quality improvement projects,other maintenance of our plants, approximately R$202226.8 million for the replacement of depreciated equipment, approximately R$118 million for productivity improvements and approximately R$378175.4 million for plant modernization and information systems.systems and approximately R$161.9 million for health, environmental and quality improvement projects.
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Other Projects
We are currently evaluating projects that could entail significant capital expenditures in the future.future, including:
Maintenance
Maintenance
Most of our maintenance is performed by third-party service providers. For example, we have contracts with Construtora Norberto Odebrecht S.A., or CNO, a company in the Odebrecht Group, Asea Brown Boveri Ltd., Cegelec Ltda., Rip Serviços Industriais S/A, Cl Engenharia Ltda. and other service providers to perform maintenance for our Basic Petrochemicals Unit, Copesul and our Business Development Unit. We also perform some of our ordinary course maintenance with our small team of maintenance technicians, which also coordinate the planning and execution of maintenance services performed by third parties.
Prior to January 1, 2006, we recorded expenditures for programmed maintenance shutdowns of our plants as “Deferred charges.” Such expenses occur at scheduled intervals from one to six years and are depreciated to production cost until the beginning of the next maintenance shutdown. Beginning January 1, 2006, in accordance with IBRACON Technical Interpretation 01/2006, we recorded all programmed maintenance shutdown expenses in property, plant and equipment as “Machinery, equipment and facilities.” In addition, the retrospective effects of depreciation with the adoption of this interpretation was recognized as shareholders’ equity. Accordingly, for periods ending after January 1, 2006, we have reclassified the amount of R$400.2 million from deferred charges to property, plant and equipment, and recognized the amount of R$164.9 million in shareholders’ equity.
Basic Petrochemicals Unit
Because we have two independent Olefins units and two independent Aromatics units, we may continue production of basic petrochemicals without interruption, even while we perform certain maintenance services. We occasionally undertake other brief shutdowns of the operations of our operationsBasic Petrochemicals Unit that do not materially affect our production output, primarily for maintenance purposes, catalyst regeneration and equipment cleaning.
Regular basic petrochemicals plant maintenance requires complete plant shutdowns from time to time, and these shutdowns usually take approximately 30 days to complete. Since commencing operations in July 1978, our largest basic petrochemicals plant (Olefins 1) has undergone seven scheduled major maintenance services as part of our regular maintenance activities.
The last general maintenance shutdown of our Olefins 1 unit was carried out in July and August 2001 and lasted for 25 days. This shutdown permitted inspection and maintenance of this unit, which had been operational for almost six years without a shutdown. This shutdown was intended to improve the plant’s efficiency and production capacity. The cost of servicing the unit was approximately R$39.8 million (not including the value of lost production during this shutdown). The next general shutdown of our Olefins 1 unit has been scheduled for July 2007 with an estimated duration of approximately 30 days.
In 2002, we shut down our Olefins 1 unit for 92 days in order to increase its production capacity and to modernize and upgrade its technology. This shutdown reduced our Basic Petrochemical Unit’s ethylene and propylene production in 2002. The cost of these improvements to this Unitunit was approximately R$142.8 million (not including lost production). We performed a non-programmed maintenance shutdown of our Olefins 1 unit in December 2006 for 13 days. This shutdown permitted inspection and maintenance of this unit, in order to ensure the production of ethylene until May 2008. The cost of servicing the unit was approximately R$7.0 million (not including the value of lost production during this shutdown). A general maintenance shutdown of our Olefins 1 commenced on May 23, 2008 with an estimated duration of approximately 35 days at an expected cost of R$95 million (not including the value of lost production during this shutdown or investments in productivity enhancements).
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The last general maintenance shutdown of our Aromatics 1 unit was carried out in 2005 and lasted 30 days. The cost of servicing this unit was approximately R$21 million (not including the value of lost production during this shutdown or investments in productivity enhancements). We no longer perform general maintenance shutdowns of our Aromatics 1 unit and instead perform general maintenance shutdowns of specific plants or groups of plants in this unit. We performed maintenance of the parex plant of the Aromatics 1 unit during a shutdown of this plant during 2007 that lasted 52 days. The cost of servicing this plant was approximately R$19 million (not including the value of lost production during this shutdown or investments in productivity enhancements). A general maintenance shutdown of the butadiene plant and the commons systems associated with Olefins 1 commenced on May 23, 2008 with an estimated duration of approximately 30 days at an expected cost of R$16 million (not including the value of lost production during this shutdown or investments in productivity enhancements). The next general maintenance shutdown of the Catalyst Reform plant and the plants comprising the C8 loop has been scheduled for September 2009 with an estimated duration of approximately 30 days at an expected cost of R$35 million (not including the value of lost production during this shutdown or investments in productivity enhancements).
The last general maintenance shutdown of our Aromatics 2 and Olefins 2 units (which form part of the same basic petrochemicals facility) was carried out in January and February 2004 and lasted 36 days. This shutdown permitted inspection and maintenance of this unit, which had been operational for almost six years without a shutdown. This shutdown was intended to improve the plant’s efficiency and production capacity. In addition, we implemented various improvements to ensure the reliability and continuous operation of these units and to minimize the environmental impact of our operations. The cost of servicing this unitthese units was approximately R$89 million (not including the value of lost production during this shutdown). The next general shutdown of our Aromatics 2 and Olefins 2 units has been scheduled for 2010 with an estimated duration of approximately 25 days.
Copesul
Because Copesul has two independent Olefins units, we may continue production of basic petrochemicals without interruption, even while we perform certain maintenance services. We occasionally undertake other brief shutdowns of Copesul’s operations that do not materially affect our production output, primarily for maintenance purposes, catalyst regeneration and equipment cleaning. Regular maintenance of Copesul’s plants requires complete plant shutdowns from time to time, and these shutdowns usually take approximately 30 days to complete.
The last general maintenance shutdown of ourCopesul��s Olefins 1 unit and Aromatics 1 unit was carried out beginning in August 2005April 2008 and lasted 30for 38 days. This shutdown permitted inspection and maintenance of this unit, which had been operational for three years without a shutdown, and the implementation of new projects to increase productivity. This shutdown was also intended to improve the efficiency and production capacity of the plants in this unit and resulted in the development of new solvents and substantial growth in our production of aromatics. The cost of servicing thisthe unit was approximately R$2155.0 million (not including the value of lost production during this shutdown or investments in productivity enhancements)shutdown). The next general shutdown of ourCopesul’s Olefins 1 unit and Aromatics 1 unit has been scheduled for 20082014.
The last general maintenance shutdown of Copesul Olefins 2 unit was carried out in 2005 and lasted for 32 days. The cost of servicing the unit was approximately R$44.1 million (not including the value of lost production during this shutdown). The next general shutdown of this unit has been scheduled for April 2011 with an estimated duration of approximately 30 days.
Polyolefins and Ipiranga Petroquímica
We have a regular maintenance program for each of our polyolefins plants. Production at each of our Polyolefins Unit’s polyolefins plants generally is shut down for seven to 20 days every two years to allow for regular inspection and maintenance. Production at each of Ipiranga Petroquímica’s polyolefins plants generally is shut down for seven to 20 days every three years to allow for regular inspection and maintenance. In addition, we undertake other brief shutdowns for maintenance purposes that do not materially affect our production of polyolefins. We coordinate the maintenance cycles of our polyolefins plants with those of our basic petrochemicals plants. While our basic petrochemicals facilities must be shut down for up to 30 days for maintenance, our polyolefins facilities may be shut down for shorter periods because these facilities are less complex to operate and maintain than our basic petrochemicals facilities.
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Vinyls Unit
We have a regular maintenance program for each of our vinyls plants. Our Camaçari and Alagoas PVC plants are generally shut down for 15 to 20 days every two years to allow for regular inspection and maintenance. The last general maintenance shutdown of our PVC plant in Camaçari was carried out in May 2006 and lasted for 14 days. The next general maintenance shutdown of this plant is scheduled for April 2008.November 2009. The last general maintenance shutdown of our PVC plant in Alagoas was carried out in November 2005April 2007 and lasted for seven days. The next general maintenance shutdown of this plant is scheduled for March 2007.October 2008. Our São Paulo PVC plant generally shuts downdoes not require prolonged maintenance shutdowns, resulting in shutdowns of two or three days each year for five days of maintenance each year. Ourregular maintenance. Prior to 2007, our caustic soda and chlorine plant in Alagoas was generally shutsshut down for 15 days of maintenance every two years. Beginning in 2007, our maintenance schedule at this plant has been altered so that we will now shut down this plant once a year for three days of maintenance in different parts of the plant. The last general maintenance shutdown of this plant was carried out in February 2004October 2006 and lasted for 12five days. The next general maintenance shutdown of this plant is scheduled for May 2006. Our caustic soda and chlorine plant in Camaçari does not require prolonged maintenance shutdowns and is shut down for two or three days each year.
Regular maintenance of our Business Development Unit plants usually requires plant shutdowns every two years that take approximately 20 days to complete. The last general maintenance shutdown of our caprolactam plant was carried out in October 2005 and lasted 28 days. The cost of this maintenance shutdown was approximately R$13 million (not including lost production value). Prior to this general maintenance shutdown, the last general maintenance shutdown of our caprolactam plant was in March 2003, during which we changed certain production equipment, which (together with other measures that we have adopted) will extend the periods between general maintenance shut downs of this plant from two to three years. The last general maintenance shutdown of our Business Development Unit’s DMT and polyethylene teraphthalate, or PET, plants was carried
out in April 2005 and lasted for 27 days. The cost of this shutdown was R$10.0 million (not including lost production value). Prior to this general maintenance shutdown, the last general maintenance shutdown of our DMT and PET plants was in June 2003, during which we successfully upgraded the PET plant’s reactor, resulting in resin quality improvements as well as increasing the plant’s annual production capacity from 60,000 tons to 70,000 tons. We also implemented operational improvements in our PET plant in 2004, which further increased the plant’s annual production capacity from 70,000 tons to 78,000 tons. The next general maintenance shutdown of our PET and DMT plants is scheduled for April 2007.Environmental Regulation
Beginning January 1, 2006, in accordance with IBRACON Technical Interpretation 01/2006, we recorded all programmed maintenance shutdown expenses in property, plant and equipment, as “Machinery, equipment and facilities”. Such expenses occur at scheduled intervals from one to six years and are depreciated to production cost until the beginning of the next maintenance shutdown. In addition, the retrospective effects of depreciation with the adoption of this interpretation will be recognized in shareholders’ equity. Accordingly, for periods ending after January 1, 2006, we will reclassify the amount of R$356.1 million from deferred charges to property, plant and equipment, and recognize the amount of R$164.9 million in shareholders’ equity.
Environmental Regulation
We are subject to Brazilian federal, state and local laws and regulations governing the discharge of effluents and emissions into the environment and the handling and disposal of industrial waste and otherwise relating to the protection of the environment.
Under federal and state environmental laws and regulations, we are required to obtain operating permits for our manufacturing facilities. State authorities in the State of Bahia issued operating permits for our plants in the Northeastern Complex in 2000, which were renewed in 2005 for a six-year term. Our environmental operating permit obligates us to engage in systematic measures for the treatment of wastewater and hazardous solid waste. State authorities in the State of Rio Grande do Sul, where our Southern Complex plants are located, including Copesul’s plants and some of Ipiranga Petroquímica’s plants, regulate our operations by prescribing specific environmental standards in our operating permits, which must be renewed every four years. Copesul’s operating permit was renewed in 2008 and the operating permits for our polyethelene and polypropylene plants were renewed on various dates in 2006 and 2007. State authorities in the States of Alagoas and São Paulo have issued permits for our plants in those respective complexes, which also must be renewed every four years. If any of our environmental licenses and permits lapse or are not renewed or if we fail to obtain any required environmental licenses and permits, we may be subject to fines ranging from R$50.0500 to R$50.0 million, and the Brazilian government may partially or totally suspend our activities and impose civil and criminal sanctions on our company or both. All our environmental licenses and permits are in full force and effect.
All projects for the installation and operation of industrial facilities in the Northeastern Complex are subject to approval by the Council for Environmental Protection of the State of Bahia or by the Environmental Resources Center, the State’s Environmental Protection Council’s technical office, depending on the complexity of the facility. The State’s Research and Development Center and other outside consultants act as technical advisors to the Environmental Resources Center. The State’s Environmental Protection Council must approve installed projects prior to their commencement of operations and must renew such approval every five years thereafter.
All projects for the installation, modification and operation of industrial facilities in the Southern Complex are subject to approval by the Rio Grande do Sul State Environmental Protection Foundation. The Rio Grande do Sul State Environmental Protection Foundation must approve installed projects prior to their commencement of operations and must renew such approval every four years thereafter.
CETREL S.A.—Empresa de Proteção Ambiental, or Cetrel, treats wastewater generated by our company and the other petrochemical producers at the Northeastern Complex at a liquid effluents treatment station located in the Northeastern Complex. This treatment station also includes a system for the collection and disposal of contaminated wastewater. Cetrel also stores and incinerates, treats and disposes of hazardous solid waste. For other kinds of solid waste, Cetrel maintains a landfill. Cetrel has installed two hazardous solid waste incinerators with a total annual incineration capacity of 16,600 tons. One of these incinerators has an annual incineration capacity of 4,400 tons and is used to dispose of chlorinated residue, and the other incinerator has an annual incineration capacity of 12,000 tons and is used to dispose of non-chlorinated residue. Another Brazilian company co-processes hazardous solid waste in a cement kiln located in the city of Pedro Leopoldo, State of Minas Gerais.
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In January 1996, Cetrel obtained its BS 7750 environmental certification (British Standard) and in September 1996 became one of the first companies in the world to receive the ISO 14001 certification, an international standard for environmental control. In 1998, Cetrel obtained certification of its laboratory by the ISO Guide 25 standards system from the Brazilian Institute of Metrology and Industrial Quality.
Companhia Riograndense de Saneamento, or Corsan, a state-owned environmental company, operates an integrated system for liquid effluents treatment, or Sitel, in the Southern Complex. Sitel treats wastewater generated by our company and the other petrochemical producers at the Southern Complex at a liquid effluents treatment station located in the Southern Complex. This treatment station also includes a system for the collection and disposal of contaminated wastewater. Corsan also operates a centralized system for solid waste control, or Sicecors, in the Souther Complex. Sicecors centralizes the collection, treatment and final disposal of solid waste that is generated in the Southern Compex. Sicecors stores, treats and disposes of hazardous solid waste. For other kinds of solid waste, Sicecors maintains a landfill. Sitel and Sicecors received ISO 14001 certifications in 2001.
The Brazilian government enacted an Environmental Crimes Law in 1998 that imposes criminal penalties on corporations and individuals causing environmental damage. Corporations found to be polluting can be fined up to R$50.0 million, have their operations suspended, be prohibited from government contracting, be required to repair damage that they cause and lose certain tax benefits and incentives. Executive officers, directors and other individuals may be imprisoned for up to five years for environmental violations.
Cetrel treats wastewater generated by our company and the other petrochemical producers at the Northeastern Complex at a liquid effluents treatment station located in the Northeastern Complex. This treatment station also includes a system for the collection and disposal of contaminated wastewater. Cetrel also stores and incinerates, treats and disposes of hazardous solid waste. For other kinds of solid waste, Cetrel maintains a
landfill. In 1998, Cetrel installed a hazardous solid waste incinerator with an annual incineration capacity of 4,400 tons. Another Brazilian company co-processes hazardous solid waste in a cement kiln located in the city of Pedro Leopoldo, State of Minas Gerais.
In January 1996, Cetrel obtained its BS 7750 environmental certification (British Standard) and in September 1996 became one of the first companies in the world to receive the ISO 14001 certification, an international standard for environmental control. In 1998, Cetrel obtained certification of its laboratory by the ISO Guide 25 standards system from the Brazilian Institute of Metrology and Industrial Quality.
We believe our operations are in compliance in all material respects with applicable environmental laws and regulations currently in effect. Some environmental studies that we have commissioned have indicated instances of environmental contamination at certain of our plants. In addition, we and certain of our subsidiaries and executive officers of our company and of our subsidiaries have received notices from time to time of minor environmental violations and are or have been subject to investigations or legal proceedings with respect to certain alleged environmental violations. These environmental issues, and any future environmental issues that may arise, could subject us to fines or other civil or criminal penalties imposed by Brazilian authorities. We are addressing all environmental issues of which we are aware, and we believe that none of these issues will have a material adverse effect on our business, financial condition or operations.
Our consolidated annual expenditures on environmental control were R$92.7 million in 2007, R$73.8 million in 2006 and R$71.7 million during 2005, R$58.1 million during 2004 and R$51.7 million during 2003.in 2005. To dispose of our industrial wastewater and solid hazardous waste, we contract our jointly controlled company Cetrel at the Northeastern Complex, Corsan at the Southern Complex, our subsidiary Companhia Alagoas Industrial—Cinal at Alagoas, Companhia Riograndense de Saneamento, a state-owned environmental company at the Southern Complex and other third parties. These companies treat our industrial waste immediately after this waste is generated and dispose of our solid waste. Our consolidated environmental expenses relate to our continuous control and monitoring policies, and we do not have any material future environmental liabilities related to our ongoing operations. Accordingly, we
We have not established a provision for environmental contingencies.contingencies in the amount of R$18.4 million at December 31, 2007. However, our environmental compliance costs are likely to increase as a result of the projected increase in our production capacity and projected increases in unit costs for treatment and disposal of industrial waste as well as the cost of compliance with future environmental regulations.
Our environmental compliance in 20052007 included the following results:
In September 2002, we created a Health, Safety and Environment Committee, composed of leaders of each of our business units and other members of our management. This committee supports and monitors our environmental, health and safety efforts. In February 2003, our board of directors approved a comprehensive health, safety and environment policy, as we recognize that sustainable development and ethical practices are essential to our continued growth and performance. As part of this policy, we are committed to:
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Safety and Quality Control
Safety
We have adopted a policy that makes all of our officers, directors and employees responsible for the safety of our workers and for preserving the environment.
We participate in the “Responsible Care” program, which establishes international standards for environmental, occupational health and safety practices for chemical manufacturers. Through our participation in this program, we adopted policies and procedures that require us to follow detailed instructions in matters of health, safety and the environment. We seek to maintain these environmental standards and have qualified each of our plants for NBR-ISO 9001 and 14001 certification, which includes internationally prescribed environmental management practices. We are currently implementing health, safety and environmental standards based on OHSASOSHAS 18001 and standards issued by the U.S. Occupational Safety and Health Administration.
Our safety record ranks above the average of companies in the Brazilian chemical industry. The following table illustrates our progress in terms of our safety record and compares our safety record to the average for the Brazilian chemical industry:
Year Ended December 31, | ||||||||
2007 | 2006 | 2005 | 2006 (1) | |||||
Braskem | Brazilian Chemical | |||||||
Industry Average | ||||||||
Safety Indicator | ||||||||
Braskem: | ||||||||
Index of Accident Frequency (accidents/200,000 man-hours) | 0.2 | 0.3 | 0.2 | 2.8 | ||||
Index of Severity (lost and deducted days/200,000 man-hours) | 5 | 3 | 4 | 32 | ||||
Copesul: | ||||||||
Index of Accident Frequency (accidents/200,000 man-hours) | 2.0 | 2.46 | 2.28 | 2.8 | ||||
Index of Severity (lost and deducted days/200,000 man-hours) | 23 | 41 | 27 | 32 | ||||
Ipiranga Petroquímica: | ||||||||
Index of Accident Frequency (accidents/200,000 man-hours) | 0.6 | 1.4 | — | 2.8 | ||||
Index of Severity (lost and deducted days/200,000 man-hours) | 36 | 67 | — | 32 |
Year ended December 31, | ||||||||
2005 | 2004 | 2003 | 2003(1) | |||||
Braskem | Brazilian chemical industry average | |||||||
Safety Indicator | ||||||||
Index of Accident Frequency (accidents/200,000 man-hours) | 0.2 | 0.4 | 0.6 | 3 | ||||
Index of Severity (lost and deducted days/200,000 man-hours) | 4.0 | 11.0 | 5.0 | 40 |
(1) | Brazilian petrochemical industry average of the members of Brazilian Association of Chemical Industry and Derivative Products for |
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Our safety record in 20052007 included the following results:
Each of our industrial plants areis equipped with a comprehensive firefighting safety system. At the Northeastern Complex, water is available from a 200,000 cubic meter artificial lake, connected to the industrial plants by a pumping station and a distribution network and built according to international safety standards. We and the other companies in the Northeastern Complex maintain emergency equipment and trained safety crews. The safety plan for the Northeastern Complex provides for firefighting brigades of all companies in the complex to jointly assist in the event of any major accidents. The Northeastern Complex has safety standards for construction density and the design of pipelines and highways.
Similar systems are employed at the Southern Complex, our plant in the State of Alagoas and our plant in the State of São Paulo (except with respect to safety standards for construction density and design of pipelines and highways, as we do not have such facilities in São Paulo).
Each of the nine companies that operate in the Southern Complex relies on its own supply of water from nearby lakes and water tanks for firefighting capabilities. Copesul relies on a 7,400 cubic meter artificial pond, with an additional 12,600 cubic meter pond available in case of emergencies. Both water sources are connected to Copesul’s facilities by a pumping station and a distribution network, which currently employs seven water pumps, built according to international safety standards. Copesul also maintains emergency equipment and trained safety crews. In addition, Copesul’s safety plan provides for firefighting brigades consisting of six technicians and 14 operational and maintenance technicians per shift. Copesul and the other companies located in the Southern Complex are supported by the Southern Complex’s Mutual Plan of Emergency (Plano de Auxílio Mútuo do Pólo). Copesul’s commitment to safety includes the operation of a training center for its safety crews that simulates emergencies typical to the petrochemical industry. Similar systems are employed at the facilities of Ipiranga Petroquímica and our Polyolefins Unit in the Southern Complex.
We have obtained OSHAS 18001 certification of our Basic Petrochemical Unit and Copesul. This certification relates to our employee health and safety management system.
Quality Control
Our quality control management uses ISO 9001/00, an internationally recognized quality control standard, and ISO 14001, an internationally recognized environmental control standard, as its base. We have instituted systematic improvement processes in our operational areas, focusing on integrating production, maintenance, inventory management, customer satisfaction and profitability.
ISO Certifications
We have obtained ISO 9001 certifications for all of our products. We have also obtained ISO 14001 certifications for all of our industrial plants. These certifications take into account both the quality of our products and the quality of our operating procedures.
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Property, Plant and Equipment
Our properties consist primarily of petrochemical production facilities in Camaçari in the State of Bahia, in Maceió in the State of Alagoas, in Triunfo in the State of Rio Grande do Sul, in Maceió in the State of Alagoas and in São Paulo in the State of São Paulo. Our principal executive offices are located in São Paulo in the State of São Paulo, and we have an administrative support office in the City of Rio de Janeiro. We also have equity interests in investments located in other parts of the country. We own all our production facilities, but we generally rent our administrative offices.
The following table sets forth our properties and the properties of our principal subsidiaryat December 31, 2007 by location of facilities, products produced and size of plant.
Type of Product or Service | Location of Facilities | Size of Plant | ||
(in hectares (1)) | ||||
Basic petrochemicals | Camaçari | |||
| Triunfo | |||
| ||||
| ||||
| ||||
| ||||
| Marechal Deodoro | |||
Polyethylene | Camaçari | 24.5 | ||
Caustic soda/EDC/chlorine | Maceió | 15.0 | ||
PVC/caustic soda/chlorine | Camaçari | 12.6 | ||
Polyethylene | Triunfo | 30.5 | ||
Polypropylene | Triunfo | 10.0 | ||
Caprolactam | Camaçari | 8.1 | ||
PVC | Marechal Deodoro | 7.0 | ||
PET(2) | Camaçari | 6.2 | ||
PVC | Vila Prudente/Capuava | |||
| ||||
|
(1) | One hectare equals 10,000 square meters. |
(2) | On May 16, 2007, we temporarily closed our PET plant. |
The descriptions of each of our business units above contain detailed charts showing the location, primary products, annual production capacity and historical annual production for each of our company’s production facilities.
We believe that all of our production facilities are in good operating condition. At December 31, 2005,2007, the consolidated net book value of our property, plant and equipment was R$5,964.28,404.1 million. Without giving effect to the proportional consolidation of our jointly controlled companies, the net book value of our property, plant and equipment was R$5,359.68,002.8 million.
Certain of our properties located in the Northeastern Complex (including our DMT and PET plantsplant and all of the equipment located in these plants)this plant) and two of our polyolefins plants in the Southern Complex are mortgaged or pledged to secure certain of our financial transactions.
Insurance
We carryBraskem carries insurance for ourits plants against material damage and consequent business interruption through “all risks” policies with a total replacement value of US$4.76.1 billion. Our insurance coverage is underwritten in the Brazilian insurance market by large Brazilian insurance companies. Approximately 89%83% of our insurance coverage is reinsured in the international insurance market. Our existing “all risks” policies are in force until November 30, 20062008 and are renewed annually.
The material damage insurance provides insurance coverage for losses due to accidents resulting from fire, explosion and machinery breakdown, among others. This coverage has a maximum indemnification limit of US$1.9 billion per event (combined material damage and business interruption coverage) and has deductibles of
up to US$5 million depending on the plant. The business interruption coverage provides insurance for losses resulting from interruptions due to any material damage covered by the policy. This coverage is calculated to insure against losses up to US$832956.9 million due to shutdowns extending beyond 60 days. The losses are covered until the plant and production are fully re-established, with maximum indemnity periods ranging from 12 to 24 months.
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Copesul carries insurance with the same terms and conditions as Braskem with a total replacement value of US$2.3 billion, a maximum indemnification limit of US$1.6 billion per event (combined material damage and business interruption coverage) and a deductible of up to US$10 million. The business interruption coverage contracted by Copesul insures against losses of up to US$ 490.7 million for an indemnity period of 24 months.
Ipiranga Petroquímica carries property damage insurance to cover its plants and business interruptions with a total replacement value of US$509.2 million, a maximum indemnification limit of US$500 million per event (combined material damage and business interruption coverage), and a deductible of US$750,000. The business interruption coverage contracted by Ipiranga Petroquímica insures against losses of up to US$204 million for an indemnity period of 18 months.
We also have a third-party liability policy, which covers losses for damages caused to third parties from our operations, including sudden environmental pollution, up to a limit of US$60 million per loss or occurrence.occurrence in the case of Braskem, US$35 million in the case of Copesul and R$50 million in the case of Ipiranga Petroquímica.
In addition to these policies, we maintain other insurance policies for specific risks, including directors and officers liability coverage, marine and transportation insurance, automotive insurance and other kinds of coverages that are not covered by our “all risks” policies.
We do not anticipate having any difficulties in renewing any of our insurance policies and believe that our insurance coverage is reasonable in amount and consistent with industry standards applicable to chemical companies operating in Brazil.
Antitrust Matters
Under Brazilian Law No. 8,884/94, any transaction that results in a concentration of market share equal to or greater than 20.0% of any relevant market or that involves any company or group of companies with annual gross sales of R$400.0 million or more must be submitted to and approved by the Brazilian antitrust authorities, which consist of three entities:
CADE is the antitrust authority responsible for reviewing and authorizing transactions that may lead to economic concentration. SEAE and SDE analyze the economic and legal implications of mergers and acquisitions under Brazilian antitrust law. As part of the antitrust review process, SDE, SEAE, the attorney general of CADE and the Brazilian federal public prosecutor each render preliminary opinions, which are delivered to the members of CADE. The members of CADE then render a final decision.
The Ipiranga Transaction is subject to the final approval of the Brazilian antitrust authorities. However, Brazilian law permits us to consummate these transactions prior to receiving this final approval, unless CADE issues a writ of prevention blocking a transaction or requires the parties to enter into an agreement permitting the effects of the transaction to be reversed which, by its terms, delays the consummation of the transaction. Our company, together with Ultrapar and Petrobras, submitted the terms and conditions of the Ipiranga Transaction for review by the Brazilian antitrust authorities in April 2007.
We completed In April 2007, CADE issued a writ of prevention relating to the Politeno acquisitionIpiranga Transaction, which, among other things, prevented our exercise of strategic management control over Ipiranga Química and Ipiranga Petroquímica. In issuing the writ of prevention, CADE stated that the purpose of the writ of prevention was to guarantee that the Ipiranga Transaction could be reversed in the event that CADE so determined following its review of the Ipiranga Transaction. In April 2007, CADE revoked this writ of prevention upon the agreement of our company to execute the Reversibility Agreement designed to preserve the reversibility of the Ipiranga Transaction. Under the Reversibility Agreement, we agreed to preserve all of the assets acquired in the Ipiranga Transaction until CADE makes a final determination with respect to the Ipiranga Transaction, and we are permitted to effectively own and manage these assets pending this final determination.
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Although the terms and conditions of the Ipiranga Transaction were submitted to the Brazilian antitrust authorities in four separate filings reflecting the separate markets affected by the Ipiranga Transaction, on April 6, 2006,September 19, 2007, CADE decided that the four fillings should be analyzed and submitted for approval together.
SEAE issued a favorable opinion with respect to the Ipiranga Transaction in February 2008. Approval of this transaction by CADE remains pending.
Although we believe that the Petrobras Transaction is not subject to the final approval of the Brazilian antitrust authorities, as permitted by Brazilian law. Webecause the Petrobras Transaction is a follow-on transaction to the Ipiranga Transaction and does not involve any change of control of our company or Petrobras, we and Petrobras submitted the terms and conditions of the Politeno acquisitionPetrobras Transaction to the Brazilian antitrust authorities onin December 2007.
The SEAE and the SDE issued favorable opinions with respect to the Petrobras Transaction in April 27, 2006. The2008. Approval of this transaction by CADE remains pending.
There can be no assurances that the Brazilian antitrust authorities will determine whether this transaction adversely impacts competitive conditions or negatively affects consumers inapprove the markets in which we compete. The Brazilian antitrust authorities would have the authority to impose conditions or performance commitments onIpiranga Transaction as currently structured, agree with our company in connection with this transaction.
A favorable non-binding opinion recommending the unconditional approvalanalysis of the Politeno acquisition, was issued by the SEAE in May 2006. The SDE and CADE are still reviewingPetrobras Transaction, or that these transactions and may disagree with the opinion of the SEAE and mayauthorities will not impose additional conditions on our company.
ITEM 4A. UNRESOLVED STAFF COMMENTS.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements at December 31, 20052007 and 20042006 and for the three years ended December 31, 20052007 included in this annual report, as well as with the information presented under “Introduction” and “Item 3. Key Information—Selected Financial Information.”
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Cautionary Statement with Respect to Forward-Looking Statements” and “Item 3. Key Information—Risk Factors.”
The discussion and analysis of our financial condition and results of operations has been organized to present the following:
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Overview
We are the leading petrochemical company in Latin America, based on average annual production capacity in 2005.2007. We are also one of the threethird largest Brazilian-owned private sector industrial companies,company, based on net sales revenue in 20042006 (the most recent year for which comparative information is currently available). We recorded net income of R$625.8 million in 2005 on net sales revenue of R$13,075.1 million.17,679.4 million and net income of R$547.6 million in 2007. We produce a diversified portfolio of petrochemical products in our 1419 plants in Brazil and have a strategic focus on polyethylene, polypropylene and PVC. We were the first Brazilian company with integrated first and second generation petrochemical production facilities.
Our results of operations have been significantly influenced by (1) beginning in the second quarter of 2007, the effects of the Ipiranga Transaction and our consolidation of the assets, liabilities and results of operations of Ipiranga Química, Ipiranga Petroquímica and Copesul as from April 1, 2007, and (2) to a lesser extent, beginning in the second quarter of 2006, the effect of the Politeno Acquisition on April 6, 2006 and our full consolidation of the assets, liabilities and results of operations of Politeno and the inclusion of Politeno’s results in our Polyolefins segment as from April 1, 2006. In addition, our results of operations for the years ended December 31, 2007, 2006 and 2005 have been influenced, and our results of operations will continue to be influenced, by a variety of factors, including:
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Our financial condition and liquidity is influenced by a variety of factors, including:
Financial Presentation and Accounting Policies
Presentation of Financial Statements
We have prepared our consolidated financial statements at December 31, 20052007 and 20042006 and for the three years ended December 31, 20052007 in accordance with Brazilian GAAP, which differs in certain respects from U.S. GAAP. See note 31 to our audited consolidated financial statements included elsewhere in this annual report.
Our consolidated financial statements have been prepared in accordance with Brazilian Securities Commission Instruction No. 247/96, as amended by Brazilian Securities Commission Instruction Nos. 269/97, 285/98 and 319/99, which we refer to collectively as Instruction 247. Instruction 247 requires our company to proportionally consolidate jointly controlled companies that are not our subsidiaries, principallysubsidiaries.
Prior to March 31, 2006, we proportionally consolidated the results of Politeno in our consolidated financial statements. As a result of the Politeno Acquisition described under “Item 4. Information On The Company—History and Development of our Company,” we have fully consolidated Politeno’s results in our consolidated financial statements and included Politeno’s results in our Polyolefins segment as from April 1, 2006.
Prior to March 31, 2007, including for the first three months of 2007, we proportionally consolidated the results of Copesul Petroflexin our consolidated financial statements. As a result of the Ipiranga Transaction, we have fully consolidated Copesul’s results in our consolidated financial statements and prior toincluded Copesul’s results as a separate segment as from April 6, 2006, Politeno.1, 2007.
Prior to November 30, 2007, we proportionally consolidated the results of Petroflex in our consolidated financial statements. As a result of our entering into an agreement in December 2007 to sell our interests in Petroflex, we accounted for our interest in Petroflex in our Brazilian GAAP financial statements using the equity method as from December 1, 2007.
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Reclassifications
Our consolidated financial statements included in this annual report reflect reclassifications in 2004 and 20032005 of some items to provide for a better comparison among 2005, 20042006 and 2003.2005. For more information about these reclassifications, see “Introduction—Financial Statements.”
Business Segments and Presentation of Segment Financial Data
We have implemented an organizational structure that we believe reflects our business activities and corresponds to our principal products and production processes. We now have seven business units and report our results by four marketseven corresponding segments to reflect this organizational structure:
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In 2005, sales by our Basic Petrochemicals Unit, our Polyolefins Unit, our Vinyls Unitcompany.
We evaluate and manage business segment performance based on information generated from our statutory accounting records, which are maintained in accordance with Brazilian GAAP, and, accordingly, the segment data included in this annual report is presented under Brazilian GAAP. We have included a reconciliation of the operating results of our segments to our consolidated results under “—Results of Operations” below.
In June 2008, we began the implementation of a new organizational structure under which we will have four business units and report our results by four corresponding segments to reflect this organizational structure:
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Critical Accounting Policies
The presentation of our financial condition and results of operations in conformity with Brazilian GAAP requires us to make certain judgments and estimates regarding the effects of matters that are inherently uncertain and that impact the carrying value of our assets and liabilities. Actual results could differ from these estimates. In order to provide an understanding about how we form our judgments and estimates about certain future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different variables and conditions, we have included comments related to the following critical accounting policies under Brazilian GAAP:
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Principal Factors Affecting Our Results of Operations
Effects of the Ipiranga Transaction
On March 18, 2007, we entered into the Ipiranga Investment Agreement with Ultrapar and Petrobras. On the same date, Ultrapar and the controlling shareholders of RPI, CBPI and DPPI entered into the Purchase Agreement, with our company and Petrobras as intervening parties. As a result of the Ipiranga Transaction:
Upon the final completion of the fourth phase of the Ipiranga Transaction, we will own shares of RPI representing 33.3% of total share capital and voting share capital of RPI.
As a result of the Ipiranga Transaction, we have fully consolidated the results of Copesul and its subsidiaries and consolidated the results of Ipiranga Química and its subsidiaries, including Ipiranga Petroquímica, into our financial statements as from April 1, 2007. We have accounted for each of Copesul, Ipiranga Química and Ipiranga Petroquímica as separate segments in our financial statements as from the same date. In addition, we have accounted for our interest in the results of RPI under the equity method in our financial statements as from April 1, 2007.
The total purchase price to our company of the shares of Ipiranga Química that we have acquired and the shares of RPI that we will acquire from Ultrapar in the Ipiranga Transaction was R$1,489.1 million. In addition, we paid R$1,418.5 million for the Copesul shares not owned by our company, Ipiranga Petroquímica, Petroquisa or Triunfo and R$117.9 million for the shares of Ipiranga Petroquímica not owned by Ipiranga Química.
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We financed the Ipiranga Transaction through borrowings of US$1,200.0 million under our Acquisition Credit Agreement, US$312.5 million under an export prepayment agreement with PIFCo and US$61.0 million under two short-term financing transactions.
For additional information regarding the Ipiranga Transaction, see “Item 4. Information on the Company—Ipiranga Transaction.”
Growth of Brazil’s Gross Domestic Product and Domestic Demand for Our Products
Sales in Brazil represented 79.8%76.2% of our net sales revenue in 2005.2007. As a Brazilian company with substantially all of our operations in Brazil, we are significantly affected by economic conditions in Brazil. Our results of operations and financial condition have been, and will continue to be, affected by the growth rate of GDP in Brazil because our products are used in the manufacture of a wide range of consumer and industrial products.
Because of our significant market share in many of the Brazilian markets in which our petrochemical products are sold, fluctuations in Brazilian demand for polyethylene, polypropylene and PVC affect our production levels and net sales revenue. GDP in Brazil grew at aan estimated compound average annual rate of 2.2%2.8% from 19961998 through 2005.2007. From 19961998 through 2005,2007, the consumption volumes in Brazil of polyethylene, polypropylene and PVC increased at compound average annual rates of 4.3%4.4%, 7.3%7.9% and 2.0%3.3%, respectively.
In 2003, GDP in Brazil declined by 0.2%. In 2003, Brazilian consumption volumes of polyethylene decreased by 2.1%, polypropylene increased by 2.9% and PVC decreased by 12.4%, respectively, compared to 2002. The decreased consumption volumes of polyethylene and PVC were primarily a result of reduced economic activity.
In 2004, GDP in Brazil increased by 5.2%, the highest annual growth rate since 1994. In 2004, Brazilian consumption volumes of polyethylene increased by 13.9%, polypropylene increased by 11% and PVC increased by 11.7%, respectively, compared to 2003. The increased consumption volumes of these thermoplastics resulted primarily from the recovery of economic activity in Brazil.
In 2005, GDP in Brazil increased by 2.3%. In 2005, Brazilian consumption volumes of polyethylene decreased by 1.7%, polypropylene increased by 2.9% and PVC increased by 2.4%, respectively, compared to 2004. The modest increase
In 2006, GDP in Brazil increased by 3.7% . In 2006, Brazilian consumption volumes of polyethylene increased by 11.4%, polypropylene increased by 4.6% and PVC resulted fromincreased by 10.5% compared to 2005.
In 2007, GDP growth that was lower than expected.in Brazil increased by 5.4% . In 2007, Brazilian consumption volumes of polyethylene increased by 7.1%, polypropylene increased by 10.3% and PVC increased by 14.5%, respectively, compared to 2006.
Brazilian GDP growth has fluctuated significantly, and we anticipate that it will likely continue to do so. Our management believes that economic growth in Brazil should positively affect our future net sales revenue and results of operations. However, continued low growth or a recession in Brazil would likely reduce our future net sales revenue and have a negative impactseffect on our results of operations.
Our management believes that there has been a trend in Brazil during the last several years toward the substitutionuse of plastics as substitutes for more traditional materials, such as steel, aluminum, glass and paper. Our management anticipates that this trend will continue to stimulate the domestic demand for petrochemical products suitable for use in a variety of applications, including construction, industrial processes, agriculture and packaging. However, trends in the substitution of materials depend on many factors beyond our control, and the current beliefs of our management may prove to be incorrect.
Cyclicality Affecting the Petrochemical Industry
Global consumption of petrochemical products has increased significantly over the past 30 years. Due to this growth in consumption, producers have experienced periods of insufficient capacity for these products. Periods of insufficient capacity, including some due to raw material shortages, have usually resulted in increased capacity utilization rates and international market prices for our products, leading to increased operating margins. These periods have often been followed by periods of capacity additions, which have resulted in declining capacity utilization rates and international selling prices, leading to declining operating margins.
We expect that these cyclical trends in international selling prices and operating margins relating to global capacity shortfalls and additions will likely persist in the future, principally due to the continuing impact of four general factors:
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Rio Polímeros, a Brazilian petrochemical company, commenced operations of a major petrochemical plant in Brazil in 2005. The maximum annual capacity of this plant is 520,000 tons of ethylene, 75,000 tons of propylene and 540,000 tons of polyethylene. In addition:
Based on historical growth of Brazilian domestic demand for polyethylene, polypropylene and PVC, we believe that this additional capacity, other than the capacity of the Paulínia plant, had been absorbed by the domestic market by the end of 2007. We cannot assure you, however, that the propylene production capacity of the Paulínia plant will be fully absorbed by the domestic market or that satisfactory export opportunities will be available for products not sold domestically. In the event that this additional production is not absorbed domestically or sold in export markets, there may be resulting pressure on prices for the affected products, which could adversely affect our net sales revenues, gross margins and overall results of operations.
Effects of Fluctuations in Naphtha Prices
Fluctuations in the international market price of naphtha have significant effects on our costs of goods sold and the prices that we are able to charge our customers for our first and second generation products.
Effects on Cost of Sales
Naphtha is the principal raw material used by our Basic Petrochemicals Unit and Copesul and, indirectly, in our other business units. Purchases of naphtha represented 86.6%83.1% of the total cost of sales and services rendered of our Basic Petrochemicals Unit and 88.9% of the total cost of sales and services rendered of Copesul in 2005.2007. Naphtha represented 71.7%76.3% of our direct and indirect consolidated cost of sales and services rendered in 2005,2007, both directly and indirectly through the cost of basic petrochemicals that we purchased from Copesul.Copesul during the first quarter of 2007.
The cost of naphtha varies in accordance with international market prices, which fluctuate depending upon the supply and demand for oil and other refined petroleum products. We purchase naphtha under a long-term supply contractcontracts with Petrobras, and we import naphtha through our terminal at Aratú. in the State of Bahia and Petrobras’ terminal at Osório in the State of Rio Grande do Sul. The prices that we pay for naphtha under all of these arrangements are based on the Amsterdam-Rotterdam-Antwerp market price. As a result, fluctuations in the Amsterdam-Rotterdam-Antwerp market price for naphtha have a direct impact on the cost of our first generation products.
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Because the primary raw materials of our Polyolefins, Ipiranga Petroquímica and Vinyls Units, principally ethylene and propylene, are first generation products produced by our Basic Petrochemicals Unit and Copesul, fluctuations in the Amsterdam-Rotterdam-Antwerp market price for naphtha result in similar fluctuations in the cost of the primary raw materials of these units.
The international price of naphtha has fluctuated significantly in the past, and we expect that it will continue to do so in the future. Significant increases in the price of naphtha and, consequently, the cost of producing our products, would likely reduce our gross margins and our results of operations to the extent that we are unable to
pass all of these increased costs on to our customers and could result in reduced sales volumes of our products. Conversely, significant decreases in the price of naphtha and, consequently, the cost of producing our products, would likely increase our gross margins and our results of operations and could result in increased sales volumes if this lower cost leads us to lower our prices. In periods of high volatility in the U.S. dollar price of naphtha, there is usually a lag between the time that the U.S. dollar price increases or decreases and the time that we are able to pass on increased or reduced costs to our customers in Brazil. These pricing mismatches decrease when the the U.S. dollar price of naphtha is less volatile.
We do not currently hedge our exposure to changes in the prices of naphtha because a portion of our sales are exports payable in foreign currencies and linked to the international market prices of naphtha and also because the prices of our polyethylene, polypropylene and PVC products sold in Brazil generally reflect changes in the international market prices of these products.
Effects on Prices of Our Products
In 2005, the price of ethylene that we charged Politeno and one of our other large customers, which collectively represented 90.4% of our ethylene sales to third parties in 2005, was based on a margin sharing system described in “Item 4. Information on the Company—Basic Petrochemicals Unit—Sales and Marketing of Our Basic Petrochemicals Unit.” These prices reflect both the international market prices for naphtha and the international and domestic prices for second generation products. Prior to 2005, weour Basic Petrochemicals Unit used a margin sharing system for all of our ethylene customers, including our other business units. In 2005, we determined the prices that we charged our ethylene customers, other than our two largest ethylene customers, by reference to international market prices. In addition,2006, we are negotiatingnegotiated with thoseour remaining ethylene customers which still usethat used the margin sharing system to terminate the margin sharing system of ethylene pricing and to institute a market pricing system.
The prices that we charge some of our customers for propylene are based on our ethylene prices and the ratio of the European contract price for propylene to the European contract price for ethylene. Over the past several years, this ratio has increased. For the remainder of our customers, our prices for propylene are based on the European contract price and prevailing prices set by U.S. Gulf producers. We are applying this market pricing methodology to a growing number of our customers. The prices that we charge for butadiene and para-xylene are based on the United States contract price for these products. The prices that we charge for benzene and ortho-xylene are based on the contract prices for these products in the United States and Europe. Because European producers of basic petrochemical products primarily use naphtha as a raw material, changes in the European contract prices are strongly influenced by fluctuations in international market prices for naphtha. As our cost structures are similar to the cost structures of European producers, to the extent that our prices are based on the European contract prices for our products, the prices that we charge for these products are significantly influenced by international market prices for naphtha.
We negotiate therealprices for certain of our products, principally polyethylene, polypropylene and PVC, on a monthly basis with our domestic customers. We attempt to revise our prices to reflect changes in the international market prices of these products and the appreciation or depreciation of therealagainst the U.S. dollar. However, during periods of high volatility in international market prices or exchange rates, we are sometimes unable to reflect these changes fully in our prices quickly.
The international market prices of our petrochemical products have fluctuated significantly, and we believe that they will continue to do so. Significant increases in the international market prices of our petrochemical products and, consequently, the prices that we are able to charge, would likely increase our net sales revenue and our results of operations to the extent that we are able to maintain our operating margins and increased prices do not reduce sales volumes of our products. Conversely, significant decreases in the international prices of our petrochemical products, and, consequently, the prices that we charge, would likely reduce our net sales revenue and our results of operations if we are unable to increase our operating margins or these reduced prices do not result in increased sales volumes of our products.
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Cyclicality Affecting the Petrochemical Industry and Capacity Utilization
Capacity Expansions
Global consumption of petrochemical products has increased significantly over the past 30 years. Due to this growth in consumption, producers have experienced periods of insufficient capacity for these products. Periods of insufficient capacity, including some due to raw material shortages, have usually resulted in increased capacity utilization rates and international market prices for our products, leading to increased operating margins. These periods have often been followed by periods of capacity additions, which have resulted in declining capacity utilization rates and international selling prices, leading to declining operating margins.
We expect that these cyclical trends in international selling prices and operating margins relating to global capacity shortfalls and additions will likely persist in the future, principally due to the continuing impact of four general factors:
Rio Polímeros, a Brazilian petrochemical company, commenced operations of a major petrochemical plant in Brazil in 2005. The maximum annual capacity of this plant is 520,000 tons of ethylene, 75,000 tons of propylene and 540,000 tons of polyethylene. This plant is in the process of ramping up its production towards its annual capacity. In addition, Solvay expanded its annual PVC production capacity by 30,000 tons in December 2005. In 2004, Polibrasil commenced operation of polypropylene facility in Mauá, São Paulo with an annual capacity of 300,000 tons. In 2004, we increased our annual production capacity of polypropylene by 100,000 tons and our annual production capacity of para-xylene by 50,000 tons. In 2005, we increased our annual production capacity of PVC by 50,000 tons and our annual production capacity of polyethylene by 30,000 tons.
Based on historical growth of Brazilian domestic demand for polyethylene, polypropylene and PVC, we believe that this additional capacity will be absorbed by the domestic market over the next several years. Although there may be a short period of overcapacity in the domestic market for several of our petrochemical products following Rio Polímeros’ commencement of operations, we believe that export opportunities will be available for the sale of these products not sold domestically. We cannot assure you, however, that the additional capacity will be so absorbed by the domestic market or that satisfactory export opportunities will be available for products not sold domestically. In the event that this additional production is not absorbed domestically or sold in export markets, there may be resulting pressure on prices for the affected products, which could adversely affect our net sales revenues, gross margins and overall results of operations.
Capacity Utilization
Our operations are capital intensive. Accordingly, to obtain lower unit production costs and maintain adequate operating margins, we seek to maintain a high capacity utilization rate at all of our production facilities.
The table below sets forth capacity utilization rates with respect to the production facilities for some of our principal products for the years ended December 31, 2005, 20042007, 2006 and 2003.2005.
Year Ended December 31, | ||||||
2007 | 2006 | 2005 | ||||
Ethylene | 94%(1) | 87% | 91% | |||
Polyethylene | 91(2) | 89(3) | 94(4) | |||
Polypropylene | 97(2) | 97 | 94 | |||
PVC | 91 | 86 | 95(5) |
Year ended December 31, | |||||||||
2005 | 2004 | 2003 | |||||||
Ethylene | 91 | % | 87 | % | 84 | % | |||
Polyethylene(1) | 94 | 91 | 83 | ||||||
Polypropylene | 94 | 96 | (2) | 95 | (2) | ||||
PVC(3) | 95 | 90 | 85 |
(1) | Giving effect to our consolidation of the results of Copesul as from April 1, 2007. |
(2) | Giving effect to our consolidation of the results of Ipiranga Petroquímica as from April 1, 2007 |
(3) | Without giving effect to a 30,000 ton increase of our annual production capacity in September 2006. |
(4) | Without giving effect to a 30,000 ton increase of our annual production capacity in November 2005. |
Without giving effect to a 50,000 ton increase of our annual production capacity in December 2005. | |
The utilization rate of our ethylene production capacity was adversely affected:
13 days.
Effect of Export Levels on Our Financial Performance
We generally obtain higher prices in Brazil for our products than the prevailing international prices. The difference in prices between the Brazilian and export markets results from:
In addition, we are generally able to charge higher prices for our products than therealprice of imports because we are able to provide better product customization services to our customers than sellers of imported products.
During periods in which the domestic demand for our products is reduced, we actively pursue export opportunities for our products in order to maintain capacity utilization rates. During periods of increased domestic demand for our products, our export sales volumes may decline as we increase domestic sales of our products.
In 2005, 20.2%2007, 23.8% of our net sales revenue was derived from export sales of our products as compared with 19.1%25.6% of our net sales revenue in 2004.2006. Net sales revenues derived from export sales increased by 11.5%26.6% in 2005,2007 as a result of the implementation of our strategy to increase our presence in foreign markets.markets, which has led to the establishment of sales offices in Argentina and The Netherlands, enabling us to provide our international costumers with better service through our staff and local distribution centers.
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In 2005,2007, exports to other countries in the Americas accounted for 67%68.4% of our export sales, with the remainder of our exports sold in Europe, which accounted for 21%26.7% of our export sales, and the Far East, which accounted for 12%4.9% of our export sales. Aggregate exports of polyethylene, polypropylene and PVC to Argentina increased by 11%22.8% in 2005,2007, reflecting improvements in the Argentine economy.
Our ability to export to other South American countries is a function of the level of economic growth in these countries and other economic conditions, including prevailing inflation rates. We believe that significant growth in the global economy would likely lead to increased global demand and international market prices for our products, and consequently increased domestic prices for our products. In addition, increased global demand for our products would enhance our ability to export our products in the event that the Brazilian economy does not similarly expand. Conversely, slow or negative growth of the global economy would have the opposite effects on our company.
Effects of Fluctuations in Exchange Rates Betweenbetween the Real and the U.S. Dollar
Our results of operations and financial condition have been, and will continue to be, affected by the rate of depreciation or appreciation of therealagainst the U.S. dollar because:
Virtually all of our sales are of petrochemical products for which there are international market prices expressed in U.S. dollars. We generally attempt to set prices that take into account the international market prices for our petrochemical products and variations in thereal/U.S. dollar exchange rate. As a result, although a significant portion of our net sales revenue is inreais,substantially all of our products are sold at prices that are based on international market prices that are quoted in U.S. dollars.
The price of naphtha, our principal raw material, is linked to the U.S. dollar. Our naphtha purchase contractcontracts with Petrobras providesprovide that the prices that we pay to Petrobras for naphtha in any month are established based on the average Amsterdam-Rotterdam-Antwerp market price for naphtha in U.S. dollars during the previous month, converted intoreaisat thereal/U.S. dollar exchange rate in effect on the last day of the previous month. Fluctuations in therealaffect the cost of naphtha and other U.S. dollar-linked or imported raw materials.
When therealdepreciates against the U.S. dollar, assuming naphtha costs and international market prices of our products remain constant in U.S. dollars, the production cost for our products increases and we generally attempt to increase the prices for our products inreais(to (to the extent possible in light of then-prevailing market conditions in Brazil), which may result in reduced sales volumes of our products. To the extent that our price increases are not sufficient to cover the increased costs for raw materials, our operating margin decreases. Conversely, when therealappreciates against the U.S. dollar, assuming naphtha costs and international market prices of our products remain constant in U.S. dollars, the production cost for our products decreases and we generally decrease the prices for our products inreais, which may result in increased sales volumes of our products. In periods of high volatility in thereal/U.S. dollar exchange rate, there is usually a lag between the time that the U.S. dollar appreciates or depreciates and the time that we are able to pass on increased or reduced costs inreaisto our customers in Brazil. These pricing mismatches decrease when thereal/U.S. dollar exchange rate is less volatile.
Our consolidated U.S. dollar-denominated indebtedness represented 51.2%70.1% of our outstanding indebtedness at December 31, 2005,2007, excluding related party debt. As a result, when therealdepreciates against the U.S. dollar:
Conversely, when therealappreciates against the U.S. dollar:
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Any major devaluationA depreciation of therealagainst the U.S. dollar wouldhas the converse effects.
Any significant appreciation of therealagainst the U.S. dollar significantly increasedecreases our financial expenses and our short-term and long-term indebtedness, as expressed inreais. Conversely, any major appreciationsignificant depreciation of therealagainst the U.S. dollar would significantly decreaseincreases our financial expenses and our short-term and long-term indebtedness, as expressed inreais.
Export sales, which enable us to generate receivables payable in foreign currencies, tend to provide a hedge against a portion of our U.S. dollar-denominated debt service obligations, but they do not fully match them. Accordingly, we often enter into hedges to mitigate exchange rate fluctuations in our U.S. dollar-denominated indebtedness. To further mitigate our exposure to exchange rate risk, we try, where possible, to enter into trade finance loans for our working capital needs, which funding is generally available at a lower cost because it is linked to U.S. dollar exports. However, future U.S. dollars that we generate from exports may not be in an amount sufficient to cover all of our U.S. dollar trade finance liabilities.
Inflation affects our financial performance by increasing some of our operating expenses denominated inreais(and not linked to the U.S. dollar). A significant portion of our costs of sales and services rendered, however, are linked to the U.S. dollar and are not substantially affected by the Brazilian inflation rate. In addition, some of ourreal-denominated debt is indexed to take into account the effects of inflation. Under this debt, the principal amount generally is adjusted with reference to the General Price Index—Market (IGP-M), an inflation index, so that inflation results in increases in our financial expenses and debt service obligations. In addition, a significant portion of ourreal-denominated debt bears interest at the TJLP or the CDI rate, which are partially adjusted for inflation.
Effect of Level of Indebtedness and Interest RatesFormula Braskem
At December 31, 2005, our total outstanding consolidated indebtedness on a consolidated basis, excluding related party debt, was R$5,361.1 million. The level of our indebtedness results in significant financial expenses that are reflected in our statement of operations. Financial expenses consist of interest expense, exchange variations of U.S. dollar- and other foreign currency-denominated debt, foreign exchange losses or gains, and other items as set forth in notes 15 and 23 to our consolidated financial statements. In 2005, we recorded total financial expenses of R$675.8 million, of which R$347.0 million consisted of interest expense and R$556.9 million consisted of foreign exchange gains. By contrast,commenced our Formula Braskem program to implement a new integrated management system intended to incorporate the best practices in 2004, we recorded total financial expenses of R$1,307.2 million, of which R$595.3 million consisted of interest expense and R$425.4 million consisted of foreign exchange gains. The interest rates that we pay depend on a variety of factors, including prevailing Brazilian andthe international interest rates and risk assessments ofpetrochemical industry in our company, our industrymanagement systems and the Brazilian economymost recent technological developments available in the marketplace. We made by potential lenderscapital expenditures of R$130.0 million between 2005 and 2007 related to our company, potential purchasersthe implementation of our debt securities and the rating agencies that assess our company and its debt securities.first phase of Formula Braskem. We made capital expenditures of R$39.9 million in 2007 related to the implementation of the second phase of Formula Braskem.
Petroquímica Paulínia
Standard & Poor’sIn September 2005, we and Fitch maintain ratingsPetroquisa incorporated Paulínia as a joint venture company for the construction and operation of our companya polypropylene plant to be located in Paulínia, in the State of São Paulo, with an initial annual production capacity of 350,000 tons. This plant commenced operations in April 2008. We own 60% of the total and our debt securities. Onvoting share capital of Paulínia, and Petroquisa owns the remaining total and voting share capital. The total cost of this plant was approximately R$704.0 million. In December 2006, Paulínia entered into a global basis, Standard & Poor’s maintains a local currency ratingcredit agreement with Brazilian National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social), or BNDES, in the aggregate amount of our companyR$566.2 million to finance the construction of “BB” and a foreign currency rating for our companythis plant. The remaining cost of “BB,” and on a local basis Standard & Poor’s maintains a rating for our companythis plant was financed through equity contributions by the shareholders of “br AA/Stable Outlook.” On a global basis, Fitch maintains a local currency rating for our company of “BB+/Stable Outlook” and a foreign currency rating for our company of “BB/Positive Outlook,” and on a local basis Fitch maintains a national rating of our company of “AA- (bra)/Stable Outlook.”Paulínia. We have not been informed of any proposed actions by either of these rating agenciesinvested R$145.1 million in Paulínia, which corresponds to further modify their ratings on our company or its indebtedness. Any rating downgradingsBraskem’s share in the future would likely resultinvestments made in increased interestthe construction of Paulínia’ polypropylene plant.
Politeno Acquisition
In April 2006, we purchased all of the common and other financial expenses relating to borrowingspreferred shares of Politeno that were owned by SPQ, Sumitomo and debt securitiesItochu. We paid a portion of the purchase price for these shares in an aggregate amount of thereal-equivalent of US$111.3 million in April 2006. The remainder of the purchase price for these shares was calculated based on an “earn-out” formula taking into account Politeno’s operating performance, measured by fluctuations in polyethylene and could adversely affect our ability to obtain such financing on satisfactory terms orethylene margins in amounts required by us.
Resultsthe Brazilian petrochemical market during the 18 months following the execution date of Operations of Jointly Controlled Companies
We own 29.5%the agreement under which we acquired these shares. Following the Politeno Acquisition, we owned 100% of the voting share capital and 96.2% of the total share capital of Copesul. At December 31, 2005,Politeno. Politeno merged with and into Braskem on April 2, 2007. In January 2008, we alsopaid the remaining portion of the purchase price of R$247.5 million.
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Ipiranga Transaction
On March 18, 2007, we entered into the Ipiranga Investment Agreement with Ultrapar and Petrobras. On the same date, Ultrapar and the controlling shareholders of RPI, CBPI and DPPI entered into the Purchase Agreement, with our company and Petrobras as intervening parties.
Under the Ipiranga Investment Agreement, Ultrapar, as a commission agent acting on behalf of Braskem and Petrobras, acquired 100% of the share capital of Ipiranga Química. As of March 18, 2007, Ipiranga Química owned 34.0%86.9% of Politeno’sthe voting share capital and 92.4% of the total share capital including 35.0%of Ipiranga Petroquímica. Ipiranga Petroquímica, in turn, owned 29.5% of the share capital of Copesul. In February 2008, Ultrapar transferred 60% of the share capital of Ipiranga Química to our company and 40% of the share capital of Ipiranga Química to Petrobras, as required by the Ipiranga Investment Agreement. In addition, under the Ipiranga Investment Agreement, Ultrapar is obligated to transfer 33.3% of the share capital of RPI to our company and 33.3% of the share capital of RPI to Petrobras. Following this transfer, we will jointly and equally control RPI with Petrobras and Ultrapar. The total purchase price to our company of the shares of Ipiranga Química that we have acquired and the shares of RPI that we will acquire from Ultrapar in the Ipiranga Transaction was R$1,489.1 million.
As part of the Ipiranga Transaction:
Under the Ipiranga Investment Agreement, Braskem paid Ultrapar R$651.9 million in April 2007, R$156.7 million in October 2007, R$47.0 million in November 2007 and R$633.5 million in February 2008 for the shares of Ipiranga Química that we have acquired and the shares of RPI that we will acquire from Ultrapar in the Ipiranga Transaction. For additional information regarding the Ipiranga Transaction, see “Item 4. Information on the Company—Ipiranga Transaction.”
Venezuelan Initiatives
Polypropylene Project
In December 2007, we, through our wholly owned Netherlands subsidiary, Braskem Europe B.V., entered into a shareholders agreement, which we refer to as the Propilsur Shareholders Agreement, with Petroquímica de Venezuela, S.A., or Pequiven, the government-owned petrochemical company of the Bolivarian Republic of Venezuela, which supersedes the Project Development Agreement Framework and the Project Development Agreement that we entered into with Pequiven in April 2006 and April 2007, respectively. Under the Propilsur Shareholders Agreement, we plan to form Propilsur, a joint venture with Pequiven for the development, construction and operation of a polypropylene plant with an integrated propane dehydrogenation unit to be located in the Jose Petrochemical Complex in the State of Anzoategui, Venezuela, with an annual production capacity of approximately 450,000 tons. The Propilsur Shareholders Agreement sets forth the understanding of the parties regarding the implementation of this project and the relationship of Braskem and Pequiven as shareholders of Propilsur. Under the Propilsur Shareholders Agreement:
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The Propilsur Shareholders Agreement includes provisions for mediation and arbitration in the event of disputes and a deadlock between our company and Pequiven in matters to be determined by Propilsur’s board of directors and grants rights of first offer and first refusal to our company and Pequiven in the event that we or Pequiven determine to sell our equity interests in Propilsur.
The estimated total cost of this project to Propilsur is approximately US$843 million of which we anticipate that our company and Pequiven will each contribute approximately 15% as equity. We have announced that our board of directors has approved an initial investment of US$11 million for the next phase of this project. We expect that construction of this project will commence in the beginning of 2009 and that this project will begin production by the beginning of 2011.
We expect to form Propilsur during the third quarter of 2008. The Propilsur Shareholders Agreement provides that implementation of this project is contingent upon a final investment decision of each of the parties on or prior to May 13, 2009. We are continuing to negotiate with Pequiven regarding details of the implementation of this project. We can provide no assurances that these negotiations will be successful or that if we reach a final agreement with respect to the implementation of this project, such agreement will be upon the terms currently anticipated by our management.
Jose Olefins Project
In December 2007, we, through our wholly owned Netherland subsidiary, Braskem Europe B.V., entered into a shareholders agreement with Pequiven, which we refer to as the Polimerica Shareholders Agreement, which supersedes the memorandum of understanding and the Project Development Agreement that we entered into with Pequiven in April 2006 and April 2007, respectively. Under the Polimerica Shareholders Agreement, we plan to form Polimerica, a joint venture with Pequiven for the development, construction and operation of the Jose Olefins Project, an olefins complex to be located in the Jose Petrochemical Complex. The proposed complex would include an ethylene cracker that would use ethane extracted from natural gas as its raw material, with an annual production capacity of 1.3 million tons, and three polyethylene plants with a combined annual production capacity of 1.1 million tons of HDPE, LDPE and LLDPE. The Polimerica Shareholders Agreement sets forth the understanding of the parties regarding the implementation of this project and the relationship of Braskem and Pequiven as shareholders of Polimerica. Under the Polimerica Shareholders Agreement:
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The Polimerica Shareholders Agreement includes provisions for mediation and arbitration in the event of disputes and a deadlock between our company and Pequiven in matters to be determined by Polimerica’s board of directors and grants rights of first offer and first refusal to our company and Pequiven in the event that we or Pequiven determine to sell our equity interests in Polimerica.
The estimated total cost of this project to Polimerica would be approximately US$2,662 million of which we anticipate that our company and Pequiven will each contribute approximately 15% as equity. We have announced that our board of directors has approved an initial investment of US$80 million for the next phase of this project. We expect that construction of this project will commence in 2010 and this project will begin production by the beginning of 2013.
We expect to form Polimerica during the third quarter of 2008. The Polimerica Shareholders Agreement provides that implementation of this project is contingent upon a final investment decision of each of the parties on or prior to the third anniversary of the Polimerica Shareholders Agreement. We are continuing to negotiate with Pequiven regarding details of the implementation of this project. We can provide no assurances that these negotiations will be successful or that if we reach a final agreement with respect to the implementation of this project, such agreement will be upon the terms currently anticipated by our management.
Research and Development
Our ability to compete in the Brazilian and foreign markets that we serve depends on our ability to integrate new production processes developed by our company and third parties in order to lower our costs and offer new thermoplastic products. In addition, our relationships with our customers are enhanced by our ability to develop new products and customize existing products to meet their needs. To meet these challenges, we maintain a research and development program that is primarily implemented at the Braskem Center for Innovation and Technology in the Southern Complex. We invested R$76.5 million, R$44.3 million and R$47.2 million in research and development in 2007, 2006 and 2005, respectively.
2008 Capital Expenditure Budget
We currently are budgeting total capital expenditures of approximately R$1.3 billion for 2008. Our principal capital expenditures for 2008 consist of, in addition to the projects referred to in the preceding paragraphs, approximately R$435.2 million for productivity improvements, approximately R$354.7 million for maintenance stoppages and other maintenance of our plants, approximately R$226.8 million for the replacement of depreciated equipment, approximately R$175.4 million for plant modernization and information systems and approximately R$161.9 million for health, environmental and quality improvement projects.
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Other Projects
We are currently evaluating projects that could entail significant capital expenditures in the future, including:
Maintenance
Most of our maintenance is performed by third-party service providers. For example, we have contracts with Construtora Norberto Odebrecht S.A., or CNO, a company in the Odebrecht Group, Asea Brown Boveri Ltd., Cegelec Ltda., Rip Serviços Industriais S/A, Cl Engenharia Ltda. and other service providers to perform maintenance for our Basic Petrochemicals Unit, Copesul and our Business Development Unit. We also perform some of our ordinary course maintenance with our small team of maintenance technicians, which also coordinate the planning and execution of maintenance services performed by third parties.
Prior to January 1, 2006, we recorded expenditures for programmed maintenance shutdowns of our plants as “Deferred charges.” Such expenses occur at scheduled intervals from one to six years and are similardepreciated to production cost until the beginning of the next maintenance shutdown. Beginning January 1, 2006, in accordance with IBRACON Technical Interpretation 01/2006, we recorded all programmed maintenance shutdown expenses in property, plant and equipment as “Machinery, equipment and facilities.” In addition, the retrospective effects of depreciation with the adoption of this interpretation was recognized as shareholders’ equity. Accordingly, for periods ending after January 1, 2006, we have reclassified the amount of R$400.2 million from deferred charges to property, plant and equipment, and recognized the amount of R$164.9 million in shareholders’ equity.
Basic Petrochemicals Unit
Because we have two independent Olefins units and two independent Aromatics units, we may continue production of basic petrochemicals without interruption, even while we perform certain maintenance services. We occasionally undertake other brief shutdowns of the operations of our Basic Petrochemicals Unit that do not materially affect our production output, primarily for maintenance purposes, catalyst regeneration and equipment cleaning. Regular basic petrochemicals plant maintenance requires complete plant shutdowns from time to time, and these shutdowns usually take approximately 30 days to complete.
The last general maintenance shutdown of our Olefins 1 unit was carried out in 2001 and lasted for 25 days. The cost of servicing the unit was approximately R$39.8 million (not including the value of lost production during this shutdown). In 2002, we shut down our Olefins 1 unit for 92 days in order to increase its production capacity and to modernize and upgrade its technology. The cost of these improvements to this unit was approximately R$142.8 million (not including lost production). We performed a non-programmed maintenance shutdown of our Olefins 1 unit in December 2006 for 13 days. This shutdown permitted inspection and maintenance of this unit, in order to ensure the production of ethylene until May 2008. The cost of servicing the unit was approximately R$7.0 million (not including the value of lost production during this shutdown). A general maintenance shutdown of our Olefins 1 commenced on May 23, 2008 with an estimated duration of approximately 35 days at an expected cost of R$95 million (not including the value of lost production during this shutdown or investments in productivity enhancements).
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The last general maintenance shutdown of our Aromatics 1 unit was carried out in 2005 and lasted 30 days. The cost of servicing this unit was approximately R$21 million (not including the value of lost production during this shutdown or investments in productivity enhancements). We no longer perform general maintenance shutdowns of our Aromatics 1 unit and instead perform general maintenance shutdowns of specific plants or groups of plants in this unit. We performed maintenance of the parex plant of the Aromatics 1 unit during a shutdown of this plant during 2007 that lasted 52 days. The cost of servicing this plant was approximately R$19 million (not including the value of lost production during this shutdown or investments in productivity enhancements). A general maintenance shutdown of the butadiene plant and the commons systems associated with Olefins 1 commenced on May 23, 2008 with an estimated duration of approximately 30 days at an expected cost of R$16 million (not including the value of lost production during this shutdown or investments in productivity enhancements). The next general maintenance shutdown of the Catalyst Reform plant and the plants comprising the C8 loop has been scheduled for September 2009 with an estimated duration of approximately 30 days at an expected cost of R$35 million (not including the value of lost production during this shutdown or investments in productivity enhancements).
The last general maintenance shutdown of our Aromatics 2 and Olefins 2 units (which form part of the same basic petrochemicals facility) was carried out in 2004 and lasted 36 days. The cost of servicing these units was approximately R$89 million (not including the value of lost production during this shutdown). The next general shutdown of our Aromatics 2 and Olefins 2 units has been scheduled for 2010 with an estimated duration of approximately 25 days.
Copesul
Because Copesul has two independent Olefins units, we may continue production of basic petrochemicals without interruption, even while we perform certain maintenance services. We occasionally undertake other brief shutdowns of Copesul’s operations that do not materially affect our production output, primarily for maintenance purposes, catalyst regeneration and equipment cleaning. Regular maintenance of Politeno are similarCopesul’s plants requires complete plant shutdowns from time to time, and these shutdowns usually take approximately 30 days to complete.
The last general maintenance shutdown of Copesul��s Olefins 1 unit and Aromatics unit was carried out beginning in April 2008 and lasted for 38 days. The cost of servicing the operationsunit was approximately R$55.0 million (not including the value of lost production during this shutdown). The next general shutdown of Copesul’s Olefins 1 unit and Aromatics unit has been scheduled for 2014.
The last general maintenance shutdown of Copesul Olefins 2 unit was carried out in 2005 and lasted for 32 days. The cost of servicing the unit was approximately R$44.1 million (not including the value of lost production during this shutdown). The next general shutdown of this unit has been scheduled for April 2011 with an estimated duration of approximately 30 days.
Polyolefins and Ipiranga Petroquímica
We have a regular maintenance program for each of our polyolefins plants. Production at each of our Polyolefins Unit. Accordingly, the resultsUnit’s polyolefins plants generally is shut down for seven to 20 days every two years to allow for regular inspection and maintenance. Production at each of operations of these companies are influenced by factors similarIpiranga Petroquímica’s polyolefins plants generally is shut down for seven to the factors that influence our results of operations. However, Copesul has,20 days every three years to allow for regular inspection and prior to the Politeno acquisition, Politeno had, management that is independent from ours and a capital structure, including levels of indebtedness and corresponding levels of financing costs, different from ours.maintenance. In addition, we own 20.1%undertake other brief shutdowns for maintenance purposes that do not materially affect our production of polyolefins. We coordinate the maintenance cycles of our polyolefins plants with those of our basic petrochemicals plants. While our basic petrochemicals facilities must be shut down for up to 30 days for maintenance, our polyolefins facilities may be shut down for shorter periods because these facilities are less complex to operate and maintain than our basic petrochemicals facilities.
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Vinyls Unit
We have a regular maintenance program for each of our vinyls plants. Our Camaçari and Alagoas PVC plants are generally shut down for 15 to 20 days every two years to allow for regular inspection and maintenance. The last general maintenance shutdown of our PVC plant in Camaçari was carried out in May 2006 and lasted for 14 days. The next general maintenance shutdown of this plant is scheduled for November 2009. The last general maintenance shutdown of our PVC plant in Alagoas was carried out in April 2007 and lasted for seven days. The next general maintenance shutdown of this plant is scheduled for October 2008. Our São Paulo PVC plant does not require prolonged maintenance shutdowns, resulting in shutdowns of two or three days each year for regular maintenance. Prior to 2007, our caustic soda and chlorine plant in Alagoas was generally shut down for 15 days of maintenance every two years. Beginning in 2007, our maintenance schedule at this plant has been altered so that we will now shut down this plant once a year for three days of maintenance in different parts of the votingplant. The last general maintenance shutdown of this plant was carried out in October 2006 and total share capitallasted for five days. Our caustic soda and chlorine plant in Camaçari does not require prolonged maintenance shutdowns and is shut down for two or three days each year.
Environmental Regulation
We are subject to Brazilian federal, state and local laws and regulations governing the discharge of Petroflex. Petroflex has management that is independent from ourseffluents and a capital structure, including levelsemissions into the environment and the handling and disposal of indebtednessindustrial waste and corresponding levels of financing costs, that is different from ours. For more information aboutotherwise relating to the operations of Petroflex, see “Item 4. Information on the Company—Jointly Controlled Companies and Joint Venture—Petroflex.”
As a resultprotection of the application of Instruction 247 to our consolidated financial statements,environment.
Under federal and state environmental laws and regulations, we are required to proportionally consolidate the results of jointly controlled companies that are notobtain operating permits for our subsidiaries, such as Copesul, Politeno and Petroflex. Consequently, our results of operations are subject to fluctuations that depend on the results of these jointly controlled companies. However, in evaluating our results of operations, cash flows and liquidity, our management relies on financial information that does not include the effects of proportional consolidation, principally because we have limited, if any, control over the operations and policies of the companies whose results we are required to proportionally consolidate with our own. In our discussion of our results of operations and our discussion of our liquidity and capital resources, we have provided supplemental information drawn from our accounting records with respect to our results of operations, working capital, cash flows and indebtedness without giving effect to this proportional consolidation to provide holders of bonds with information that our management believes more accurately reflects the results of operations and financial position of our company.
As a result of the Politeno acquisition described under “—Recent Developments,” we will fully consolidate Politeno’s results in our consolidated financial statements at dates and for periods following this acquisition.
Effect of Taxes on Our Income
We are subject to a variety of generally applicable Brazilian federal and state taxes on our operations and results.
Tax Exemptions
We are generally subject to Brazilian federal income tax at an effective rate of 25%, which is the standard corporate tax rate in Brazil. We have available certain federal tax exemptions based upon federal law that offers tax incentives to companies that locate their manufacturing operationsfacilities. State authorities in the Brazilian statesState of Bahia and Alagoas. These exemptions have been grantedissued operating permits for varying lengths of time to each of our manufacturing plants located in these states.
We are exempt from corporate income tax on the profits arising from the sale of PVC manufactured at our Alagoas and PET manufactured at our plant in the Northeastern Complex until December 31, 2008. In addition, we are entitled to pay only 25% of the statutory income tax rate on the profits arising from the sale of:
Each of our exemptions entitles2000, which were renewed in 2005 for a six-year term. Our environmental operating permit obligates us to pay only 87.5%engage in systematic measures for the treatment of the statutory income tax rate on the profits arising from products manufactured at these plants for a period of one or more years after the dates set forth above.
At the end of each year, if we or any of our affected subsidiaries has taxable profit resulting from the operations described above, income tax expense is calculated without giving effect to the exemption or reductionwastewater and the income tax benefit of the exemption or reduction is deducted from income tax payable and credited to a capital reserve, which can only be used to increase capital, absorb losses which exceed retained earnings and profits reserves as defined in the Brazilian Corporation Law or redeem or repurchase share capital or participation certificates. We used R$463.2 million of this capital reserve to absorb all of our retained losses in December 2004.
Due to operating losses sustained by us in the past, we had R$167.9 million of deferred tax assets arising from R$671.5 million of tax loss carryforwards available at December 31, 2005. Income tax loss carryforwards available for offset in Brazil do not expire. However, the annual offset is limited to 30% of our adjusted net income. This limit also affects the Social Contribution on Net Income.
Our export sales are currently exempt from PIS (a federal value-added tax), COFINS (a federal value-added tax), IPI (a federal value-added tax on industrial products) and the Tax on the Circulation of Merchandise and Services (Imposto Sobre a Circulação de Mercadorias e Serviços), or ICMS (a state value-added tax on sales and services), under generally available exemptions, subject to our compliance with the requirements of these exemptions.
The eventual expiration of the income tax exemptions will not affect our net income because we record the full amount of the income tax in our income statement and credit the amount of the income tax exemptions to a reserve account in shareholders’ equity to increase our capital or absorb our losses.
Tax Disputes
We pay IPI tax on industrial products that we manufacture. The regulations governing the IPI tax assess this tax on a non-cumulative basis, which means that companies may offset their IPI tax obligations with the amount of IPI taxes paid by suppliers earlier in the production chain. The Brazilian federal taxhazardous solid waste. State authorities have asserted that purchases of raw materials that are tax-exempt, non-taxable or taxed at a zero percent rate do not generate IPI tax credits, because they maintain that there is no legal provision that expressly authorizes these credits. We believe that this interpretation is contrary to Article 153, paragraph 3 of the Brazilian Constitution, which sets forth the principle of non-cumulative taxation in a broad manner and does not exclude purchases of raw materials that are tax-exempt, non-taxable or taxed at a zero percent rate. OPP Química brought a suit against the Brazilian government claiming that it had the right to IPI tax credits on its purchases of raw materials that are in a zero percent tax bracket. In December 2002, the Brazilian Federal Supreme Court ruled in favor of OPP Química in this suit.
The Brazilian government appealed the decision of the Brazilian Federal Supreme Court. As the appeal does not challenge the validity of IPI tax credits, but only the method of calculating monetary adjustments on those credits and the time period for appealing the decision of the Brazilian Federal Supreme Court has expired, we believe that (1) the decision acknowledging the validity of the IPI tax credits is no longer subject to appeal, and (2) it is reasonably possible that we could lose the appeal regarding the method of calculating monetary adjustments on those credits. If the Brazilian Government prevails in this appeal, we could lose all or part of the IPI tax credits attributable to monetary adjustments. We recognized IPI tax credits in an aggregate amount of R$1,030.1 million in December 2002. Of this total tax credit, we used R$265.6 million during the year ended December 31, 2002, R$364.9 million during the year ended December 31, 2003 and the remainder during the year ended December 31, 2004 to offset IPI and other federal tax obligations.
Although the ruling of the Brazilian Federal Supreme Court only applies to our operations in the State of Rio Grande do Sul, we have also brought litigation againstwhere our Southern Complex plants are located, including Copesul’s plants and some of Ipiranga Petroquímica’s plants, regulate our operations by prescribing specific environmental standards in our operating permits, which must be renewed every four years. Copesul’s operating permit was renewed in 2008 and the Brazilian governmentoperating permits for our polyethelene and polypropylene plants were renewed on various dates in respect of our purchases of raw materials2006 and 2007. State authorities in the States of Alagoas and São Paulo Bahiahave issued permits for our plants in those respective complexes, which also must be renewed every four years. If any of our environmental licenses and Alagoas seekingpermits lapse or are not renewed or if we fail to obtain any required environmental licenses and permits, we may be subject to fines ranging from R$500 to R$50.0 million, and the Brazilian government may partially or totally suspend our activities and impose civil and criminal sanctions on our company or both. All our environmental licenses and permits are in full force and effect.
All projects for the installation and operation of industrial facilities in the Northeastern Complex are subject to approval by the Council for Environmental Protection of the State of Bahia or by the Environmental Resources Center, the State’s Environmental Protection Council’s technical office, depending on the complexity of the facility. The State’s Research and Development Center and other outside consultants act as technical advisors to the Environmental Resources Center. The State’s Environmental Protection Council must approve installed projects prior to their commencement of operations and must renew such approval every five years thereafter.
All projects for the installation, modification and operation of industrial facilities in the Southern Complex are subject to approval by the Rio Grande do Sul State Environmental Protection Foundation. The Rio Grande do Sul State Environmental Protection Foundation must approve installed projects prior to their commencement of operations and must renew such approval every four years thereafter.
CETREL S.A.—Empresa de Proteção Ambiental, or Cetrel, treats wastewater generated by our company and the other petrochemical producers at the Northeastern Complex at a similarliquid effluents treatment station located in the Northeastern Complex. This treatment station also includes a system for the collection and disposal of contaminated wastewater. Cetrel also stores and incinerates, treats and disposes of hazardous solid waste. For other kinds of solid waste, Cetrel maintains a landfill. Cetrel has installed two hazardous solid waste incinerators with a total annual incineration capacity of 16,600 tons. One of these incinerators has an annual incineration capacity of 4,400 tons and is used to dispose of chlorinated residue, and the other incinerator has an annual incineration capacity of 12,000 tons and is used to dispose of non-chlorinated residue. Another Brazilian company co-processes hazardous solid waste in a cement kiln located in the city of Pedro Leopoldo, State of Minas Gerais.
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In January 1996, Cetrel obtained its BS 7750 environmental certification (British Standard) and in September 1996 became one of the first companies in the world to receive the ISO 14001 certification, an international standard for environmental control. In 1998, Cetrel obtained certification of its laboratory by the ISO Guide 25 standards system from the Brazilian Institute of Metrology and Industrial Quality.
Companhia Riograndense de Saneamento, or Corsan, a state-owned environmental company, operates an integrated system for liquid effluents treatment, or Sitel, in the Southern Complex. Sitel treats wastewater generated by our company and the other petrochemical producers at the Southern Complex at a liquid effluents treatment station located in the Southern Complex. This treatment station also includes a system for the collection and disposal of contaminated wastewater. Corsan also operates a centralized system for solid waste control, or Sicecors, in the Souther Complex. Sicecors centralizes the collection, treatment and final disposal of solid waste that is generated in the Southern Compex. Sicecors stores, treats and disposes of hazardous solid waste. For other kinds of solid waste, Sicecors maintains a landfill. Sitel and Sicecors received ISO 14001 certifications in 2001.
The Brazilian government enacted an Environmental Crimes Law in 1998 that imposes criminal penalties on corporations and individuals causing environmental damage. Corporations found to be polluting can be fined up to R$50.0 million, have their operations suspended, be prohibited from government contracting, be required to repair damage that they cause and lose certain tax credit.benefits and incentives. Executive officers, directors and other individuals may be imprisoned for up to five years for environmental violations.
We believe our operations are in compliance in all material respects with applicable environmental laws and regulations currently in effect. Some environmental studies that we have commissioned have indicated instances of environmental contamination at certain of our plants. In addition, we and certain executive officers of our company and of our subsidiaries have received notices from time to time of minor environmental violations and are or have been subject to investigations or legal proceedings with respect to certain alleged environmental violations. These environmental issues, and any future environmental issues that may arise, could subject us to fines or other civil or criminal penalties imposed by Brazilian authorities. We are addressing all environmental issues of which we are aware, and we believe that none of these issues will have a material adverse effect on our business, financial condition or operations.
Our consolidated annual expenditures on environmental control were R$92.7 million in 2007, R$73.8 million in 2006 and R$71.7 million in 2005. To dispose of our industrial wastewater and solid hazardous waste, we contract our jointly controlled company Cetrel at the Northeastern Complex, Corsan at the Southern Complex, our subsidiary Companhia Alagoas Industrial—Cinal at Alagoas, and other third parties. These companies treat our industrial waste immediately after this waste is generated and dispose of our solid waste. Our consolidated environmental expenses relate to our continuous control and monitoring policies, and we do not have any material future environmental liabilities related to our ongoing operations.
We have established a provision for environmental contingencies in the amount of R$18.4 million at December 31, 2007. However, our environmental compliance costs are likely to increase as a result of the projected increase in our production capacity and projected increases in unit costs for treatment and disposal of industrial waste as well as the cost of compliance with future environmental regulations.
Our environmental compliance in 2007 included the following results:
In September 2002, we created a Health, Safety and Environment Committee, composed of leaders of each of our business units and other members of our management. This committee supports and monitors our environmental, health and safety efforts. In February 2003, our board of directors approved a comprehensive health, safety and environment policy, as we recognize that sustainable development and ethical practices are essential to our continued growth and performance. As part of this policy, we are committed to:
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Safety and Quality Control
Safety
We have adopted a policy that makes all of our officers, directors and employees responsible for the safety of our workers and for preserving the environment.
We participate in the “Responsible Care” program, which establishes international standards for environmental, occupational health and safety practices for chemical manufacturers. Through our participation in this program, we adopted policies and procedures that require us to follow detailed instructions in matters of health, safety and the environment. We seek to maintain these environmental standards and have qualified each of our plants for NBR-ISO 9001 and 14001 certification, which includes internationally prescribed environmental management practices. We are currently implementing health, safety and environmental standards based on OSHAS 18001 and standards issued by the U.S. Occupational Safety and Health Administration.
Our safety record ranks above the average of companies in the Brazilian chemical industry. The following table illustrates our progress in terms of our safety record and compares our safety record to the average for the Brazilian chemical industry:
Year Ended December 31, | ||||||||
2007 | 2006 | 2005 | 2006 (1) | |||||
Braskem | Brazilian Chemical | |||||||
Industry Average | ||||||||
Safety Indicator | ||||||||
Braskem: | ||||||||
Index of Accident Frequency (accidents/200,000 man-hours) | 0.2 | 0.3 | 0.2 | 2.8 | ||||
Index of Severity (lost and deducted days/200,000 man-hours) | 5 | 3 | 4 | 32 | ||||
Copesul: | ||||||||
Index of Accident Frequency (accidents/200,000 man-hours) | 2.0 | 2.46 | 2.28 | 2.8 | ||||
Index of Severity (lost and deducted days/200,000 man-hours) | 23 | 41 | 27 | 32 | ||||
Ipiranga Petroquímica: | ||||||||
Index of Accident Frequency (accidents/200,000 man-hours) | 0.6 | 1.4 | — | 2.8 | ||||
Index of Severity (lost and deducted days/200,000 man-hours) | 36 | 67 | — | 32 |
(1) | Brazilian petrochemical industry average of the members of Brazilian Association of Chemical Industry and Derivative Products for 2006, as reported by the Brazilian Association of Chemical Industry and Derivative Products. |
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Our safety record in 2007 included the following results:
Each of our industrial plants is equipped with a comprehensive firefighting safety system. At the Northeastern Complex, water is available from a 200,000 cubic meter artificial lake, connected to the industrial plants by a pumping station and a distribution network and built according to international safety standards. We and the other companies in the Northeastern Complex maintain emergency equipment and trained safety crews. The safety plan for the Northeastern Complex provides for firefighting brigades of all companies in the complex to jointly assist in the event of any major accidents. The Northeastern Complex has safety standards for construction density and the design of pipelines and highways.
Similar systems are employed at our plant in the State of Alagoas and our plant in the State of São Paulo (except with respect to safety standards for construction density and design of pipelines and highways, as we do not have such facilities in São Paulo).
Each of the nine companies that operate in the Southern Complex relies on its own supply of water from nearby lakes and water tanks for firefighting capabilities. Copesul relies on a 7,400 cubic meter artificial pond, with an additional 12,600 cubic meter pond available in case of emergencies. Both water sources are connected to Copesul’s facilities by a pumping station and a distribution network, which currently employs seven water pumps, built according to international safety standards. Copesul also maintains emergency equipment and trained safety crews. In addition, Copesul’s safety plan provides for firefighting brigades consisting of six technicians and 14 operational and maintenance technicians per shift. Copesul and the other companies located in the Southern Complex are supported by the Southern Complex’s Mutual Plan of Emergency (Plano de Auxílio Mútuo do Pólo). Copesul’s commitment to safety includes the operation of a training center for its safety crews that simulates emergencies typical to the petrochemical industry. Similar systems are employed at the facilities of Ipiranga Petroquímica and our Polyolefins Unit in the Southern Complex.
We have obtained OSHAS 18001 certification of our Basic Petrochemical Unit and Copesul. This certification relates to our employee health and safety management system.
Quality Control
Our quality control management uses ISO 9001/00, an internationally recognized quality control standard, and ISO 14001, an internationally recognized environmental control standard, as its base. We have instituted systematic improvement processes in our operational areas, focusing on integrating production, maintenance, inventory management, customer satisfaction and profitability.
We have obtained ISO 9001 certifications for all of our products. We have also obtained ISO 14001 certifications for all of our industrial plants. These certifications take into account both the quality of our products and the quality of our operating procedures.
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Property, Plant and Equipment
Our properties consist primarily of petrochemical production facilities in Camaçari in the State of Bahia, in Triunfo in the State of Rio Grande do Sul, in Maceió in the State of Alagoas and in São Paulo in the State of São Paulo. Our principal executive offices are located in São Paulo in the State of São Paulo, and we have an administrative support office in the City of Rio de Janeiro. We also have equity interests in investments located in other parts of the country. We own all our production facilities, but we generally rent our administrative offices.
The following table sets forth our properties at December 31, 2007 by location of facilities, products produced and size of plant.
Type of Product or Service | Location of Facilities | Size of Plant | ||
(in hectares (1)) | ||||
Basic petrochemicals | Camaçari | 65.5 | ||
Basic petrochemicals | Triunfo | 152.8 | ||
Waste disposal | Marechal Deodoro | 34.3 | ||
Polyethylene | Camaçari | 24.5 | ||
Caustic soda/EDC/chlorine | Maceió | 15.0 | ||
PVC/caustic soda/chlorine | Camaçari | 12.6 | ||
Polyethylene | Triunfo | 30.5 | ||
Polypropylene | Triunfo | 10.0 | ||
Caprolactam | Camaçari | 8.1 | ||
PVC | Marechal Deodoro | 7.0 | ||
PET(2) | Camaçari | 6.2 | ||
PVC | Vila Prudente/Capuava | 3.2 |
(1) | One hectare equals 10,000 square meters. |
(2) | On May 16, 2007, we temporarily closed our PET plant. |
The descriptions of each of our business units above contain detailed charts showing the location, primary products, annual production capacity and historical annual production for each of our company’s production facilities.
We believe that all of our production facilities are in good operating condition. At December 31, 2007, the consolidated net book value of our property, plant and equipment was R$8,404.1 million. Without giving effect to the proportional consolidation of our jointly controlled companies, the net book value of our property, plant and equipment was R$8,002.8 million.
Certain of our properties located in the Northeastern Complex (including our DMT plant and all of the equipment located in this plant) and two of our polyolefins plants in the Southern Complex are mortgaged or pledged to secure certain of our financial transactions.
Insurance
Braskem carries insurance for its plants against material damage and consequent business interruption through “all risks” policies with a total replacement value of US$6.1 billion. Our insurance coverage is underwritten in the Brazilian insurance market by large Brazilian insurance companies. Approximately 83% of our insurance coverage is reinsured in the international insurance market. Our existing “all risks” policies are in force until November 30, 2008 and are renewed annually.
The material damage insurance provides insurance coverage for losses due to accidents resulting from fire, explosion and machinery breakdown, among others. This coverage has a maximum indemnification limit of US$1.9 billion per event (combined material damage and business interruption coverage) and has deductibles of up to US$5 million depending on the plant. The business interruption coverage provides insurance for losses resulting from interruptions due to any material damage covered by the policy. This coverage is calculated to insure against losses up to US$956.9 million due to shutdowns extending beyond 60 days. The losses are covered until the plant and production are fully re-established, with maximum indemnity periods ranging from 12 to 24 months.
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Copesul carries insurance with the same terms and conditions as Braskem with a total replacement value of US$2.3 billion, a maximum indemnification limit of US$1.6 billion per event (combined material damage and business interruption coverage) and a deductible of up to US$10 million. The business interruption coverage contracted by Copesul insures against losses of up to US$ 490.7 million for an indemnity period of 24 months.
Ipiranga Petroquímica carries property damage insurance to cover its plants and business interruptions with a total replacement value of US$509.2 million, a maximum indemnification limit of US$500 million per event (combined material damage and business interruption coverage), and a deductible of US$750,000. The business interruption coverage contracted by Ipiranga Petroquímica insures against losses of up to US$204 million for an indemnity period of 18 months.
We also have a third-party liability policy, which covers losses for damages caused to third parties from our operations, including sudden environmental pollution, up to a limit of US$60 million per loss or occurrence in the case of Braskem, US$35 million in the case of Copesul and R$50 million in the case of Ipiranga Petroquímica.
In addition to these policies, we maintain other insurance policies for specific risks, including directors and officers liability coverage, marine and transportation insurance, automotive insurance and other kinds of coverages that are not covered by our “all risks” policies.
We do not anticipate having any difficulties in renewing any of our insurance policies and believe that our insurance coverage is reasonable in amount and consistent with industry standards applicable to chemical companies operating in Brazil.
Antitrust Matters
Under Brazilian Law No. 8,884/94, any transaction that results in a concentration of market share equal to or greater than 20.0% of any relevant market or that involves any company or group of companies with annual gross sales of R$400.0 million or more must be submitted to and approved by the Brazilian antitrust authorities, which consist of three entities:
CADE is the antitrust authority responsible for reviewing and authorizing transactions that may lead to economic concentration. SEAE and SDE analyze the economic and legal implications of mergers and acquisitions under Brazilian antitrust law. As part of the antitrust review process, SDE, SEAE, the attorney general of CADE and the Brazilian federal public prosecutor each render preliminary opinions, which are delivered to the members of CADE. The members of CADE then render a final decision.
The Ipiranga Transaction is subject to the final approval of the Brazilian antitrust authorities. However, Brazilian law permits us to consummate these transactions prior to receiving this final approval, unless CADE issues a writ of prevention blocking a transaction or requires the parties to enter into an agreement permitting the effects of the transaction to be reversed which, by its terms, delays the consummation of the transaction. Our company, together with Ultrapar and Petrobras, submitted the terms and conditions of the Ipiranga Transaction for review by the Brazilian antitrust authorities in April 2007.
In April 2007, CADE issued a writ of prevention relating to the Ipiranga Transaction, which, among other things, prevented our exercise of strategic management control over Ipiranga Química and Ipiranga Petroquímica. In issuing the writ of prevention, CADE stated that the purpose of the writ of prevention was to guarantee that the Ipiranga Transaction could be reversed in the event that CADE so determined following its review of the Ipiranga Transaction. In April 2007, CADE revoked this writ of prevention upon the agreement of our company to execute the Reversibility Agreement designed to preserve the reversibility of the Ipiranga Transaction. Under the Reversibility Agreement, we agreed to preserve all of the assets acquired in the Ipiranga Transaction until CADE makes a final determination with respect to the Ipiranga Transaction, and we are permitted to effectively own and manage these assets pending this final determination.
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Although the terms and conditions of the Ipiranga Transaction were submitted to the Brazilian antitrust authorities in four separate filings reflecting the separate markets affected by the Ipiranga Transaction, on September 19, 2007, CADE decided that the four fillings should be analyzed and submitted for approval together.
SEAE issued a favorable opinion with respect to the Ipiranga Transaction in February 2008. Approval of this transaction by CADE remains pending.
Although we believe that the Petrobras Transaction is not subject to the final approval of the Brazilian antitrust authorities, because the Petrobras Transaction is a follow-on transaction to the Ipiranga Transaction and does not involve any change of control of our company or Petrobras, we and Petrobras submitted the terms and conditions of the Petrobras Transaction to the Brazilian antitrust authorities in December 2007.
The SEAE and the SDE issued favorable opinions with respect to the Petrobras Transaction in April 2008. Approval of this transaction by CADE remains pending.
There can be no assurances that the Brazilian antitrust authorities will approve the Ipiranga Transaction as currently structured, agree with our analysis of the Petrobras Transaction, or that these authorities will not impose additional conditions on these transactions.
ITEM 4A. UNRESOLVED STAFF COMMENTS.
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements at December 31, 2007 and 2006 and for the three years ended December 31, 2007 included in this annual report, as well as with the information presented under “Introduction” and “Item 3. Key Information—Selected Financial Information.”
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Cautionary Statement with Respect to Forward-Looking Statements” and “Item 3. Key Information—Risk Factors.”
The discussion and analysis of our financial condition and results of operations has been organized to present the following:
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Overview
We are the leading petrochemical company in Latin America, based on average annual production capacity in 2007. We are also the third largest Brazilian-owned private sector industrial company, based on net sales revenue in 2006 (the most recent year for which comparative information is currently available). We recorded net sales revenue of R$17,679.4 million and net income of R$547.6 million in 2007. We produce a diversified portfolio of petrochemical products in our 19 plants in Brazil and have a strategic focus on polyethylene, polypropylene and PVC. We were the first Brazilian company with integrated first and second generation petrochemical production facilities.
Our results of operations have been significantly influenced by (1) beginning in the second quarter of 2007, the effects of the Ipiranga Transaction and our consolidation of the assets, liabilities and results of operations of Ipiranga Química, Ipiranga Petroquímica and Copesul as from April 1, 2007, and (2) to a lesser extent, beginning in the second quarter of 2006, the effect of the Politeno Acquisition on April 6, 2006 and our full consolidation of the assets, liabilities and results of operations of Politeno and the inclusion of Politeno’s results in our Polyolefins segment as from April 1, 2006. In addition, our results of operations for the years ended December 31, 2007, 2006 and 2005 have been influenced, and our results of operations will continue to be influenced, by a variety of factors, including:
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Our financial condition and liquidity is influenced by a variety of factors, including:
Financial Presentation and Accounting Policies
Presentation of Financial Statements
We have prepared our consolidated financial statements at December 31, 2007 and 2006 and for the three years ended December 31, 2007 in accordance with Brazilian GAAP, which differs in certain respects from U.S. GAAP.
Our consolidated financial statements have been prepared in accordance with Instruction 247. Instruction 247 requires our company to proportionally consolidate jointly controlled companies that are not our subsidiaries.
Prior to March 31, 2006, we proportionally consolidated the results of Politeno in our consolidated financial statements. As a result of the Politeno Acquisition described under “Item 4. Information On The Company—History and Development of our Company,” we have fully consolidated Politeno’s results in our consolidated financial statements and included Politeno’s results in our Polyolefins segment as from April 1, 2006.
Prior to March 31, 2007, including for the first three months of 2007, we proportionally consolidated the results of Copesul in our consolidated financial statements. As a result of the Ipiranga Transaction, we have fully consolidated Copesul’s results in our consolidated financial statements and included Copesul’s results as a separate segment as from April 1, 2007.
Prior to November 30, 2007, we proportionally consolidated the results of Petroflex in our consolidated financial statements. As a result of our entering into an agreement in December 2007 to sell our interests in Petroflex, we accounted for our interest in Petroflex in our Brazilian GAAP financial statements using the equity method as from December 1, 2007.
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Reclassifications
Our consolidated financial statements included in this annual report reflect reclassifications in 2005 of some items to provide for a better comparison among 2006 and 2005. For more information about these reclassifications, see “Introduction—Financial Statements.”
Business Segments and Presentation of Segment Financial Data
We have implemented an organizational structure that we believe reflects our business activities and corresponds to our principal products and production processes. We now have seven business units and report our results by seven corresponding segments to reflect this organizational structure:
We evaluate and manage business segment performance based on information generated from our statutory accounting records, which are maintained in accordance with Brazilian GAAP, and, accordingly, the segment data included in this annual report is presented under Brazilian GAAP. We have included a reconciliation of the operating results of our segments to our consolidated results under “—Results of Operations” below.
In June 2008, we began the implementation of a new organizational structure under which we will have four business units and report our results by four corresponding segments to reflect this organizational structure:
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Critical Accounting Policies
The presentation of our financial condition and results of operations in conformity with Brazilian GAAP requires us to make certain judgments and estimates regarding the effects of matters that are inherently uncertain and that impact the carrying value of our assets and liabilities. Actual results could differ from these estimates. In order to provide an understanding about how we form our judgments and estimates about certain future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different variables and conditions, we have included comments related to the following critical accounting policies under Brazilian GAAP:
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deferred tax assets.
Principal Factors Affecting Our Results of Operations
Effects of the Ipiranga Transaction
On March 18, 2007, we entered into the Ipiranga Investment Agreement with Ultrapar and Petrobras. On the same date, Ultrapar and the controlling shareholders of RPI, CBPI and DPPI entered into the Purchase Agreement, with our company and Petrobras as intervening parties. As a result of the Ipiranga Transaction:
Upon the final completion of the fourth phase of the Ipiranga Transaction, we will own shares of RPI representing 33.3% of total share capital and voting share capital of RPI.
As a result of the Ipiranga Transaction, we have fully consolidated the results of Copesul and its subsidiaries and consolidated the results of Ipiranga Química and its subsidiaries, including Ipiranga Petroquímica, into our financial statements as from April 1, 2007. We have established provisionsaccounted for each of Copesul, Ipiranga Química and Ipiranga Petroquímica as separate segments in our financial statements as from the same date. In addition, we have accounted for our interest in the results of RPI under the equity method in our financial statements as from April 1, 2007.
The total purchase price to our company of the shares of Ipiranga Química that we have acquired and the shares of RPI that we will acquire from Ultrapar in the Ipiranga Transaction was R$1,489.1 million. In addition, we paid R$1,418.5 million for the Copesul shares not owned by our company, Ipiranga Petroquímica, Petroquisa or Triunfo and R$117.9 million for the shares of Ipiranga Petroquímica not owned by Ipiranga Química.
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We financed the Ipiranga Transaction through borrowings of US$1,200.0 million under our Acquisition Credit Agreement, US$312.5 million under an export prepayment agreement with PIFCo and US$61.0 million under two short-term financing transactions.
For additional information regarding the Ipiranga Transaction, see “Item 4. Information on the Company—Ipiranga Transaction.”
Growth of Brazil’s Gross Domestic Product and Domestic Demand for Our Products
Sales in Brazil represented 76.2% of our net sales revenue in 2007. As a Brazilian company with substantially all of our operations in Brazil, we are significantly affected by economic conditions in Brazil. Our results of operations and financial condition have been, and will continue to be, affected by the growth rate of GDP in Brazil because our products are used in the manufacture of a wide range of consumer and industrial products.
Because of our significant market share in many of the Brazilian markets in which our petrochemical products are sold, fluctuations in Brazilian demand for polyethylene, polypropylene and PVC affect our production levels and net sales revenue. GDP in Brazil grew at an estimated compound average annual rate of 2.8% from 1998 through 2007. From 1998 through 2007, the consumption volumes in Brazil of polyethylene, polypropylene and PVC increased at compound average annual rates of 4.4%, 7.9% and 3.3%, respectively.
In 2005, GDP in Brazil increased by 2.3% . In 2005, Brazilian consumption volumes of polyethylene decreased by 1.7%, polypropylene increased by 2.9% and PVC increased by 2.4%, respectively, compared to 2004.
In 2006, GDP in Brazil increased by 3.7% . In 2006, Brazilian consumption volumes of polyethylene increased by 11.4%, polypropylene increased by 4.6% and PVC increased by 10.5% compared to 2005.
In 2007, GDP in Brazil increased by 5.4% . In 2007, Brazilian consumption volumes of polyethylene increased by 7.1%, polypropylene increased by 10.3% and PVC increased by 14.5%, respectively, compared to 2006.
Brazilian GDP growth has fluctuated significantly, and we anticipate that it will likely continue to do so. Our management believes that economic growth in Brazil should positively affect our future net sales revenue and results of operations. However, continued low growth or a recession in Brazil would likely reduce our future net sales revenue and have a negative effect on our results of operations.
Our management believes that there has been a trend in Brazil during the last several years toward the use of plastics as substitutes for more traditional materials, such as steel, aluminum, glass and paper. Our management anticipates that this trend will continue to stimulate the domestic demand for petrochemical products suitable for use in a variety of applications, including construction, industrial processes, agriculture and packaging. However, trends in the substitution of materials depend on many factors beyond our control, and the current beliefs of our management may prove to be incorrect.
Cyclicality Affecting the Petrochemical Industry
Global consumption of petrochemical products has increased significantly over the past 30 years. Due to this growth in consumption, producers have experienced periods of insufficient capacity for these products. Periods of insufficient capacity, including some due to raw material shortages, have usually resulted in increased capacity utilization rates and international market prices for our products, leading to increased operating margins. These periods have often been followed by periods of capacity additions, which have resulted in declining capacity utilization rates and international selling prices, leading to declining operating margins.
We expect that these cyclical trends in international selling prices and operating margins relating to global capacity shortfalls and additions will likely persist in the future, principally due to the continuing impact of four general factors:
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Rio Polímeros, a Brazilian petrochemical company, commenced operations of a major petrochemical plant in Brazil in 2005. The maximum annual capacity of this plant is 520,000 tons of ethylene, 75,000 tons of propylene and 540,000 tons of polyethylene. In addition:
Based on historical growth of Brazilian domestic demand for polyethylene, polypropylene and PVC, we believe that this additional capacity, other than the capacity of the Paulínia plant, had been absorbed by the domestic market by the end of 2007. We cannot assure you, however, that the propylene production capacity of the Paulínia plant will be fully absorbed by the domestic market or that satisfactory export opportunities will be available for products not sold domestically. In the event that this additional production is not absorbed domestically or sold in export markets, there may be resulting pressure on prices for the affected products, which could adversely affect our net sales revenues, gross margins and overall results of operations.
Effects of Fluctuations in Naphtha Prices
Fluctuations in the international market price of naphtha have significant effects on our costs of goods sold and the prices that we are able to charge our customers for our first and second generation products.
Effects on Cost of Sales
Naphtha is the principal raw material used by our Basic Petrochemicals Unit and Copesul and, indirectly, in our other business units. Purchases of naphtha represented 83.1% of the total cost of sales and services rendered of our Basic Petrochemicals Unit and 88.9% of the total cost of sales and services rendered of Copesul in 2007. Naphtha represented 76.3% of our direct and indirect consolidated cost of sales and services rendered in 2007, both directly and indirectly through the cost of basic petrochemicals that we purchased from Copesul during the first quarter of 2007.
The cost of naphtha varies in accordance with international market prices, which fluctuate depending upon the supply and demand for oil and other refined petroleum products. We purchase naphtha under long-term supply contracts with Petrobras, and we import naphtha through our terminal at Aratú in the State of Bahia and Petrobras’ terminal at Osório in the State of Rio Grande do Sul. The prices that we pay for naphtha under all of these arrangements are based on the Amsterdam-Rotterdam-Antwerp market price. As a result, fluctuations in the Amsterdam-Rotterdam-Antwerp market price for naphtha have a direct impact on the cost of our obligations under current legislation, utilizationfirst generation products.
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Because the primary raw materials of our Polyolefins, Ipiranga Petroquímica and Vinyls Units, principally ethylene and propylene, are first generation products produced by our Basic Petrochemicals Unit and Copesul, fluctuations in the Amsterdam-Rotterdam-Antwerp market price for naphtha result in similar fluctuations in the cost of the contingent IPI tax credits, and our estimated costs of resolving other claims in which we believe we have a probable tax loss. The tax contingencies relate primarily to the Social Contribution on Net Income, PIS, COFINS and IPI. If anyprimary raw materials of these legal proceedings is decided adverselyunits.
The international price of naphtha has fluctuated significantly in the past, and we expect that it will continue to us,do so in the future. Significant increases in the price of naphtha and, consequently, the cost of producing our products, would likely reduce our gross margins and our results of operations to the extent that we are unable to pass all of these increased costs on to our customers and could result in reduced sales volumes of our products. Conversely, significant decreases in the price of naphtha and, consequently, the cost of producing our products, would likely increase our gross margins and our results of operations and could result in increased sales volumes if this lower cost leads us to lower our prices. In periods of high volatility in the U.S. dollar price of naphtha, there is usually a lag between the time that the U.S. dollar price increases or financial condition could be materially adversely affected. For more informationdecreases and the time that we are able to pass on increased or reduced costs to our customers in Brazil. These pricing mismatches decrease when the U.S. dollar price of naphtha is less volatile.
We do not currently hedge our exposure to changes in the prices of naphtha because a portion of our sales are exports payable in foreign currencies and linked to the international market prices of naphtha and also because the prices of our polyethylene, polypropylene and PVC products sold in Brazil generally reflect changes in the international market prices of these products.
Effects on Prices of Our Products
Prior to 2005, our Basic Petrochemicals Unit used a margin sharing system for all of our ethylene customers, including our other business units. In 2005, we determined the prices that we charged our ethylene customers, other than our two largest ethylene customers, by reference to international market prices. In 2006, we negotiated with our remaining ethylene customers that used the margin sharing system to terminate the margin sharing system of ethylene pricing and to institute a market pricing system.
The prices that we charge some of our customers for propylene are based on our tax proceedings, the amounts claimed by governmental authoritiesethylene prices and the amountsratio of the European contract price for propylene to the European contract price for ethylene. Over the past several years, this ratio has increased. For the remainder of our customers, our prices for propylene are based on the European contract price and prevailing prices set by U.S. Gulf producers. We are applying this market pricing methodology to a growing number of our customers. The prices that we charge for butadiene and para-xylene are based on the United States contract price for these products. The prices that we charge for benzene and ortho-xylene are based on the contract prices for these products in the United States and Europe. Because European producers of basic petrochemical products primarily use naphtha as a raw material, changes in the European contract prices are strongly influenced by fluctuations in international market prices for naphtha. As our cost structures are similar to the cost structures of European producers, to the extent that our prices are based on the European contract prices for our products, the prices that we charge for these products are significantly influenced by international market prices for naphtha.
We negotiate the real prices for certain of our products, principally polyethylene, polypropylene and PVC, on a monthly basis with our domestic customers. We attempt to revise our prices to reflect changes in the international market prices of these products and the appreciation or depreciation of the real against the U.S. dollar. However, during periods of high volatility in international market prices or exchange rates, we are sometimes unable to reflect these changes fully in our prices quickly.
The international market prices of our petrochemical products have reserved againstfluctuated significantly, and we believe that they will continue to do so. Significant increases in the international market prices of our petrochemical products and, consequently, the prices that we are able to charge, would likely increase our net sales revenue and our results of operations to the extent that we are able to maintain our operating margins and increased prices do not reduce sales volumes of our products. Conversely, significant decreases in the international prices of our petrochemical products, and, consequently, the prices that we charge, would likely reduce our net sales revenue and our results of operations if we are unable to increase our operating margins or these reduced prices do not result in increased sales volumes of our products.
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Capacity Utilization
Our operations are capital intensive. Accordingly, to obtain lower unit production costs and maintain adequate operating margins, we seek to maintain a high capacity utilization rate at all of our production facilities.
The table below sets forth capacity utilization rates with respect to the production facilities for some of these claims, see “Item 8.our principal products for the years ended December 31, 2007, 2006 and 2005.
Year Ended December 31, | ||||||
2007 | 2006 | 2005 | ||||
Ethylene | 94%(1) | 87% | 91% | |||
Polyethylene | 91(2) | 89(3) | 94(4) | |||
Polypropylene | 97(2) | 97 | 94 | |||
PVC | 91 | 86 | 95(5) |
(1) | Giving effect to our consolidation of the results of Copesul as from April 1, 2007. |
(2) | Giving effect to our consolidation of the results of Ipiranga Petroquímica as from April 1, 2007 |
(3) | Without giving effect to a 30,000 ton increase of our annual production capacity in September 2006. |
(4) | Without giving effect to a 30,000 ton increase of our annual production capacity in November 2005. |
(5) | Without giving effect to a 50,000 ton increase of our annual production capacity in December 2005. |
The utilization rate of our ethylene production capacity was adversely affected during 2006 as a result of operating difficulties that led to a non-programmed maintenance shutdown of the Olefins 1 unit of our Basic Petrochemicals Unit for 13 days.
Effect of Export Levels on Our Financial Information—Legal Proceedings—Tax Proceedings.”Performance
We generally obtain higher prices in Brazil for our products than the prevailing international prices. The difference in prices between the Brazilian and export markets results from:
In addition, we are generally able to charge higher prices for our products than theCorporate Competitiveness Programsrealprice of imports because we are able to provide better product customization services to our customers than sellers of imported products.
Braskem+ ProgramDuring periods in which the domestic demand for our products is reduced, we actively pursue export opportunities for our products in order to maintain capacity utilization rates. During periods of increased domestic demand for our products, our export sales volumes may decline as we increase domestic sales of our products.
In 2004, we commenced2007, 23.8% of our net sales revenue was derived from export sales of our products as compared with 25.6% of our net sales revenue in 2006. Net sales revenues derived from export sales increased by 26.6% in 2007 as a result of the implementation of a corporateour strategy to increase our presence in foreign markets, which has led to the establishment of sales offices in Argentina and operational excellence program called Braskem+. The Braskem+ program seeks to:Netherlands, enabling us to provide our international costumers with better service through our staff and local distribution centers.
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We anticipate that this program will allow usOur ability to create value in all stagesexport to other South American countries is a function of the petrochemical cycle.
In connection with the developmentlevel of the Braskem+ program, we engaged a leading consulting firm to analyze our industrial practiceseconomic growth in these countries and compare them to benchmarking practicesother economic conditions, including prevailing inflation rates. We believe that significant growth in the global economy would likely lead to increased global demand and international market prices for our products, and consequently increased domestic prices for our products. In addition, increased global demand for our products would enhance our ability to export our products in the event that the Brazilian economy does not similarly expand. Conversely, slow or negative growth of the global economy would have the opposite effects on our company.
Effects of Fluctuations in Exchange Rates between the Real and the U.S. Dollar
Our results of operations and financial condition have been, and will continue to be, affected by the rate of depreciation or appreciation of therealagainst the U.S. dollar because:
Virtually all of our sales are of petrochemical sector. Through this analysis,products for which there are international market prices expressed in U.S. dollars. We generally attempt to set prices that take into account the international market prices for our petrochemical products and variations in thereal/U.S. dollar exchange rate. As a result, although a significant portion of our net sales revenue is inreais,substantially all of our products are sold at prices that are based on international market prices that are quoted in U.S. dollars.
The price of naphtha, our principal raw material, is linked to the U.S. dollar. Our naphtha purchase contracts with Petrobras provide that the prices that we identified 210 initiatives designedpay to further improve, among other things, our capacity utilization and variable and fixed costs. We implemented 59Petrobras for naphtha in any month are established based on the average Amsterdam-Rotterdam-Antwerp market price for naphtha in U.S. dollars during the previous month, converted intoreais at thereal/U.S. dollar exchange rate in effect on the last day of these initiatives at a totalthe previous month. Fluctuations in thereal affect the cost of R$23.5 million in 2004naphtha and 39 of these initiatives at a total cost of R$117.2 million in 2005, resulting in an aggregate of approximately R$256.0 million in cost savings on a recurring annual basis, as estimated by our management. We cannot assure holdersother U.S. dollar-linked or imported raw materials.
When thereal depreciates against the U.S. dollar, assuming naphtha costs and international market prices of our class A preferred sharesproducts remain constant in U.S. dollars, the production cost for our products increases and we generally attempt to increase the ADS that we will realizeprices for our products inreais (to the full benefitextent possible in light of the identified annual cost savingsthen-prevailing market conditions in upcoming years.Brazil), which may result in reduced sales volumes of our products. To the extent that our price increases are not sufficient to cover the increased costs for raw materials, our operating margin decreases. Conversely, when therealappreciates against the U.S. dollar, assuming naphtha costs and international market prices of our products remain constant in U.S. dollars, the production cost for our products decreases and we failgenerally decrease the prices for our products inreais, which may result in increased sales volumes of our products. In periods of high volatility in thereal/U.S. dollar exchange rate, there is usually a lag between the time that the U.S. dollar appreciates or depreciates and the time that we are able to do so, for any reason,pass on increased or reduced costs in any year,reaisto our customers in Brazil. These pricing mismatches decrease when thereal/U.S. dollar exchange rate is less volatile.
Our consolidated U.S. dollar-denominated indebtedness represented 70.1% of our outstanding indebtedness at December 31, 2007, excluding related party debt. As a result, when thereal appreciates against the U.S. dollar:
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A depreciation of therealagainst the U.S. dollar has the converse effects.
Any significant appreciation of therealagainst the U.S. dollar significantly decreases our financial expenses and our short-term and long-term indebtedness, as expressed inreais. Conversely, any significant depreciation of therealagainst the U.S. dollar significantly increases our financial expenses and our short-term and long-term indebtedness, as expressed inreais.
Export sales, which enable us to generate receivables payable in foreign currencies, tend to provide a hedge against a portion of our U.S. dollar-denominated debt service obligations, but they do not fully match them. Accordingly, we often enter into hedges to mitigate exchange rate fluctuations in our U.S. dollar-denominated indebtedness. To further mitigate our exposure to exchange rate risk, we try, where possible, to enter into trade finance loans for our working capital needs, which funding is generally available at a lower cost because it is linked to U.S. dollar exports. However, future U.S. dollars that we generate from exports may not be in an amount sufficient to cover all of our U.S. dollar trade finance liabilities.
Formula Braskem
In 2005, we commenced a new program that we callour Formula Braskem program to implement a comprehensivenew integrated management system. Formula Braskem issystem intended to incorporate the best practices in the international petrochemical industry in our management systems and the most recent technological developments available in the marketplace. This program, together with the Braskem+ program, is designedWe made capital expenditures of R$130.0 million between 2005 and 2007 related to support our expansion and future internationalization, and we expect to realize productivity and efficiency gains through their implementation. In addition, we believe that the implementation of the first phase of Formula Braskem will assist us with our compliance with the requirementsBraskem. We made capital expenditures of the U.S. Sarbanes-Oxley Act of 2002R$39.9 million in a manner consistent with our commitment2007 related to transparency and corporate governance.
We anticipate that Formula Braskem will be operational by October 2006. We have engaged SAP an affiliate of SAP AG, and Accenture, an affiliate of Accenture Ltd., to assist us in implementing Formula Braskem under agreements that provide for (1) the payment of bonuses to SAP and Accenture in the event that we achieve identified annual cost savings as a result of the implementation of the second phase of Formula BraskemBraskem.
Petroquímica Paulínia
In September 2005, we and Petroquisa incorporated Paulínia as a joint venture company for the construction and operation of a polypropylene plant to be located in excessPaulínia, in the State of those identifiedSão Paulo, with an initial annual production capacity of 350,000 tons. This plant commenced operations in our calculationsApril 2008. We own 60% of the projected net present valuetotal and voting share capital of Paulínia, and Petroquisa owns the remaining total and voting share capital. The total cost of this project,plant was approximately R$704.0 million. In December 2006, Paulínia entered into a credit agreement with Brazilian National Bank for Economic and (2) the payment of bonuses to SAPSocial Development (Banco Nacional de Desenvolvimento Econômico e Social), or BNDES, in the event that Formula Braskem is operational prioraggregate amount of R$566.2 million to its target date. Conversely, these agreements provide forfinance the paymentconstruction of penaltiesthis plant. The remaining cost of this plant was financed through equity contributions by Accenture and the forfeitureshareholders of any bonuses by SAPPaulínia. We have invested R$145.1 million in Paulínia, which corresponds to Braskem’s share in the event that Formula Braskem does not become operational until afterinvestments made in the target date. We have a dedicated teamconstruction of approximately 110 employees working together with SAP and Accenture on the implementation of Formula Braskem which we
expect to implement at a cost of approximately R$130 million. We cannot assure holders of our class A preferred shares and the ADSs that we will realize the full benefit of the identified annual cost savings in upcoming years. To the extent that we fail to do so, for any reason, in any year, our results of operations for that year may be adversely affected.Politeno Acquisition
Recent Developments
OnIn April 6, 2006, we purchased all of the common and preferred shares of Politeno that were owned by SPQ, a subsidiary of Suzano, Sumitomo and Itochu. We paid a portion of the purchase price for these shares in an aggregate amount of thereal-equivalent of US$111.3 million (US$60.6 million to SPQ and a total of US$50.7 to Sumitomo and Itochu) onin April 6, 2006. The remainder of the purchase price for these shares will bewas calculated based on an “earn-out” formula that will taketaking into account Politeno’s operating performance, measured by fluctuations in polyethylene and ethylene margins in the Brazilian petrochemical market during the 18 months following the execution date of this agreement. As a result ofthe agreement under which we acquired these shares. Following the Politeno acquisition,Acquisition, we now ownowned 100% of the voting share capital and 96.2% of the total share capital of Politeno. Politeno merged with and into Braskem on April 2, 2007. In January 2008, we paid the remaining portion of the purchase price of R$247.5 million.
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Ipiranga Transaction
On March 18, 2007, we entered into the Ipiranga Investment Agreement with Ultrapar and Petrobras. On the same date, Ultrapar and the controlling shareholders of RPI, CBPI and DPPI entered into the Purchase Agreement, with our company and Petrobras as intervening parties.
On April 28, 2006, we issued Under the Ipiranga Investment Agreement, Ultrapar, as a commission agent acting on behalf of Braskem and sold US$200.0 million aggregate principal amount of our 9.00% Perpetual Bonds. Interest on these bonds is payable quarterly in arrears in January, April, July and October in each year. We may, at our option, redeem these bonds, in whole or in part, atPetrobras, acquired 100% of their principal amount plus accured interestthe share capital of Ipiranga Química. As of March 18, 2007, Ipiranga Química owned 86.9% of the voting share capital and additional amounts, if any, on any interest payment date on or after April 28, 2011, provided92.4% of the total share capital of Ipiranga Petroquímica. Ipiranga Petroquímica, in turn, owned 29.5% of the share capital of Copesul. In February 2008, Ultrapar transferred 60% of the share capital of Ipiranga Química to our company and 40% of the share capital of Ipiranga Química to Petrobras, as required by the Ipiranga Investment Agreement. In addition, under the Ipiranga Investment Agreement, Ultrapar is obligated to transfer 33.3% of the share capital of RPI to our company and 33.3% of the share capital of RPI to Petrobras. Following this transfer, we will jointly and equally control RPI with Petrobras and Ultrapar. The total purchase price to our company of the shares of Ipiranga Química that if we redeem these bondshave acquired and the shares of RPI that we will acquire from Ultrapar in the Ipiranga Transaction was R$1,489.1 million.
As part at least US$100 million aggregate principal amountof the Ipiranga Transaction:
Under the Ipiranga Investment Agreement, Braskem paid Ultrapar R$651.9 million in April 2007, R$156.7 million in October 2007, R$47.0 million in November 2007 and R$633.5 million in February 2008 for the shares of Ipiranga Química that we have acquired and the shares of RPI that we will acquire from Ultrapar in the Ipiranga Transaction. For additional information regarding the Ipiranga Transaction, see “Item 4. Information on the Company—Ipiranga Transaction.”
Venezuelan Initiatives
Polypropylene Project
In December 2007, we, through our wholly owned Netherlands subsidiary, Braskem Europe B.V., entered into a shareholders agreement, which we refer to as the Propilsur Shareholders Agreement, with Petroquímica de Venezuela, S.A., or Pequiven, the government-owned petrochemical company of the Bolivarian Republic of Venezuela, which supersedes the Project Development Agreement Framework and the Project Development Agreement that we entered into with Pequiven in April 2006 and April 2007, respectively. Under the Propilsur Shareholders Agreement, we plan to form Propilsur, a joint venture with Pequiven for the development, construction and operation of a polypropylene plant with an integrated propane dehydrogenation unit to be located in the Jose Petrochemical Complex in the State of Anzoategui, Venezuela, with an annual production capacity of approximately 450,000 tons. The Propilsur Shareholders Agreement sets forth the understanding of the parties regarding the implementation of this project and the relationship of Braskem and Pequiven as shareholders of Propilsur. Under the Propilsur Shareholders Agreement:
On May 4, 2006, 73
The Propilsur Shareholders Agreement includes provisions for mediation and arbitration in the event of disputes and a deadlock between our company and Pequiven in matters to be determined by Propilsur’s board of directors and grants rights of first offer and first refusal to our company and Pequiven in the event that we or Pequiven determine to sell our equity interests in Propilsur.
The estimated total cost of this project to Propilsur is approximately US$843 million of which we anticipate that our company and Pequiven will each contribute approximately 15% as equity. We have announced that our board of directors has authorizedapproved an initial investment of US$11 million for the next phase of this project. We expect that construction of this project will commence in the beginning of 2009 and that this project will begin production by the beginning of 2011.
We expect to form Propilsur during the third quarter of 2008. The Propilsur Shareholders Agreement provides that implementation of this project is contingent upon a final investment decision of each of the parties on or prior to May 13, 2009. We are continuing to negotiate with Pequiven regarding details of the implementation of this project. We can provide no assurances that these negotiations will be successful or that if we reach a final agreement with respect to the implementation of this project, such agreement will be upon the terms currently anticipated by our management.
Jose Olefins Project
In December 2007, we, through our wholly owned Netherland subsidiary, Braskem Europe B.V., entered into a shareholders agreement with Pequiven, which we refer to as the Polimerica Shareholders Agreement, which supersedes the memorandum of understanding and the Project Development Agreement that we entered into with Pequiven in April 2006 and April 2007, respectively. Under the Polimerica Shareholders Agreement, we plan to form Polimerica, a joint venture with Pequiven for the development, construction and operation of the Jose Olefins Project, an olefins complex to be located in the Jose Petrochemical Complex. The proposed complex would include an ethylene cracker that would use ethane extracted from natural gas as its raw material, with an annual production capacity of 1.3 million tons, and three polyethylene plants with a combined annual production capacity of 1.1 million tons of HDPE, LDPE and LLDPE. The Polimerica Shareholders Agreement sets forth the understanding of the parties regarding the implementation of this project and the relationship of Braskem and Pequiven as shareholders of Polimerica. Under the Polimerica Shareholders Agreement:
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The Polimerica Shareholders Agreement includes provisions for mediation and arbitration in the event of disputes and a deadlock between our company and Pequiven in matters to be determined by Polimerica’s board of directors and grants rights of first offer and first refusal to our company and Pequiven in the event that we or Pequiven determine to sell our equity interests in Polimerica.
The estimated total cost of this project to Polimerica would be approximately US$2,662 million of which we anticipate that our company and Pequiven will each contribute approximately 15% as equity. We have announced that our board of directors has approved an initial investment of US$80 million for the next phase of this project. We expect that construction of this project will commence in 2010 and this project will begin production by the beginning of 2013.
We expect to form Polimerica during the third quarter of 2008. The Polimerica Shareholders Agreement provides that implementation of this project is contingent upon a final investment decision of each of the parties on or prior to the third anniversary of the Polimerica Shareholders Agreement. We are continuing to negotiate with Pequiven regarding details of the implementation of this project. We can provide no assurances that these negotiations will be successful or that if we reach a final agreement with respect to the implementation of this project, such agreement will be upon the terms currently anticipated by our management.
Research and Development
Our ability to compete in the Brazilian and foreign markets that we serve depends on our ability to integrate new production processes developed by our company and third parties in order to lower our costs and offer new thermoplastic products. In addition, our relationships with our customers are enhanced by our ability to develop new products and customize existing products to meet their needs. To meet these challenges, we maintain a research and development program that is primarily implemented at the Braskem Center for Innovation and Technology in the Southern Complex. We invested R$76.5 million, R$44.3 million and R$47.2 million in research and development in 2007, 2006 and 2005, respectively.
2008 Capital Expenditure Budget
We currently are budgeting total capital expenditures of approximately R$1.3 billion for 2008. Our principal capital expenditures for 2008 consist of, in addition to the projects referred to in the preceding paragraphs, approximately R$435.2 million for productivity improvements, approximately R$354.7 million for maintenance stoppages and other maintenance of our plants, approximately R$226.8 million for the replacement of depreciated equipment, approximately R$175.4 million for plant modernization and information systems and approximately R$161.9 million for health, environmental and quality improvement projects.
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Other Projects
We are currently evaluating projects that could entail significant capital expenditures in the future, including:
Maintenance
Most of our maintenance is performed by third-party service providers. For example, we have contracts with Construtora Norberto Odebrecht S.A., or CNO, a company in the Odebrecht Group, Asea Brown Boveri Ltd., Cegelec Ltda., Rip Serviços Industriais S/A, Cl Engenharia Ltda. and other service providers to perform maintenance for our Basic Petrochemicals Unit, Copesul and our Business Development Unit. We also perform some of our ordinary course maintenance with our small team of maintenance technicians, which also coordinate the planning and execution of maintenance services performed by third parties.
Prior to January 1, 2006, we recorded expenditures for programmed maintenance shutdowns of our plants as “Deferred charges.” Such expenses occur at scheduled intervals from one to six years and are depreciated to production cost until the beginning of the next maintenance shutdown. Beginning January 1, 2006, in accordance with IBRACON Technical Interpretation 01/2006, we recorded all programmed maintenance shutdown expenses in property, plant and equipment as “Machinery, equipment and facilities.” In addition, the retrospective effects of depreciation with the adoption of this interpretation was recognized as shareholders’ equity. Accordingly, for periods ending after January 1, 2006, we have reclassified the amount of R$400.2 million from deferred charges to property, plant and equipment, and recognized the amount of R$164.9 million in shareholders’ equity.
Basic Petrochemicals Unit
Because we have two independent Olefins units and two independent Aromatics units, we may continue production of basic petrochemicals without interruption, even while we perform certain maintenance services. We occasionally undertake other brief shutdowns of the operations of our Basic Petrochemicals Unit that do not materially affect our production output, primarily for maintenance purposes, catalyst regeneration and equipment cleaning. Regular basic petrochemicals plant maintenance requires complete plant shutdowns from time to time, and these shutdowns usually take approximately 30 days to complete.
The last general maintenance shutdown of our Olefins 1 unit was carried out in 2001 and lasted for 25 days. The cost of servicing the unit was approximately R$39.8 million (not including the value of lost production during this shutdown). In 2002, we shut down our Olefins 1 unit for 92 days in order to increase its production capacity and to modernize and upgrade its technology. The cost of these improvements to this unit was approximately R$142.8 million (not including lost production). We performed a non-programmed maintenance shutdown of our Olefins 1 unit in December 2006 for 13 days. This shutdown permitted inspection and maintenance of this unit, in order to ensure the production of ethylene until May 2008. The cost of servicing the unit was approximately R$7.0 million (not including the value of lost production during this shutdown). A general maintenance shutdown of our Olefins 1 commenced on May 23, 2008 with an estimated duration of approximately 35 days at an expected cost of R$95 million (not including the value of lost production during this shutdown or investments in productivity enhancements).
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The last general maintenance shutdown of our Aromatics 1 unit was carried out in 2005 and lasted 30 days. The cost of servicing this unit was approximately R$21 million (not including the value of lost production during this shutdown or investments in productivity enhancements). We no longer perform general maintenance shutdowns of our Aromatics 1 unit and instead perform general maintenance shutdowns of specific plants or groups of plants in this unit. We performed maintenance of the parex plant of the Aromatics 1 unit during a shutdown of this plant during 2007 that lasted 52 days. The cost of servicing this plant was approximately R$19 million (not including the value of lost production during this shutdown or investments in productivity enhancements). A general maintenance shutdown of the butadiene plant and the commons systems associated with Olefins 1 commenced on May 23, 2008 with an estimated duration of approximately 30 days at an expected cost of R$16 million (not including the value of lost production during this shutdown or investments in productivity enhancements). The next general maintenance shutdown of the Catalyst Reform plant and the plants comprising the C8 loop has been scheduled for September 2009 with an estimated duration of approximately 30 days at an expected cost of R$35 million (not including the value of lost production during this shutdown or investments in productivity enhancements).
The last general maintenance shutdown of our Aromatics 2 and Olefins 2 units (which form part of the same basic petrochemicals facility) was carried out in 2004 and lasted 36 days. The cost of servicing these units was approximately R$89 million (not including the value of lost production during this shutdown). The next general shutdown of our Aromatics 2 and Olefins 2 units has been scheduled for 2010 with an estimated duration of approximately 25 days.
Copesul
Because Copesul has two independent Olefins units, we may continue production of basic petrochemicals without interruption, even while we perform certain maintenance services. We occasionally undertake other brief shutdowns of Copesul’s operations that do not materially affect our production output, primarily for maintenance purposes, catalyst regeneration and equipment cleaning. Regular maintenance of Copesul’s plants requires complete plant shutdowns from time to time, and these shutdowns usually take approximately 30 days to complete.
The last general maintenance shutdown of Copesul��s Olefins 1 unit and Aromatics unit was carried out beginning in April 2008 and lasted for 38 days. The cost of servicing the unit was approximately R$55.0 million (not including the value of lost production during this shutdown). The next general shutdown of Copesul’s Olefins 1 unit and Aromatics unit has been scheduled for 2014.
The last general maintenance shutdown of Copesul Olefins 2 unit was carried out in 2005 and lasted for 32 days. The cost of servicing the unit was approximately R$44.1 million (not including the value of lost production during this shutdown). The next general shutdown of this unit has been scheduled for April 2011 with an estimated duration of approximately 30 days.
Polyolefins and Ipiranga Petroquímica
We have a regular maintenance program for each of our polyolefins plants. Production at each of our Polyolefins Unit’s polyolefins plants generally is shut down for seven to 20 days every two years to allow for regular inspection and maintenance. Production at each of Ipiranga Petroquímica’s polyolefins plants generally is shut down for seven to 20 days every three years to allow for regular inspection and maintenance. In addition, we undertake other brief shutdowns for maintenance purposes that do not materially affect our production of polyolefins. We coordinate the maintenance cycles of our polyolefins plants with those of our basic petrochemicals plants. While our basic petrochemicals facilities must be shut down for up to 30 days for maintenance, our polyolefins facilities may be shut down for shorter periods because these facilities are less complex to operate and maintain than our basic petrochemicals facilities.
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Vinyls Unit
We have a regular maintenance program for each of our vinyls plants. Our Camaçari and Alagoas PVC plants are generally shut down for 15 to 20 days every two years to allow for regular inspection and maintenance. The last general maintenance shutdown of our PVC plant in Camaçari was carried out in May 2006 and lasted for 14 days. The next general maintenance shutdown of this plant is scheduled for November 2009. The last general maintenance shutdown of our PVC plant in Alagoas was carried out in April 2007 and lasted for seven days. The next general maintenance shutdown of this plant is scheduled for October 2008. Our São Paulo PVC plant does not require prolonged maintenance shutdowns, resulting in shutdowns of two or three days each year for regular maintenance. Prior to 2007, our caustic soda and chlorine plant in Alagoas was generally shut down for 15 days of maintenance every two years. Beginning in 2007, our maintenance schedule at this plant has been altered so that we will now shut down this plant once a year for three days of maintenance in different parts of the plant. The last general maintenance shutdown of this plant was carried out in October 2006 and lasted for five days. Our caustic soda and chlorine plant in Camaçari does not require prolonged maintenance shutdowns and is shut down for two or three days each year.
Environmental Regulation
We are subject to Brazilian federal, state and local laws and regulations governing the discharge of effluents and emissions into the environment and the handling and disposal of industrial waste and otherwise relating to the protection of the environment.
Under federal and state environmental laws and regulations, we are required to obtain operating permits for our manufacturing facilities. State authorities in the State of Bahia issued operating permits for our plants in the Northeastern Complex in 2000, which were renewed in 2005 for a six-year term. Our environmental operating permit obligates us to engage in systematic measures for the treatment of wastewater and hazardous solid waste. State authorities in the State of Rio Grande do Sul, where our Southern Complex plants are located, including Copesul’s plants and some of Ipiranga Petroquímica’s plants, regulate our operations by prescribing specific environmental standards in our operating permits, which must be renewed every four years. Copesul’s operating permit was renewed in 2008 and the operating permits for our polyethelene and polypropylene plants were renewed on various dates in 2006 and 2007. State authorities in the States of Alagoas and São Paulo have issued permits for our plants in those respective complexes, which also must be renewed every four years. If any of our environmental licenses and permits lapse or are not renewed or if we fail to obtain any required environmental licenses and permits, we may be subject to fines ranging from R$500 to R$50.0 million, and the Brazilian government may partially or totally suspend our activities and impose civil and criminal sanctions on our company or both. All our environmental licenses and permits are in full force and effect.
All projects for the installation and operation of industrial facilities in the Northeastern Complex are subject to approval by the Council for Environmental Protection of the State of Bahia or by the Environmental Resources Center, the State’s Environmental Protection Council’s technical office, depending on the complexity of the facility. The State’s Research and Development Center and other outside consultants act as technical advisors to the Environmental Resources Center. The State’s Environmental Protection Council must approve installed projects prior to their commencement of operations and must renew such approval every five years thereafter.
All projects for the installation, modification and operation of industrial facilities in the Southern Complex are subject to approval by the Rio Grande do Sul State Environmental Protection Foundation. The Rio Grande do Sul State Environmental Protection Foundation must approve installed projects prior to their commencement of operations and must renew such approval every four years thereafter.
CETREL S.A.—Empresa de Proteção Ambiental, or Cetrel, treats wastewater generated by our company and the other petrochemical producers at the Northeastern Complex at a liquid effluents treatment station located in the Northeastern Complex. This treatment station also includes a system for the collection and disposal of contaminated wastewater. Cetrel also stores and incinerates, treats and disposes of hazardous solid waste. For other kinds of solid waste, Cetrel maintains a landfill. Cetrel has installed two hazardous solid waste incinerators with a total annual incineration capacity of 16,600 tons. One of these incinerators has an annual incineration capacity of 4,400 tons and is used to dispose of chlorinated residue, and the other incinerator has an annual incineration capacity of 12,000 tons and is used to dispose of non-chlorinated residue. Another Brazilian company co-processes hazardous solid waste in a cement kiln located in the city of Pedro Leopoldo, State of Minas Gerais.
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In January 1996, Cetrel obtained its BS 7750 environmental certification (British Standard) and in September 1996 became one of the first companies in the world to receive the ISO 14001 certification, an international standard for environmental control. In 1998, Cetrel obtained certification of its laboratory by the ISO Guide 25 standards system from the Brazilian Institute of Metrology and Industrial Quality.
Companhia Riograndense de Saneamento, or Corsan, a state-owned environmental company, operates an integrated system for liquid effluents treatment, or Sitel, in the Southern Complex. Sitel treats wastewater generated by our company and the other petrochemical producers at the Southern Complex at a liquid effluents treatment station located in the Southern Complex. This treatment station also includes a system for the collection and disposal of contaminated wastewater. Corsan also operates a centralized system for solid waste control, or Sicecors, in the Souther Complex. Sicecors centralizes the collection, treatment and final disposal of solid waste that is generated in the Southern Compex. Sicecors stores, treats and disposes of hazardous solid waste. For other kinds of solid waste, Sicecors maintains a landfill. Sitel and Sicecors received ISO 14001 certifications in 2001.
The Brazilian government enacted an Environmental Crimes Law in 1998 that imposes criminal penalties on corporations and individuals causing environmental damage. Corporations found to be polluting can be fined up to R$50.0 million, have their operations suspended, be prohibited from government contracting, be required to repair damage that they cause and lose certain tax benefits and incentives. Executive officers, directors and other individuals may be imprisoned for up to five years for environmental violations.
We believe our operations are in compliance in all material respects with applicable environmental laws and regulations currently in effect. Some environmental studies that we have commissioned have indicated instances of environmental contamination at certain of our plants. In addition, we and certain executive officers of our company and of our subsidiaries have received notices from time to time of minor environmental violations and are or have been subject to investigations or legal proceedings with respect to certain alleged environmental violations. These environmental issues, and any future environmental issues that may arise, could subject us to fines or other civil or criminal penalties imposed by Brazilian authorities. We are addressing all environmental issues of which we are aware, and we believe that none of these issues will have a material adverse effect on our business, financial condition or operations.
Our consolidated annual expenditures on environmental control were R$92.7 million in 2007, R$73.8 million in 2006 and R$71.7 million in 2005. To dispose of our industrial wastewater and solid hazardous waste, we contract our jointly controlled company Cetrel at the Northeastern Complex, Corsan at the Southern Complex, our subsidiary Companhia Alagoas Industrial—Cinal at Alagoas, and other third parties. These companies treat our industrial waste immediately after this waste is generated and dispose of our solid waste. Our consolidated environmental expenses relate to our continuous control and monitoring policies, and we do not have any material future environmental liabilities related to our ongoing operations.
We have established a provision for environmental contingencies in the amount of R$18.4 million at December 31, 2007. However, our environmental compliance costs are likely to increase as a result of the projected increase in our production capacity and projected increases in unit costs for treatment and disposal of industrial waste as well as the cost of compliance with future environmental regulations.
Our environmental compliance in 2007 included the following results:
In September 2002, we created a Health, Safety and Environment Committee, composed of leaders of each of our business units and other members of our management. This committee supports and monitors our environmental, health and safety efforts. In February 2003, our board of directors approved a comprehensive health, safety and environment policy, as we recognize that sustainable development and ethical practices are essential to our continued growth and performance. As part of this policy, we are committed to:
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Safety and Quality Control
Safety
We have adopted a policy that makes all of our officers, directors and employees responsible for the safety of our workers and for preserving the environment.
We participate in the “Responsible Care” program, which establishes international standards for environmental, occupational health and safety practices for chemical manufacturers. Through our participation in this program, we adopted policies and procedures that require us to follow detailed instructions in matters of health, safety and the environment. We seek to maintain these environmental standards and have qualified each of our plants for NBR-ISO 9001 and 14001 certification, which includes internationally prescribed environmental management practices. We are currently implementing health, safety and environmental standards based on OSHAS 18001 and standards issued by the U.S. Occupational Safety and Health Administration.
Our safety record ranks above the average of companies in the Brazilian chemical industry. The following table illustrates our progress in terms of our safety record and compares our safety record to the average for the Brazilian chemical industry:
Year Ended December 31, | ||||||||
2007 | 2006 | 2005 | 2006 (1) | |||||
Braskem | Brazilian Chemical | |||||||
Industry Average | ||||||||
Safety Indicator | ||||||||
Braskem: | ||||||||
Index of Accident Frequency (accidents/200,000 man-hours) | 0.2 | 0.3 | 0.2 | 2.8 | ||||
Index of Severity (lost and deducted days/200,000 man-hours) | 5 | 3 | 4 | 32 | ||||
Copesul: | ||||||||
Index of Accident Frequency (accidents/200,000 man-hours) | 2.0 | 2.46 | 2.28 | 2.8 | ||||
Index of Severity (lost and deducted days/200,000 man-hours) | 23 | 41 | 27 | 32 | ||||
Ipiranga Petroquímica: | ||||||||
Index of Accident Frequency (accidents/200,000 man-hours) | 0.6 | 1.4 | — | 2.8 | ||||
Index of Severity (lost and deducted days/200,000 man-hours) | 36 | 67 | — | 32 |
(1) | Brazilian petrochemical industry average of the members of Brazilian Association of Chemical Industry and Derivative Products for 2006, as reported by the Brazilian Association of Chemical Industry and Derivative Products. |
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Our safety record in 2007 included the following results:
Each of our industrial plants is equipped with a comprehensive firefighting safety system. At the Northeastern Complex, water is available from a 200,000 cubic meter artificial lake, connected to the industrial plants by a pumping station and a distribution network and built according to international safety standards. We and the other companies in the Northeastern Complex maintain emergency equipment and trained safety crews. The safety plan for the Northeastern Complex provides for firefighting brigades of all companies in the complex to jointly assist in the event of any major accidents. The Northeastern Complex has safety standards for construction density and the design of pipelines and highways.
Similar systems are employed at our plant in the State of Alagoas and our plant in the State of São Paulo (except with respect to safety standards for construction density and design of pipelines and highways, as we do not have such facilities in São Paulo).
Each of the nine companies that operate in the Southern Complex relies on its own supply of water from nearby lakes and water tanks for firefighting capabilities. Copesul relies on a 7,400 cubic meter artificial pond, with an additional 12,600 cubic meter pond available in case of emergencies. Both water sources are connected to Copesul’s facilities by a pumping station and a distribution network, which currently employs seven water pumps, built according to international safety standards. Copesul also maintains emergency equipment and trained safety crews. In addition, Copesul’s safety plan provides for firefighting brigades consisting of six technicians and 14 operational and maintenance technicians per shift. Copesul and the other companies located in the Southern Complex are supported by the Southern Complex’s Mutual Plan of Emergency (Plano de Auxílio Mútuo do Pólo). Copesul’s commitment to safety includes the operation of a training center for its safety crews that simulates emergencies typical to the petrochemical industry. Similar systems are employed at the facilities of Ipiranga Petroquímica and our Polyolefins Unit in the Southern Complex.
We have obtained OSHAS 18001 certification of our Basic Petrochemical Unit and Copesul. This certification relates to our employee health and safety management system.
Quality Control
Our quality control management uses ISO 9001/00, an internationally recognized quality control standard, and ISO 14001, an internationally recognized environmental control standard, as its base. We have instituted systematic improvement processes in our operational areas, focusing on integrating production, maintenance, inventory management, customer satisfaction and profitability.
We have obtained ISO 9001 certifications for all of our products. We have also obtained ISO 14001 certifications for all of our industrial plants. These certifications take into account both the quality of our products and the quality of our operating procedures.
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Property, Plant and Equipment
Our properties consist primarily of petrochemical production facilities in Camaçari in the State of Bahia, in Triunfo in the State of Rio Grande do Sul, in Maceió in the State of Alagoas and in São Paulo in the State of São Paulo. Our principal executive offices are located in São Paulo in the State of São Paulo, and we have an administrative support office in the City of Rio de Janeiro. We also have equity interests in investments located in other parts of the country. We own all our production facilities, but we generally rent our administrative offices.
The following table sets forth our properties at December 31, 2007 by location of facilities, products produced and size of plant.
Type of Product or Service | Location of Facilities | Size of Plant | ||
(in hectares (1)) | ||||
Basic petrochemicals | Camaçari | 65.5 | ||
Basic petrochemicals | Triunfo | 152.8 | ||
Waste disposal | Marechal Deodoro | 34.3 | ||
Polyethylene | Camaçari | 24.5 | ||
Caustic soda/EDC/chlorine | Maceió | 15.0 | ||
PVC/caustic soda/chlorine | Camaçari | 12.6 | ||
Polyethylene | Triunfo | 30.5 | ||
Polypropylene | Triunfo | 10.0 | ||
Caprolactam | Camaçari | 8.1 | ||
PVC | Marechal Deodoro | 7.0 | ||
PET(2) | Camaçari | 6.2 | ||
PVC | Vila Prudente/Capuava | 3.2 |
(1) | One hectare equals 10,000 square meters. |
(2) | On May 16, 2007, we temporarily closed our PET plant. |
The descriptions of each of our business units above contain detailed charts showing the location, primary products, annual production capacity and historical annual production for each of our company’s production facilities.
We believe that all of our production facilities are in good operating condition. At December 31, 2007, the consolidated net book value of our property, plant and equipment was R$8,404.1 million. Without giving effect to the proportional consolidation of our jointly controlled companies, the net book value of our property, plant and equipment was R$8,002.8 million.
Certain of our properties located in the Northeastern Complex (including our DMT plant and all of the equipment located in this plant) and two of our polyolefins plants in the Southern Complex are mortgaged or pledged to secure certain of our financial transactions.
Insurance
Braskem carries insurance for its plants against material damage and consequent business interruption through “all risks” policies with a total replacement value of US$6.1 billion. Our insurance coverage is underwritten in the Brazilian insurance market by large Brazilian insurance companies. Approximately 83% of our insurance coverage is reinsured in the international insurance market. Our existing “all risks” policies are in force until November 30, 2008 and are renewed annually.
The material damage insurance provides insurance coverage for losses due to accidents resulting from fire, explosion and machinery breakdown, among others. This coverage has a maximum indemnification limit of US$1.9 billion per event (combined material damage and business interruption coverage) and has deductibles of up to US$5 million depending on the plant. The business interruption coverage provides insurance for losses resulting from interruptions due to any material damage covered by the policy. This coverage is calculated to insure against losses up to US$956.9 million due to shutdowns extending beyond 60 days. The losses are covered until the plant and production are fully re-established, with maximum indemnity periods ranging from 12 to 24 months.
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Copesul carries insurance with the same terms and conditions as Braskem with a total replacement value of US$2.3 billion, a maximum indemnification limit of US$1.6 billion per event (combined material damage and business interruption coverage) and a deductible of up to US$10 million. The business interruption coverage contracted by Copesul insures against losses of up to US$ 490.7 million for an indemnity period of 24 months.
Ipiranga Petroquímica carries property damage insurance to cover its plants and business interruptions with a total replacement value of US$509.2 million, a maximum indemnification limit of US$500 million per event (combined material damage and business interruption coverage), and a deductible of US$750,000. The business interruption coverage contracted by Ipiranga Petroquímica insures against losses of up to US$204 million for an indemnity period of 18 months.
We also have a third-party liability policy, which covers losses for damages caused to third parties from our operations, including sudden environmental pollution, up to a limit of US$60 million per loss or occurrence in the case of Braskem, US$35 million in the case of Copesul and R$50 million in the case of Ipiranga Petroquímica.
In addition to these policies, we maintain other insurance policies for specific risks, including directors and officers liability coverage, marine and transportation insurance, automotive insurance and other kinds of coverages that are not covered by our “all risks” policies.
We do not anticipate having any difficulties in renewing any of our insurance policies and believe that our insurance coverage is reasonable in amount and consistent with industry standards applicable to chemical companies operating in Brazil.
Antitrust Matters
Under Brazilian Law No. 8,884/94, any transaction that results in a concentration of market share buy-back programequal to or greater than 20.0% of any relevant market or that involves any company or group of companies with annual gross sales of R$400.0 million or more must be submitted to and approved by the Brazilian antitrust authorities, which consist of three entities:
CADE is the antitrust authority responsible for reviewing and authorizing transactions that may lead to economic concentration. SEAE and SDE analyze the economic and legal implications of mergers and acquisitions under Brazilian antitrust law. As part of the antitrust review process, SDE, SEAE, the attorney general of CADE and the Brazilian federal public prosecutor each render preliminary opinions, which are delivered to the members of CADE. The members of CADE then render a final decision.
The Ipiranga Transaction is subject to the final approval of the Brazilian antitrust authorities. However, Brazilian law permits us to consummate these transactions prior to receiving this final approval, unless CADE issues a writ of prevention blocking a transaction or requires the parties to enter into an agreement permitting the effects of the transaction to be reversed which, by its terms, delays the consummation of the transaction. Our company, together with Ultrapar and Petrobras, submitted the terms and conditions of the Ipiranga Transaction for review by the Brazilian antitrust authorities in April 2007.
In April 2007, CADE issued a writ of prevention relating to the Ipiranga Transaction, which, among other things, prevented our exercise of strategic management control over Ipiranga Química and Ipiranga Petroquímica. In issuing the writ of prevention, CADE stated that the purpose of the writ of prevention was to guarantee that the Ipiranga Transaction could be reversed in the event that CADE so determined following its review of the Ipiranga Transaction. In April 2007, CADE revoked this writ of prevention upon the agreement of our company to execute the Reversibility Agreement designed to preserve the reversibility of the Ipiranga Transaction. Under the Reversibility Agreement, we agreed to preserve all of the assets acquired in the Ipiranga Transaction until CADE makes a final determination with respect to the Ipiranga Transaction, and we are permitted to effectively own and manage these assets pending this final determination.
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Although the terms and conditions of the Ipiranga Transaction were submitted to the Brazilian antitrust authorities in four separate filings reflecting the separate markets affected by the Ipiranga Transaction, on September 19, 2007, CADE decided that the four fillings should be analyzed and submitted for approval together.
SEAE issued a favorable opinion with respect to the Ipiranga Transaction in February 2008. Approval of this transaction by CADE remains pending.
Although we believe that the Petrobras Transaction is not subject to the final approval of the Brazilian antitrust authorities, because the Petrobras Transaction is a follow-on transaction to the Ipiranga Transaction and does not involve any change of control of our company or Petrobras, we and Petrobras submitted the terms and conditions of the Petrobras Transaction to the Brazilian antitrust authorities in December 2007.
The SEAE and the SDE issued favorable opinions with respect to the Petrobras Transaction in April 2008. Approval of this transaction by CADE remains pending.
There can be no assurances that the Brazilian antitrust authorities will approve the Ipiranga Transaction as currently structured, agree with our analysis of the Petrobras Transaction, or that these authorities will not impose additional conditions on these transactions.
ITEM 4A. UNRESOLVED STAFF COMMENTS.
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements at December 31, 2007 and 2006 and for the three years ended December 31, 2007 included in this annual report, as well as with the information presented under “Introduction” and “Item 3. Key Information—Selected Financial Information.”
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Cautionary Statement with Respect to Forward-Looking Statements” and “Item 3. Key Information—Risk Factors.”
The discussion and analysis of our financial condition and results of operations has been organized to present the following:
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Overview
We are the leading petrochemical company in Latin America, based on average annual production capacity in 2007. We are also the third largest Brazilian-owned private sector industrial company, based on net sales revenue in 2006 (the most recent year for which comparative information is currently available). We recorded net sales revenue of R$17,679.4 million and net income of R$547.6 million in 2007. We produce a diversified portfolio of petrochemical products in our 19 plants in Brazil and have a strategic focus on polyethylene, polypropylene and PVC. We were the first Brazilian company with integrated first and second generation petrochemical production facilities.
Our results of operations have been significantly influenced by (1) beginning in the second quarter of 2007, the effects of the Ipiranga Transaction and our consolidation of the assets, liabilities and results of operations of Ipiranga Química, Ipiranga Petroquímica and Copesul as from April 1, 2007, and (2) to a lesser extent, beginning in the second quarter of 2006, the effect of the Politeno Acquisition on April 6, 2006 and our full consolidation of the assets, liabilities and results of operations of Politeno and the inclusion of Politeno’s results in our Polyolefins segment as from April 1, 2006. In addition, our results of operations for the years ended December 31, 2007, 2006 and 2005 have been influenced, and our results of operations will continue to be influenced, by a variety of factors, including:
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Our financial condition and liquidity is influenced by a variety of factors, including:
Financial Presentation and Accounting Policies
Presentation of Financial Statements
We have prepared our consolidated financial statements at December 31, 2007 and 2006 and for the three years ended December 31, 2007 in accordance with Brazilian GAAP, which differs in certain respects from U.S. GAAP.
Our consolidated financial statements have been prepared in accordance with Instruction 247. Instruction 247 requires our company to proportionally consolidate jointly controlled companies that are not our subsidiaries.
Prior to March 31, 2006, we proportionally consolidated the results of Politeno in our consolidated financial statements. As a result of the Politeno Acquisition described under “Item 4. Information On The Company—History and Development of our Company,” we have fully consolidated Politeno’s results in our consolidated financial statements and included Politeno’s results in our Polyolefins segment as from April 1, 2006.
Prior to March 31, 2007, including for the first three months of 2007, we proportionally consolidated the results of Copesul in our consolidated financial statements. As a result of the Ipiranga Transaction, we have fully consolidated Copesul’s results in our consolidated financial statements and included Copesul’s results as a separate segment as from April 1, 2007.
Prior to November 30, 2007, we proportionally consolidated the results of Petroflex in our consolidated financial statements. As a result of our entering into an agreement in December 2007 to sell our interests in Petroflex, we accounted for our interest in Petroflex in our Brazilian GAAP financial statements using the equity method as from December 1, 2007.
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Reclassifications
Our consolidated financial statements included in this annual report reflect reclassifications in 2005 of some items to provide for a better comparison among 2006 and 2005. For more information about these reclassifications, see “Introduction—Financial Statements.”
Business Segments and Presentation of Segment Financial Data
We have implemented an organizational structure that we believe reflects our business activities and corresponds to our principal products and production processes. We now have seven business units and report our results by seven corresponding segments to reflect this organizational structure:
We evaluate and manage business segment performance based on information generated from our statutory accounting records, which are maintained in accordance with Brazilian GAAP, and, accordingly, the segment data included in this annual report is presented under Brazilian GAAP. We have included a reconciliation of the operating results of our segments to our consolidated results under “—Results of Operations” below.
In June 2008, we began the implementation of a new organizational structure under which we will have four business units and report our results by four corresponding segments to reflect this organizational structure:
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Critical Accounting Policies
The presentation of our financial condition and results of operations in conformity with Brazilian GAAP requires us to make certain judgments and estimates regarding the effects of matters that are inherently uncertain and that impact the carrying value of our assets and liabilities. Actual results could differ from these estimates. In order to provide an understanding about how we form our judgments and estimates about certain future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different variables and conditions, we have included comments related to the following critical accounting policies under Brazilian GAAP:
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Principal Factors Affecting Our Results of Operations
Effects of the Ipiranga Transaction
On March 18, 2007, we entered into the Ipiranga Investment Agreement with Ultrapar and Petrobras. On the same date, Ultrapar and the controlling shareholders of RPI, CBPI and DPPI entered into the Purchase Agreement, with our company and Petrobras as intervening parties. As a result of the Ipiranga Transaction:
Upon the final completion of the fourth phase of the Ipiranga Transaction, we will own shares of RPI representing 33.3% of total share capital and voting share capital of RPI.
As a result of the Ipiranga Transaction, we have fully consolidated the results of Copesul and its subsidiaries and consolidated the results of Ipiranga Química and its subsidiaries, including Ipiranga Petroquímica, into our financial statements as from April 1, 2007. We have accounted for each of Copesul, Ipiranga Química and Ipiranga Petroquímica as separate segments in our financial statements as from the same date. In addition, we have accounted for our interest in the results of RPI under the equity method in our financial statements as from April 1, 2007.
The total purchase price to our company of the shares of Ipiranga Química that we have acquired and the shares of RPI that we will acquire from Ultrapar in the Ipiranga Transaction was R$1,489.1 million. In addition, we paid R$1,418.5 million for the Copesul shares not owned by our company, Ipiranga Petroquímica, Petroquisa or Triunfo and R$117.9 million for the shares of Ipiranga Petroquímica not owned by Ipiranga Química.
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We financed the Ipiranga Transaction through borrowings of US$1,200.0 million under our Acquisition Credit Agreement, US$312.5 million under an export prepayment agreement with PIFCo and US$61.0 million under two short-term financing transactions.
For additional information regarding the Ipiranga Transaction, see “Item 4. Information on the Company—Ipiranga Transaction.”
Growth of Brazil’s Gross Domestic Product and Domestic Demand for Our Products
Sales in Brazil represented 76.2% of our net sales revenue in 2007. As a Brazilian company with substantially all of our operations in Brazil, we are significantly affected by economic conditions in Brazil. Our results of operations and financial condition have been, and will continue to be, affected by the growth rate of GDP in Brazil because our products are used in the manufacture of a wide range of consumer and industrial products.
Because of our significant market share in many of the Brazilian markets in which our petrochemical products are sold, fluctuations in Brazilian demand for polyethylene, polypropylene and PVC affect our production levels and net sales revenue. GDP in Brazil grew at an estimated compound average annual rate of 2.8% from 1998 through 2007. From 1998 through 2007, the consumption volumes in Brazil of polyethylene, polypropylene and PVC increased at compound average annual rates of 4.4%, 7.9% and 3.3%, respectively.
In 2005, GDP in Brazil increased by 2.3% . In 2005, Brazilian consumption volumes of polyethylene decreased by 1.7%, polypropylene increased by 2.9% and PVC increased by 2.4%, respectively, compared to 2004.
In 2006, GDP in Brazil increased by 3.7% . In 2006, Brazilian consumption volumes of polyethylene increased by 11.4%, polypropylene increased by 4.6% and PVC increased by 10.5% compared to 2005.
In 2007, GDP in Brazil increased by 5.4% . In 2007, Brazilian consumption volumes of polyethylene increased by 7.1%, polypropylene increased by 10.3% and PVC increased by 14.5%, respectively, compared to 2006.
Brazilian GDP growth has fluctuated significantly, and we anticipate that it will likely continue to do so. Our management believes that economic growth in Brazil should positively affect our future net sales revenue and results of operations. However, continued low growth or a recession in Brazil would likely reduce our future net sales revenue and have a negative effect on our results of operations.
Our management believes that there has been a trend in Brazil during the last several years toward the use of plastics as substitutes for more traditional materials, such as steel, aluminum, glass and paper. Our management anticipates that this trend will continue to stimulate the domestic demand for petrochemical products suitable for use in a variety of applications, including construction, industrial processes, agriculture and packaging. However, trends in the substitution of materials depend on many factors beyond our control, and the current beliefs of our management may prove to be incorrect.
Cyclicality Affecting the Petrochemical Industry
Global consumption of petrochemical products has increased significantly over the past 30 years. Due to this growth in consumption, producers have experienced periods of insufficient capacity for these products. Periods of insufficient capacity, including some due to raw material shortages, have usually resulted in increased capacity utilization rates and international market prices for our products, leading to increased operating margins. These periods have often been followed by periods of capacity additions, which have resulted in declining capacity utilization rates and international selling prices, leading to declining operating margins.
We expect that these cyclical trends in international selling prices and operating margins relating to global capacity shortfalls and additions will likely persist in the future, principally due to the continuing impact of four general factors:
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Rio Polímeros, a Brazilian petrochemical company, commenced operations of a major petrochemical plant in Brazil in 2005. The maximum annual capacity of this plant is 520,000 tons of ethylene, 75,000 tons of propylene and 540,000 tons of polyethylene. In addition:
Based on historical growth of Brazilian domestic demand for polyethylene, polypropylene and PVC, we believe that this additional capacity, other than the capacity of the Paulínia plant, had been absorbed by the domestic market by the end of 2007. We cannot assure you, however, that the propylene production capacity of the Paulínia plant will be fully absorbed by the domestic market or that satisfactory export opportunities will be available for products not sold domestically. In the event that this additional production is not absorbed domestically or sold in export markets, there may be resulting pressure on prices for the affected products, which could adversely affect our net sales revenues, gross margins and overall results of operations.
Effects of Fluctuations in Naphtha Prices
Fluctuations in the international market price of naphtha have significant effects on our costs of goods sold and the prices that we are able to charge our customers for our first and second generation products.
Effects on Cost of Sales
Naphtha is the principal raw material used by our Basic Petrochemicals Unit and Copesul and, indirectly, in our other business units. Purchases of naphtha represented 83.1% of the total cost of sales and services rendered of our Basic Petrochemicals Unit and 88.9% of the total cost of sales and services rendered of Copesul in 2007. Naphtha represented 76.3% of our direct and indirect consolidated cost of sales and services rendered in 2007, both directly and indirectly through the cost of basic petrochemicals that we purchased from Copesul during the first quarter of 2007.
The cost of naphtha varies in accordance with international market prices, which fluctuate depending upon the supply and demand for oil and other refined petroleum products. We purchase naphtha under long-term supply contracts with Petrobras, and we import naphtha through our terminal at Aratú in the State of Bahia and Petrobras’ terminal at Osório in the State of Rio Grande do Sul. The prices that we pay for naphtha under all of these arrangements are based on the Amsterdam-Rotterdam-Antwerp market price. As a result, fluctuations in the Amsterdam-Rotterdam-Antwerp market price for naphtha have a direct impact on the cost of our first generation products.
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Because the primary raw materials of our Polyolefins, Ipiranga Petroquímica and Vinyls Units, principally ethylene and propylene, are first generation products produced by our Basic Petrochemicals Unit and Copesul, fluctuations in the Amsterdam-Rotterdam-Antwerp market price for naphtha result in similar fluctuations in the cost of the primary raw materials of these units.
The international price of naphtha has fluctuated significantly in the past, and we expect that it will continue to do so in the future. Significant increases in the price of naphtha and, consequently, the cost of producing our products, would likely reduce our gross margins and our results of operations to the extent that we are unable to pass all of these increased costs on to our customers and could result in reduced sales volumes of our products. Conversely, significant decreases in the price of naphtha and, consequently, the cost of producing our products, would likely increase our gross margins and our results of operations and could result in increased sales volumes if this lower cost leads us to lower our prices. In periods of high volatility in the U.S. dollar price of naphtha, there is usually a lag between the time that the U.S. dollar price increases or decreases and the time that we are able to pass on increased or reduced costs to our customers in Brazil. These pricing mismatches decrease when the U.S. dollar price of naphtha is less volatile.
We do not currently hedge our exposure to changes in the prices of naphtha because a portion of our sales are exports payable in foreign currencies and linked to the international market prices of naphtha and also because the prices of our polyethylene, polypropylene and PVC products sold in Brazil generally reflect changes in the international market prices of these products.
Effects on Prices of Our Products
Prior to 2005, our Basic Petrochemicals Unit used a margin sharing system for all of our ethylene customers, including our other business units. In 2005, we determined the prices that we charged our ethylene customers, other than our two largest ethylene customers, by reference to international market prices. In 2006, we negotiated with our remaining ethylene customers that used the margin sharing system to terminate the margin sharing system of ethylene pricing and to institute a market pricing system.
The prices that we charge some of our customers for propylene are based on our ethylene prices and the ratio of the European contract price for propylene to the European contract price for ethylene. Over the past several years, this ratio has increased. For the remainder of our customers, our prices for propylene are based on the European contract price and prevailing prices set by U.S. Gulf producers. We are applying this market pricing methodology to a growing number of our customers. The prices that we charge for butadiene and para-xylene are based on the United States contract price for these products. The prices that we charge for benzene and ortho-xylene are based on the contract prices for these products in the United States and Europe. Because European producers of basic petrochemical products primarily use naphtha as a raw material, changes in the European contract prices are strongly influenced by fluctuations in international market prices for naphtha. As our cost structures are similar to the cost structures of European producers, to the extent that our prices are based on the European contract prices for our products, the prices that we charge for these products are significantly influenced by international market prices for naphtha.
We negotiate the real prices for certain of our products, principally polyethylene, polypropylene and PVC, on a monthly basis with our domestic customers. We attempt to revise our prices to reflect changes in the international market prices of these products and the appreciation or depreciation of the real against the U.S. dollar. However, during periods of high volatility in international market prices or exchange rates, we are sometimes unable to reflect these changes fully in our prices quickly.
The international market prices of our petrochemical products have fluctuated significantly, and we believe that they will continue to do so. Significant increases in the international market prices of our petrochemical products and, consequently, the prices that we are able to charge, would likely increase our net sales revenue and our results of operations to the extent that we are able to maintain our operating margins and increased prices do not reduce sales volumes of our products. Conversely, significant decreases in the international prices of our petrochemical products, and, consequently, the prices that we charge, would likely reduce our net sales revenue and our results of operations if we are unable to increase our operating margins or these reduced prices do not result in increased sales volumes of our products.
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Capacity Utilization
Our operations are capital intensive. Accordingly, to obtain lower unit production costs and maintain adequate operating margins, we seek to maintain a high capacity utilization rate at all of our production facilities.
The table below sets forth capacity utilization rates with respect to the production facilities for some of our principal products for the years ended December 31, 2007, 2006 and 2005.
Year Ended December 31, | ||||||
2007 | 2006 | 2005 | ||||
Ethylene | 94%(1) | 87% | 91% | |||
Polyethylene | 91(2) | 89(3) | 94(4) | |||
Polypropylene | 97(2) | 97 | 94 | |||
PVC | 91 | 86 | 95(5) |
(1) | Giving effect to our consolidation of the results of Copesul as from April 1, 2007. |
(2) | Giving effect to our consolidation of the results of Ipiranga Petroquímica as from April 1, 2007 |
(3) | Without giving effect to a 30,000 ton increase of our annual production capacity in September 2006. |
(4) | Without giving effect to a 30,000 ton increase of our annual production capacity in November 2005. |
(5) | Without giving effect to a 50,000 ton increase of our annual production capacity in December 2005. |
The utilization rate of our ethylene production capacity was adversely affected during 2006 as a result of operating difficulties that led to a non-programmed maintenance shutdown of the Olefins 1 unit of our Basic Petrochemicals Unit for 13 days.
Effect of Export Levels on Our Financial Performance
We generally obtain higher prices in Brazil for our products than the prevailing international prices. The difference in prices between the Brazilian and export markets results from:
In addition, we are generally able to charge higher prices for our products than therealprice of imports because we are able to provide better product customization services to our customers than sellers of imported products.
During periods in which the domestic demand for our products is reduced, we actively pursue export opportunities for our products in order to maintain capacity utilization rates. During periods of increased domestic demand for our products, our export sales volumes may decline as we increase domestic sales of our products.
In 2007, 23.8% of our net sales revenue was derived from export sales of our products as compared with 25.6% of our net sales revenue in 2006. Net sales revenues derived from export sales increased by 26.6% in 2007 as a result of the implementation of our strategy to increase our presence in foreign markets, which has led to the establishment of sales offices in Argentina and The Netherlands, enabling us to provide our international costumers with better service through our staff and local distribution centers.
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In 2007, exports to other countries in the Americas accounted for 68.4% of our export sales, with the remainder of our exports sold in Europe, which accounted for 26.7% of our export sales, and the Far East, which accounted for 4.9% of our export sales. Aggregate exports of polyethylene, polypropylene and PVC to Argentina increased by 22.8% in 2007, reflecting improvements in the Argentine economy.
Our ability to export to other South American countries is a function of the level of economic growth in these countries and other economic conditions, including prevailing inflation rates. We believe that significant growth in the global economy would likely lead to increased global demand and international market prices for our products, and consequently increased domestic prices for our products. In addition, increased global demand for our products would enhance our ability to export our products in the event that the Brazilian economy does not similarly expand. Conversely, slow or negative growth of the global economy would have the opposite effects on our company.
Effects of Fluctuations in Exchange Rates between the Real and the U.S. Dollar
Our results of operations and financial condition have been, and will continue to be, affected by the rate of depreciation or appreciation of therealagainst the U.S. dollar because:
Virtually all of our sales are of petrochemical products for which there are international market prices expressed in U.S. dollars. We generally attempt to set prices that take into account the international market prices for our petrochemical products and variations in thereal/U.S. dollar exchange rate. As a result, although a significant portion of our net sales revenue is inreais,substantially all of our products are sold at prices that are based on international market prices that are quoted in U.S. dollars.
The price of naphtha, our principal raw material, is linked to the U.S. dollar. Our naphtha purchase contracts with Petrobras provide that the prices that we pay to Petrobras for naphtha in any month are established based on the average Amsterdam-Rotterdam-Antwerp market price for naphtha in U.S. dollars during the previous month, converted intoreais at thereal/U.S. dollar exchange rate in effect on the last day of the previous month. Fluctuations in thereal affect the cost of naphtha and other U.S. dollar-linked or imported raw materials.
When thereal depreciates against the U.S. dollar, assuming naphtha costs and international market prices of our products remain constant in U.S. dollars, the production cost for our products increases and we generally attempt to increase the prices for our products inreais (to the extent possible in light of then-prevailing market conditions in Brazil), which may result in reduced sales volumes of our products. To the extent that our price increases are not sufficient to cover the increased costs for raw materials, our operating margin decreases. Conversely, when therealappreciates against the U.S. dollar, assuming naphtha costs and international market prices of our products remain constant in U.S. dollars, the production cost for our products decreases and we generally decrease the prices for our products inreais, which may result in increased sales volumes of our products. In periods of high volatility in thereal/U.S. dollar exchange rate, there is usually a lag between the time that the U.S. dollar appreciates or depreciates and the time that we are able to pass on increased or reduced costs inreaisto our customers in Brazil. These pricing mismatches decrease when thereal/U.S. dollar exchange rate is less volatile.
Our consolidated U.S. dollar-denominated indebtedness represented 70.1% of our outstanding indebtedness at December 31, 2007, excluding related party debt. As a result, when thereal appreciates against the U.S. dollar:
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A depreciation of therealagainst the U.S. dollar has the converse effects.
Any significant appreciation of therealagainst the U.S. dollar significantly decreases our financial expenses and our short-term and long-term indebtedness, as expressed inreais. Conversely, any significant depreciation of therealagainst the U.S. dollar significantly increases our financial expenses and our short-term and long-term indebtedness, as expressed inreais.
Export sales, which enable us to generate receivables payable in foreign currencies, tend to provide a hedge against a portion of our U.S. dollar-denominated debt service obligations, but they do not fully match them. Accordingly, we often enter into hedges to mitigate exchange rate fluctuations in our U.S. dollar-denominated indebtedness. To further mitigate our exposure to exchange rate risk, we try, where possible, to enter into trade finance loans for our working capital needs, which funding is generally available at a lower cost because it is linked to U.S. dollar exports. However, future U.S. dollars that we generate from exports may not be in an amount sufficient to cover all of our U.S. dollar trade finance liabilities.
Effect of Level of Indebtedness and Interest Rates
At December 31, 2007, our total outstanding consolidated indebtedness on a consolidated basis, excluding related party debt, was R$8,381.9 million. The level of our indebtedness results in significant financial expenses that are reflected in our statement of operations. Financial expenses consist of interest expense, exchange variations of U.S. dollar- and other foreign currency-denominated debt, foreign exchange losses or gains, and other items as set forth in note 23 to our consolidated financial statements. In 2007, we recorded total financial expenses of R$180.1 million, of which R$341.9 million consisted of interest expense and R$203.8 million consisted of monetary variation on financing and related parties, that was more than offset by R$1,073.1 million of foreign exchange gains. The interest rates that we pay depend on a variety of factors, including prevailing Brazilian and international interest rates and risk assessments of our company, our industry and the Brazilian economy made by potential lenders to our company, potential purchasers of our debt securities and the rating agencies that assess our company and its debt securities.
Standard & Poor’s, Moody’s and Fitch maintain ratings of our company and our debt securities. Standard & Poor’s maintains a rating of our company on a local basis of “br AA+/Stable Outlook,” Moody’s maintains a rating of our company on a local basis of “Aa2.br/Stable Outlook” and Fitch maintains a local rating for our company of “AA (bra)/Positive Outlook.” On a global basis, Standard & Poor’s maintains a local currency rating for our company of “BB+ (stable)” and a foreign currency rating for our company of “BB+ (stable),” Moody’s maintains a local currency rating for our company of “Ba1” and a foreign currency rating for our company of “Ba1” and Fitch maintains a local currency rating for our company of “BB+/Positive Outlook” and a foreign currency rating for our company of “BB+/Positive Outlook.” Any ratings downgrades in the future would likely result in increased interest and other financial expenses relating to borrowings and debt securities and could adversely affect our ability to obtain such financing on satisfactory terms or in amounts required by us.
Effects of Brazilian Inflation
Inflation affects our financial performance by increasing some of our operating expenses denominated inreais (and not linked to the U.S. dollar). A significant portion of our costs of sales and services rendered, however, are linked to the U.S. dollar and are not substantially affected by the Brazilian inflation rate. Some of ourreal-denominated debt is indexed to take into account the effects of inflation. Under this debt, the principal amount generally is adjusted with reference to the General Price Index—Market, or the IGP-M, an inflation index, so that inflation results in increases in our financial expenses and debt service obligations. In addition, a significant portion of our real-denominated debt bears interest at the TJLP or the CDI rate, which are partially adjusted for inflation.
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Results of Operations of Jointly Controlled Companies
As a result of the application of Instruction 247 to our consolidated financial statements, we are required to proportionally consolidate the results of jointly controlled companies that are not our subsidiaries. Consequently, our results of operations are subject to fluctuations that depend on the results of these jointly controlled companies. However, in evaluating our results of operations, cash flows and liquidity, our management relies on financial information that does not include the effects of proportional consolidation, principally because we have limited, if any, control over the operations and policies of the companies whose results we are required to proportionally consolidate with our own. In our discussion of our results of operations and our discussion of our liquidity and capital resources, we have provided supplemental information drawn from our accounting records with respect to our results of operations, working capital, cash flows and indebtedness without giving effect to this proportional consolidation to provide information that our management believes more accurately reflects the results of operations and financial position of our company.
We own 60% of the voting and total share capital of Paulínia. Paulínia has management that is independent from ours and a capital structure, including a level of indebtedness and corresponding level of financing costs, that is different from ours. As a result of the completion of the first phase of the Petrobras Transaction, we will fully consolidate the results of Paulínia into our financial statements as from April 1, 2008. See “Item 4. Information on the Company—Petrobras Transaction.”
Prior to the Politeno Acquisition on April 6, 2006, we owned 35.0% of Politeno’s voting share capital and 34.0% of its total share capital. As a result, at dates and for periods prior to April 6, 2006, we proportionally consolidated Politeno’s results in our consolidated financial statements and did not include Politeno’s results in our Polyolefins segment. Following the Politeno Acquisition on April 6, 2006, we owned 100% of the voting share capital and 96.2% of the total share capital of Politeno, and we have fully consolidated Politeno’s results in our consolidated financial statements and included Politeno’s results in our Polyolefins segment as from April 1, 2006. Politeno merged with and into Braskem on April 2, 2007.
Prior to March 31, 2007, we owned 29.5% of the voting share capital and total share capital of Copesul, and we proportionally consolidated the results of Copesul in our consolidated financial statements. As a result of the Ipiranga Transaction and our obtaining effective management control over the 29.5% of the share capital of Copesul then owned by Ipiranga Petroquímica, we have fully consolidated the results of Copesul and its subsidiaries into our financial statements and included Copesul’s results as a separate segment in our financial statements as from April 1, 2007.
At December 31, 2007, we owned 33.5% of the total share capital of Petroflex, including 33.6% of its voting share capital. In April 2008, we sold all of our share capital in Petroflex to Lanxess Participações Ltda. for an aggregate price of R$252.1 million. See “Item 4. Information On The Company—History and Development of Our Company—Developments Since January 1, 2005—Acquisition of Additional Interest in Petroflex and Sale of Interest in Petroflex.” Prior to November 30, 2007, we accounted for our interest in Petroflex in our Brazilian GAAP financial statements using the proportional consolidation method. As a result of our entering into an agreement in December 2007 to sell our interests in Petroflex, we accounted for our interest in Petroflex in our Brazilian GAAP financial statements using the equity method as from December 1, 2007. As a result of this transaction, Petroflex registered a non-operational gain of R$115.6 million.
Effect of Taxes on Our Income
We are subject to a variety of generally applicable Brazilian federal and state taxes on our operations and results.
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Tax Exemptions
We are generally subject to Brazilian federal income tax at an effective rate of 25%, which is the standard corporate tax rate in Brazil. We have available certain federal tax exemptions based upon federal law that offers tax incentives to companies that locate their manufacturing operations in the Brazilian states of Bahia and Alagoas. These exemptions have been granted for varying lengths of time to each of our manufacturing plants located in these states.
We are exempt from corporate income tax on the profits arising from the sale of PVC manufactured at our Alagoas plant and PET manufactured at our plant in the Northeastern Complex until December 31, 2008. We expect that these tax exemptions will be renewed in 2009 for an additional 10-year period. In addition, we are entitled to pay only 25% of the statutory income tax rate on the profits arising from the sale of:
Each of our exemptions entitles us to pay only 87.5% of the statutory income tax rate on the profits arising from products manufactured at these plants for a period of one or more years after the dates set forth above.
Law No. 11,638/07 has recently changed the accounting rules applicable to tax exemptions. As from January 1, 2008, if we or any of our affected subsidiaries has taxable profit resulting from the operations at our Alagoas plant and in our plants in the Northeastern Complex, income tax expense is calculated without giving effect to the tax exemption or reduction (i.e., the income tax benefit of the exemption or reduction will be deducted from income tax expense). The net income arising from the recording of such tax credit will be allocated to a tax incentive reserve established under Brazilian law. This reserve may be used only to increase capital or absorb losses which exceed retained earnings and profits reserves as defined in the Brazilian law. As a result, the eventual expiration of the income tax exemptions will adversely affect our net income in periods after the expiration. Prior to January 1, 2008, the net results arising from tax exemptions or reductions were directly recorded as a tax incentive reserve under our shareholders’ equity.
Due to operating losses sustained by us in the past, we had R$146.4 million of deferred tax assets arising from R$585.8 million of tax loss carryforwards available at December 31, 2007. Income tax loss carryforwards available for offset in Brazil do not expire. However, the annual offset is limited to 30% of our adjusted net income. This limit also affects the CSLL.
Our export sales are currently exempt from PIS (a federal value-added tax), COFINS (a federal value-added tax), IPI (a federal value-added tax on industrial products) and the Tax on the Circulation of Merchandise and Services (Imposto Sobre a Circulação de Mercadorias e Serviços), or ICMS (a state value-added tax on sales and services), under generally available exemptions.
Tax Disputes
We are currently involved in numerous tax proceedings. We have established provisions based on our obligations under current legislation, utilization of the contingent IPI tax credits, and our estimated costs of resolving other claims in which we believe we have a probable tax loss. The tax contingencies relate primarily to the CSLL, PIS, COFINS and IPI. If any of these legal proceedings is decided adversely to us, our results of operations or financial condition could be materially adversely affected. For more information on our tax proceedings, the amounts claimed by governmental authorities and the amounts we have reserved against some of these claims, see “Item 8. Financial Information—Legal Proceedings—Tax Proceedings.”
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Recent Developments
Credit Export Note Facility
In January 2008, we entered into a credit export note facility in the amount of US$150 million with a Brazilian financial institution. This facility bears interest at a rate of 7.3% per annum, payable semiannually in arrears commencing in August 2008. The principal amount of this facility matures in February 2020.
Fourth Phase of Ipiranga Transaction
As part of the Ipiranga Transaction, in February 2008 Ultrapar delivered:
In February 2008, we paid to Ultrapar the final installment of the purchase price for the Ipiranga Transaction in the amount of R$633.5 million, and we received the sixth and final disbursement under the Acquisition Credit Agreement in the aggregate amount of US$251.2 million to fund this payment.
Sale of Interest in Petroflex
In April 2008, we sold all of our share capital in Petroflex to Lanxess for an aggregate price of R$252.1 million
Petrobras Transaction
On May 30, 2008, Braskem completed the first phase of the Petrobras Transaction. In the first phase of the Petrobras Transaction, Petrobras and Petroquisa contributed the following assets to Braskem:
In exchange for these assets, Braskem issued an aggregate of 46,903,320 common shares and 43,144,662 class A preferred shares and up to 1,400,495 common shares. We are authorized to purchase these shares at market prices over the São Paulo Stock Exchange at any time and from time to time prior to October 31, 2006. Shares that are repurchased may be held in treasury and subsequently resold or cancelled.Petroquisa.
At an extraordinary shareholders’ meeting on May 31, 2006, our shareholders approved our merger with PolialdenAs a result of the completion of the first phase of the Petrobras Transaction, Petrobras owns, directly and the conversion of 2,632,043indirectly, 23.1% of our class A preferred shares into 2,632,043total share capital, including 30.0% of our commonvoting share capital, and Braskem owns, directly and indirectly:
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The first phase of the Petrobras Transaction was implemented through an exchange of shares (incorporação de ações) in orderwhich shares of Braskem were issued to maintain the required minimum ratio of our common shares to preferred shares in accordance with the Brazilian Corporation Law after completion of our merger with Polialden. In connection with this merger, we issued 7,878,825 of our class A preferred sharesPetroquisa in exchange for 264,886,083shares of Polialden’s preferred shares.Grust Holdings S.A., a wholly-owned subsidiary of Petroquisa that, directly and indirectly, owns the interests in Copesul, Ipiranga Química, Ipiranga Petroquímica and Paulínia contributed to Braskem.
As a result of the completion of the first phase of the Petrobras Transaction, we will no longer record minority interests with respect to Copesul and Ipiranga Química. In addition, we will fully consolidate the results of Paulínia into our financial statements as from April 1, 2008.
Fixed Rate Notes
On June 5, 2008, we issued and sold US$500.0 million aggregate principal amount of our 7.250% Notes due 2018. Interest on these notes is payable semi-annualy in arrears in June and December of each year and these notes mature on June 5, 2018. We used the proceeds of this offering to repay a portion of the indebtedness outstanding under the Acquisition Credit Agreement.
Results of Operations
The following discussion of our results of operations is based on our consolidated financial statements prepared in accordance with Brazilian GAAP.
Our results of operations for the year ended December 31, 2007 are not comparable to our results of operations for the year ended December 31, 2006 as a result of the Ipiranga Transaction. As a result of the Ipiranga Transaction, we have fully consolidated the results of Ipiranga Química, Ipiranga Petroquímica and Copesul and included these companies as separate segments as from April 1, 2007. Prior to April 1, 2007, we did not include the results of our Ipiranga Química and Ipiranga Petroquímica segments in our consolidated financial statements, we proportionally consolidated the results of Copesul in our consolidated financial statements to reflect our 29.5% interest in Copesul’s voting and total share capital and we did not reflect any of the results of Copesul in any of our then-existing segments.
Prior to March 31, 2006, we proportionally consolidated the results of Politeno in our consolidated financial statements. As a result of the Politeno Acquisition described under “Item 4. Information On The Company—History and Development of Our Company,” we have fully consolidated Politeno’s results in our consolidated financial statements and included Politeno’s results in our Polyolefins segment as from April 1, 2006. Politeno merged with and into Braskem on April 2, 2007.
Prior to March 31, 2007, we proportionally consolidated the results of Copesul in our consolidated financial statements. As a result of the Ipiranga Transaction, three of our segments (Copesul, Ipiranga Petroquímica and Ipiranga Química) were created, and we have fully consolidated the results of Copesul and have consolidated the results of Ipiranga Química and Ipiranga Petroquímica in our consolidated financial statements as from April 1, 2007.
During 2007, we proportionally consolidated the results of three jointly controlled companies: Paulínia; Petroflex (through November 30, 2007); and Cetrel. During 2006 and 2005, we proportionally consolidated the results of four jointly controlled companies: Copesul, Paulínia, Petroflex, and Cetrel.
The discussion of the results of our business segments is based upon financial information reported for each of the four segments of our business, as presented in the table below. There are certain differences between the concepts used by our company in preparing information about segments and the requirements of Brazilian GAAP as applied in the statutory financial statements. The principal differences are:
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The following tables set forth the operating results of each of our segments and the reconciliation of these results of our segments to our consolidated results of operations. This segment information was prepared on the same basis as the information that our senior management uses to allocate resources among segments and evaluate their performance. We evaluate and manage the performance of our segments based on information generated from our statutory accounting records maintained in accordance with Brazilian GAAP and reflected in our consolidated financial statements. However, the operating income presented in the following tables does not include financial expenses, financial income and investment in associated companies.results from equity accounting.
Year Ended December 31, 2007 | ||||||||||||||
Selling, general | ||||||||||||||
Cost of sales | and | Depreciation | ||||||||||||
Net sales | and services | administrative | and | Other expense | Operating | |||||||||
revenue | rendered | Gross profit | expenses | amortization | (income), net | income | ||||||||
(in millions ofreais) | ||||||||||||||
Basic Petrochemicals | R$7,220.7 | R$6,341.2 | R$879.5 | R$324.6 | R$1.4 | R$(15.9) | R$569.4 | |||||||
Polyolefins | 5,669.1 | 4,636.1 | 1,033.0 | 427.1 | 13.9 | (14.4) | 577.6 | |||||||
Vinyls | 1,789.4 | 1,438.1 | 351.3 | 201.7 | 2.1 | (25.9) | 173.4 | |||||||
Business Development | 489.7 | 510.3 | (20.6) | 16.5 | 0.0 | 22.8 | (59.9) | |||||||
Copesul | 5,516.1 | 4,924.7 | 591.4 | 74.6 | 17.6 | (10.1) | 509.3 | |||||||
Ipiranga Petroquímica | 1,551.4 | 1,232.5 | 318.9 | 85.1 | 5.7 | 26.0 | 202.1 | |||||||
Ipiranga Química | 392.6 | 338.9 | 53.7 | 39.1 | 4.3 | 0.7 | 9.6 | |||||||
Total segments | 22,629.0 | 19,421.8 | 3,207.2 | 1,168.7 | 45.0 | 12.0 | 1,981.5 | |||||||
Eliminations | (5,617.4) | (5,488.4) | (129.0) | 32.8 | 432.0 | (142.3) | (451.5) | |||||||
Total prior to CVM 247 | 17,011.6 | 13,933.4 | 3,078.2 | 1,201.5 | 477.0 | (130.3) | 1,530.0 | |||||||
Effects of CVM 247 | 667.8 | 507.6 | 160.2 | 37.0 | 2.1 | (1.2) | 122.3 | |||||||
Consolidated | R$17,679.4 | R$14,441.0 | R$3,238.4 | R$1,238.5 | R$479.1 | R$(131.5) | R$1,652.3 | |||||||
Year Ended December 31, 2006 | ||||||||||||||
Selling, general | ||||||||||||||
Cost of sales | and | Depreciation | ||||||||||||
Net sales | and services | administrative | and | Other expense | Operating | |||||||||
revenue | rendered | Gross profit | expenses | amortization | (income), net | income | ||||||||
(in millions ofreais) | ||||||||||||||
Basic Petrochemicals | R$6,883.6 | R$5,994.8 | R$888.8 | R$339.0 | R$0.4 | R$10.4 | R$539.0 | |||||||
Polyolefins | 4,775.8 | 3,985.4 | 790.4 | 344.5 | 10.4 | (22.5) | 458.0 | |||||||
Vinyls | 1,541.7 | 1,245.3 | 296.4 | 123.0 | 0.4 | (35.1) | 208.1 | |||||||
Business Development | 483.1 | 545.7 | (62.6) | 26.0 | 0.1 | (1.9) | (86.8) | |||||||
Copesul | — | — | — | — | — | — | — | |||||||
Ipiranga Petroquímica | — | — | — | — | — | — | — | |||||||
Ipiranga Química | — | — | — | — | — | — | — | |||||||
Total segments | 13,684.2 | 11,771.2 | 1,913.0 | 832.5 | 11.3 | (49.1) | 1.118.3 | |||||||
Eliminations | (1,965.2) | (1,889.6) | (75.6) | 41.9 | 368.3 | (107.8) | (378.0) | |||||||
Total prior to CVM 247 | 11,719.0 | 9,881.6 | 1,837.4 | 874.4 | 379.6 | (156.9) | 740.3 | |||||||
Effects of CVM 247 | 1,273.7 | 910.5 | 363.2 | 77.1 | 5.4 | (29.2) | 309.9 | |||||||
Consolidated | R$12,992.7 | R$10,792.1 | R$2,200.6 | R$951.5 | R$385.0 | R$(186.1) | R$1,050.2 | |||||||
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Year Ended December 31, 2005 | ||||||||||||||
Selling, general | ||||||||||||||
Cost of sales | and | Depreciation | ||||||||||||
Net sales | and services | administrative | and | Other expense | Operating | |||||||||
revenue | rendered | Gross profit | expenses | amortization | (income), net | income | ||||||||
(in millions ofreais) | ||||||||||||||
Basic Petrochemicals | R$7,226.7 | R$6,138.5 | R$1,088.2 | R$250.3 | R$0.0 | R$(57.1) | R$895.0 | |||||||
Polyolefins | 3,919.0 | 3,182.8 | 736.2 | 229.0 | 6.9 | (53.0) | 553.3 | |||||||
Vinyls | 1,794.1 | 1,271.9 | 522.2 | 89.2 | 0.8 | (6.6) | 438.8 | |||||||
Business Development | 569.0 | 552.9 | 16.1 | 18.2 | 0.3 | (9.2) | 6.8 | |||||||
Copesul | — | — | — | — | — | — | — | |||||||
Ipiranga Petroquímica | — | — | — | — | — | — | — | |||||||
Ipiranga Química | — | — | — | — | — | — | — | |||||||
Total segments | 13,508.8 | 11,146.1 | 2,362.7 | 586.7 | 8.0 | (125.9) | 1,893.9 | |||||||
Eliminations | (1,894.2) | (1,827.6) | (66.6) | 89.7 | 342.2 | 56.1 | (554.6) | |||||||
Total prior to CVM 247 | 11,614.6 | 9,318.5 | 2,296.1 | 676.4 | 350.2 | (69.8) | 1,339.3 | |||||||
Effects of CVM 247 | 1,460.5 | 1,043.2 | 417.3 | 110.7 | 5.4 | 47.0 | 254.2 | |||||||
Consolidated | R$13,075.1 | R$10,361.7 | R$2,713.4 | R$787.1 | R$355.6 | R$(22.8) | R$1,593.5 | |||||||
Year ended December 31, 2005 | ||||||||||||||||||||||||||||||||||||
(in millions ofreais) | Basic chemicals | Polyolefins | Vinyls | Business ment | Total segments | Elimi- nations | Total prior to CVM 247 | CVM 247 | Consoli- dated | |||||||||||||||||||||||||||
Net sales revenue | R$ | 7,226.7 | R$ | 3,919.0 | R$ | 1,794.1 | R$ | 569.0 | R$ | 13,508.8 | R$ | (1,894.2 | ) | R$ | 11,614.6 | R$ | 1,460.5 | R$ | 13,075.1 | |||||||||||||||||
Cost of sales and services rendered | (6,138.5 | ) | (3,182.8 | ) | (1,271.9 | ) | (552.9 | ) | (11,146.1 | ) | 1,827.6 | (9,318.5 | ) | (1,043.2 | ) | (10,361.7 | ) | |||||||||||||||||||
Gross profit | 1,088.2 | 736.2 | 522.2 | 16.1 | 2,362.7 | (66.6 | ) | 2,296.1 | 417.3 | 2,713.4 | ||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||
Selling, general and administrative | (250.3 | ) | (229.0 | ) | (89.2 | ) | (18.2 | ) | (586.7 | ) | (89.7 | ) | (676.4 | ) | (110.7 | ) | (787.1 | ) | ||||||||||||||||||
Depreciation and amortization | 0.0 | (6.9 | ) | (0.8 | ) | (0.3 | ) | (8.0 | ) | (342.2 | ) | (350.2 | ) | (5.4 | ) | (355.6 | ) | |||||||||||||||||||
Other, net | 57.1 | 53.0 | 6.6 | 9.2 | 125.9 | (56.1 | ) | 69.8 | (47.0 | ) | 22.8 | |||||||||||||||||||||||||
Operating income | R$ | 895.0 | R$ | 553.3 | R$ | 438.8 | R$ | 6.8 | R$ | 1,893.9 | R$ | (554.6 | ) | R$ | 1,339.3 | R$ | 254.2 | R$ | 1,593.5 | |||||||||||||||||
Year ended December 31, 2004 | ||||||||||||||||||||||||||||||||||||
(in millions ofreais) | Basic chemicals | Polyolefins | Vinyls | Business ment | Total segments | Elimi- nations | Total prior to CVM 247 | CVM 247 | Consoli- dated | |||||||||||||||||||||||||||
Net sales revenue | R$ | 6,480.0 | R$ | 3,489.4 | R$ | 1,858.8 | R$ | 620.8 | R$ | 12,449.0 | R$ | (1,404.8 | ) | R$ | 11,044.2 | R$ | 1,345.3 | R$ | 12,389.5 | |||||||||||||||||
Cost of sales and services rendered | (5,330.1 | ) | (2,523.0 | ) | (1,157.1 | ) | (564.9 | ) | (9,575.1 | ) | 1,269.4 | (8,305.7 | ) | (917.3 | ) | (9,223.0 | ) | |||||||||||||||||||
Gross profit | 1,149.9 | 966.4 | 701.7 | 55.9 | 2,873.9 | (135.4 | ) | 2,738.5 | 428.0 | 3,166.5 | ||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||
Selling, general and administrative | (213.8 | ) | (199.1 | ) | (80.1 | ) | (24.9 | ) | (517.9 | ) | (62.8 | ) | (580.7 | ) | (96.3 | ) | (677.0 | ) | ||||||||||||||||||
Depreciation and amortization | (2.6 | ) | (5.9 | ) | (0.6 | ) | (0.7 | ) | (9.8 | ) | (344.0 | ) | (353.8 | ) | (5.9 | ) | (359.7 | ) | ||||||||||||||||||
Other, net | 22.2 | 6.3 | 14.9 | 2.6 | 46.0 | (10.8 | ) | 35.2 | 7.8 | 43.0 | ||||||||||||||||||||||||||
Operating income | R$ | 955.7 | R$ | 767.7 | R$ | 635.9 | R$ | 32.9 | R$ | 2,392.2 | R$ | (553.0 | ) | R$ | 1,839.2 | R$ | 333.6 | R$ | 2,172.8 | |||||||||||||||||
Year ended December 31, 2003 | ||||||||||||||||||||||||||||||||||||
(in millions ofreais) | Basic chemicals | Polyolefins | Vinyls | Business ment | Total segments | Elimi- nations | Total prior to CVM 247 | CVM 247 | Consoli- dated | |||||||||||||||||||||||||||
Net sales revenue | R$ | 4,765.3 | R$ | 3,386.8 | R$ | 1,371.8 | R$ | 455.3 | R$ | 9,979.2 | R$ | (788.3 | ) | R$ | 9,190.9 | R$ | 1,109.3 | R$ | 10,300.2 | |||||||||||||||||
Cost of sales and services rendered | (4,111.5 | ) | (2,719.7 | ) | (1,007.0 | ) | (416.8 | ) | (8,255.0 | ) | 913.4 | (7,341.6 | ) | (883.0 | ) | (8,224.6 | ) | |||||||||||||||||||
Gross profit | 653.8 | 667.1 | 364.8 | 38.5 | 1,724.2 | 125.1 | 1,849.3 | 226.3 | 2,075.6 | |||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||
Selling, general and administrative | (196.0 | ) | (139.3 | ) | (54.8 | ) | (19.2 | ) | (409.3 | ) | 7.8 | (401.5 | ) | (86.9 | ) | (488.4 | ) | |||||||||||||||||||
Depreciation and amortization | (9.0 | ) | (0.9 | ) | — | (0.5 | ) | (10.4 | ) | (177.8 | ) | (188.2 | ) | (5.3 | ) | (193.5 | ) | |||||||||||||||||||
Other, net | 51.1 | 2.6 | 3.7 | 10.0 | 67.4 | (16.2 | ) | 51.2 | 4.3 | 55.5 | ||||||||||||||||||||||||||
Operating income | R$ | 499.9 | R$ | 529.5 | R$ | 313.7 | R$ | 28.8 | R$ | 1,371.9 | R$ | (61.1 | ) | R$ | 1,310.8 | R$ | 138.4 | R$ | 1,449.2 | |||||||||||||||||
In the following discussion, references to increases or decreases in any year or period are made by comparison with the corresponding prior year or period, except as the context otherwise indicates.
Year endedEnded December 31, 20052007 Compared with Year Ended December 31, 20042006
Consolidated Results
Consolidated Results
The following table sets forth consolidated financial information for the years ended December 31, 20052007 and 2004.2006.
Year Ended December 31, | ||||
2007(1) | 2006(2) | |||
(in millions ofreais) | ||||
Net sales revenue | R$17,679.4 | R$12,992.7 | ||
Cost of sales and services rendered | (14,441.0) | (10,792.1) | ||
Gross profit | 3,238.4 | 2,200.6 | ||
Selling, general and administrative expenses | (1,238.5) | (951.5) | ||
Depreciation and amortization | (479.1) | (385.0) | ||
Other operating income, net | 131.5 | 186.1 | ||
Results from equity accounting(3) | (107.3) | (28.8) | ||
Financial expenses, net | (293.6) | (938.4) | ||
Operating income | 1,251.4 | 83.0 | ||
Non-operating expenses, net | (67.2) | 7.1 | ||
Income before income tax and social contribution and minority interest | 1,184.2 | 90.1 | ||
Income tax and social contribution | (377.0) | 12.8 | ||
Income before profit sharing and minority interest | 807.2 | 102.9 | ||
Profit sharing | (18.7) | — | ||
Minority interest | (240.9) | (1.6) | ||
Net income | R$ 547.6 | R$ 101.3 | ||
(1) | As a result of the Ipiranga Transaction, includes fully consolidated results of Copesul and consolidated results of Ipiranga Química and Ipiranga Petroquímica as from April 1, 2007. |
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(2) | As a result of the Politeno Acquisition described under “Item 4. Information On The Company—History and Development of Our Company,” includes fully consolidated results of Politeno for periods as from April 1, 2006. Politeno merged with and into Braskem on April 2, 2007. |
(3) | Results from equity accounting comprises the following line items in our consolidated statement of operations: equity in the results, amortization of goodwill (negative goodwill), net, foreign exchange variation, and tax incentives and other. |
Net Sales Revenue
Net sales revenue increased by 36.1% in 2007 primarily as a result of the following factors:
Year ended December 31, | ||||||||
(In millions ofreais) | 2005 | 2004 | ||||||
Net sales revenue | R$ | 13,075.1 | R$ | 12,389.5 | ||||
Cost of sales and services rendered | (10,361.7 | ) | (9,223.0 | ) | ||||
Gross profit | 2,713.4 | 3,166.5 | ||||||
Selling, general and administrative expenses | (787.1 | ) | (677.0 | ) | ||||
Investment in associated companies, net(1) | (109.8 | ) | (107.6 | ) | ||||
Depreciation and amortization | (355.6 | ) | (359.7 | ) | ||||
Financial expenses, net | (709.4 | ) | (1,238.6 | ) | ||||
Other operating income, net | 22.8 | 43.0 | ||||||
Operating income | 774.3 | 826.6 | ||||||
Non-operating expenses, net | (25.2 | ) | (29.8 | ) | ||||
Income before income tax and social contribution and minority interest | 749.1 | 796.8 | ||||||
Income tax and social contribution | (177.4 | ) | (85.1 | ) | ||||
Income before minority interest | 571.7 | 711.7 | ||||||
Minority interest | 54.1 | (24.6 | ) | |||||
Net income | R$ | 625.8 | R$ | 687.1 | ||||
Without giving effect to the proportional consolidation of our jointly controlled entities and the effects of intercompany eliminations, the aggregate increase of net sales revenues of our consolidated subsidiaries in 2007 compared to 2006 that was related to the consolidation Ipiranga Química, Ipiranga Petroquímica and Copesul as from April 1, 2007 was R$7,460.1 million.
Without giving effect to the proportional consolidation of our jointly controlled companies (Paulínia, Petroflex and Cetrel during 2007, and Copesul, Paulínia, Petroflex and Cetrel during 2006), our net sales revenue increased by 45.2% in 2007.
Cost of Sales and Services Rendered and Gross Profit
Cost of sales and services rendered increased by 33.8% in 2007, primarily as a result of the following factors:
Without giving effect to the proportional consolidation of our jointly controlled entities and the effects of intercompany eliminations, the aggregate increase of cost of sales and services rendered of our consolidated subsidiaries in 2007 compared to 2006 that was related to the consolidation Ipiranga Química, Ipiranga Petroquímica and Copesul as from April 1, 2007 was R$6,496.1 million.
Without giving effect to the proportional consolidation of our jointly controlled companies, our cost of sales and services rendered increased by 41.0% in 2007.
Gross profit increased by 47.2% in 2007. Without giving effect to the proportional consolidation of our jointly controlled companies, gross profit increased by 67.5% in 2007.
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Gross profit as a percentage of net sales revenue, or gross margin, was 18.3% in 2007 compared to 16.9% in 2006. Without giving effect to the proportional consolidation of our jointly controlled companies, gross margin increased to 18.1% in 2007 compared to 15.7% in 2006.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by 30.2% in 2007, primarily as a result of the following factors:
Selling, general and administrative expenses represented 7.0% of net sales revenue in 2007 compared to 7.3% of net sales revenue in 2006.
Without giving effect to the proportional consolidation of our jointly controlled entities and the effects of intercompany eliminations, the aggregate increase of selling, general and administrative expense of our consolidated subsidiaries in 2007 compared to 2006 that was related to the consolidation Ipiranga Química, Ipiranga Petroquímica and Copesul as from April 1, 2007 was R$198.8 million.
Without giving effect to the proportional consolidation of our jointly controlled companies, selling, general and administrative expenses increased by 37.4% in 2007, and selling, general and administrative expenses represented 7.1% of net sales revenue in 2007 compared to 7.5% of net sales revenue in 2006.
Depreciation and Amortization
Depreciation and amortization increased by 24.4% in 2007. Depreciation and amortization expenses were higher in 2007, primarily as a result of the following factors:
Without giving effect to the proportional consolidation of our jointly controlled companies, depreciation and amortization increased by 25.6% in 2007.
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Other Operating Income, Net
Other operating income, net declined by 29.3% in 2007. Without giving effect to the proportional consolidation of our jointly controlled companies, other operating income, net increased by 16.8% in 2007.
Results from Equity Accounting
Results from equity accounting were an expense of R$107.3 million in 2007 compared to an expense of R$28.8 million in 2006, primarily as a result of the following factors:
Without giving effect to the proportional consolidation of our jointly controlled companies, results from equity accounting were an expense of R$27.9 million in 2007 compared to an expense of R$166.7 million in 2006.
Financial Expenses, Net
Financial expenses, net, declined by 68.7% in 2007, primarily as a result of (1) the effects of thereal/U.S. dollar exchange rate on our U.S. dollar-denominated and U.S. dollar-indexed assets and liabilities, and (2) to a lesser extent, our recording of a R$2.5 million net gain on derivative transactions in 2007 compared to a R$47.8 million net loss on derivative transactions in 2006.
As a result of the 17.2% appreciation of therealagainst the U.S. dollar in 2007, we recorded:
As a result of the 8.7% appreciation of therealagainst the U.S. dollar in 2006, we recorded:
Without giving effect to the proportional consolidation of our jointly controlled companies, financial expenses, net declined by 68.6% in 2007.
Operating Income
Operating income was R$1,251.4 million in 2007 compared to R$83.0 million in 2006, primarily as a result of the 47.2% increase in gross profit and a 68.7% decrease in financial expenses, net as a result of the significant appreciation of thereal against the U.S. dollar. Operating income represented 7.1% of net sales revenue in 2007 compared to 0.6% of net sales revenue in 2006.
Without giving effect to the proportional consolidation of our jointly controlled entities and the effects of intercompany eliminations, the aggregate increase of operating income of our consolidated subsidiaries in 2007 compared to 2006 that was related to the consolidation Ipiranga Química, Ipiranga Petroquímica and Copesul as from April 1, 2007 was R$1,007.7 million.
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Without giving effect to the proportional consolidation of our jointly controlled companies, operating income increased to R$1,210.9 million in 2007 compared to operating loss of R$21.7 million in 2006 and represented 7.1% of net sales revenue in 2007 compared to (0.2)% of net sales revenue in 2006.
Non-Operating Income (Expense), Net
Non-operating expense, net was R$67.2 million in 2007 compared to non-operating income, net of R$7.1 million in 2006. This change was primarily as a result of a R$35.5 million investment loss as a result of the merger of EDSP58 with and into Copesul and a R$19.7 million provision for losses recorded in 2007 related to the permanent closure of the DMT unit in our PET plant. Without giving effect to the proportional consolidation of our jointly controlled companies, non-operating expense, net was an expense of R$56.6 million in 2007 compared to non-operating income, net of R$8.1 million in 2006.
Income Tax and Social Contribution
Income tax and social contribution was an expense of R$377.0 million in 2007 compared to a benefit of R$12.8 million in 2006, primarily as a result of the full consolidation of the results of Copesul and the consolidation of the results of Ipiranga Química in our financial statements as from April 1, 2007. Without giving effect to the proportional consolidation of our jointly controlled companies, income tax and social contribution was an expense of R$338.3 million in 2007 compared to a benefit of R$97.0 million in 2006.
Profit Sharing and Minority Interest
Minority interest increased to R$240.9 million in 2007 compared to R$1.6 million in 2006, primarily as a result of the full consolidation of the results of Copesul and the consolidation of the results of Ipiranga Química in our financial statements as from April 1, 2007 and the significant minority interests in each of these companies. In addition, we recorded Copesul’s profit sharing expense of R$18.7 million in 2007 as a result of the full consolidation of the results of Copesul in our financial statements. Without giving effect to the proportional consolidation of our jointly controlled companies, minority interest and profit sharing was an expense of R$240.9 million in 2007 compared to an expense of R$1.6 million in 2006.
Net Income
We recorded net income of R$547.6 million, or 3.1% of net sales revenue, in 2007 compared to net income of R$101.3 million, or 0.8% of net sales revenue, in 2006.
Business Segment Results
The following table sets forth consolidated financial information for our business segments for the years ended December 31, 2007 and 2006. We have not included a comparative discussion of the results of the Copesul, Ipiranga Química and Ipiranga Petroquímica business segments as the operations of these business segments had not been acquired prior to December 31, 2006.
Year Ended December 31, | ||||
2007 | 2006 | |||
(in millions ofreais,except | ||||
percentages) | ||||
Basic Petrochemicals | ||||
Net sales revenue | R$7,220.7 | R$6,883.6 | ||
Cost of sales and services rendered | (6,341.2) | (5,994.8) | ||
Gross profit | 879.5 | 888.8 |
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Year Ended December 31, | ||||
2007 | 2006 | |||
(in millions ofreais,except | ||||
percentages) | ||||
Operating income (1) | 569.4 | 539.0 | ||
Gross margin (%) | 12.2% | 12.9% | ||
Operating margin (%) | 7.9% | 7.8% | ||
Polyolefins(2) | ||||
Net sales revenue | R$5,669.1 | R$4,775.8 | ||
Cost of sales | (4,636.1) | (3,985.4) | ||
Gross profit | 1,033.0 | 790.4 | ||
Operating income (1) | 577.6 | 458.0 | ||
Gross margin (%) | 18.2% | 16.6% | ||
Operating margin (%) | 10.2% | 9.6% | ||
Vinyls | ||||
Net sales revenue | R$1,789.4 | R$1,541.7 | ||
Cost of sales | (1,438.1) | (1,245.3) | ||
Gross profit | 351.3 | 296.4 | ||
Operating income (1) | 173.4 | 208.1 | ||
Gross margin (%) | 19.6% | 19.2% | ||
Operating margin (%) | 9.7% | 13.5% | ||
Business Development | ||||
Net sales revenue | R$489.7 | R$483.1 | ||
Cost of sales | (510.3) | (545.7) | ||
Gross loss | (20.6) | (62.6) | ||
Operating loss (1) | (59.9) | (86.8) | ||
Gross margin (%) | (4.2)% | (13.0)% | ||
Operating margin (%) | (12.2)% | (18.0)% | ||
Copesul(3) | ||||
Net sales revenue | R$5,516.1 | — | ||
Cost of sales and services rendered | (4,924.7) | — | ||
Gross profit | 591.4 | — | ||
Operating income (1) | 509.3 | — | ||
Gross margin (%) | 10.7% | — | ||
Operating margin (%) | 9.2% | — | ||
Ipiranga Petroquímica(3) | ||||
Net sales revenue | R$1,551.4 | — | ||
Cost of sales | (1,232.5) | — | ||
Gross profit | 318.9 | — | ||
Operating income (1) | 202.1 | — | ||
Gross margin (%) | 20.6% | — | ||
Operating margin (%) | 13.0% | — | ||
Ipiranga Química(3) | ||||
Net sales revenue | R$392.6 | — | ||
Cost of sales | (338.9) | — | ||
Gross profit | 53.7 | — | ||
Operating income (1) | 9.6 | — | ||
Gross margin (%) | 13.7% | — | ||
Operating margin (%) | 2.4% | — |
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_______________ | |
(1) | |
(2) | As a result of the Politeno Acquisition described under “Item 4. Information On The Company— History and Development of Our Company,” includes fully consolidated results of Politeno for periods as from April 1, 2006. Politeno merged with and into Braskem on April 2, 2007. |
(3) | As a result of the Ipiranga Transaction, includes fully consolidated results of Copesul and consolidated results of Ipiranga Química and Ipiranga Petroquímica as from April 1, 2007. |
Basic Petrochemicals
Net Sales Revenue.Net sales revenue of the Basic Petrochemicals segment increased by 4.9% in 2007. Net sales revenue generated by sales of basic petrochemicals by our Basic Petrochemicals Unit to our other business units increased by 20.0% in 2007 to R$2,727.0 million from R$2,272.1 million in 2006, primarily as a result of our increased production of polyethylene, polypropylene and PVC due to the increased demand for these products. Net sales revenue generated by sales of basic petrochemicals to third parties declined by 0.5% in 2007 to R$3,663.8 million from R$3,681.3 million in 2006.
Net sales revenue generated by sales of utilities by the Basic Petrochemicals segment to our other segments increased by 10.5% in 2007 to R$177.1 million from R$160.3 million in 2006. Net sales revenue generated by sales of utilities to third parties declined by 6.2% in 2007 to R$351.3 million from R$374.5 million in 2006. Net sales revenue generated by sales of automotive gasoline declined by 23.8% in 2007 to R$301.5 million from R$395.4 million in 2006. Net sales revenue generated by export sales of the Basic Petrochemicals segment increased by 19.6% in 2007 to R$1,189.8 million from R$995.0 million in 2006, primarily as a result of our increased exports of para-xylene due to the availability of this product for export as a result of our temporary closure of our PET plant in May 2007.
Sales volume of automotive gasoline to third parties declined by 18.9% to approximately 310,800 cubic meters in 2007 from approximately 383,100 cubic meters in 2006, primarily as a result of our reallocation of the intermediate products used to produce automotive gasoline to the production of para-xylene and aromatic solvents which yield higher margins. Domestic sales volume of automotive gasoline to third parties declined by 19.3% in 2007, while export sales volume of automotive gasoline declined by 13.7% . The average domestic price for automotive gasoline declined by 5.7% to R$947 per cubic meter in 2007 from R$1,004 per cubic meter in 2006 and the average export price for automotive gasoline declined by 10.1% to R$1,218 per cubic meter in 2007 from R$1,354 per cubic meter in 2006.
The most significant factors contributing to the decline of net sales revenue generated by sales of basic petrochemicals to third parties were a R$150.4 million, or 21.6%, decline in net sales revenue generated by sales of ethylene to third parties, and a R$61.2 million, or 43.7%, decline in net sales revenue generated by sales of coperaf-1 to third parties. The effects of these declines were partially offset by a R$62.1 million, or 34.0%, increase in net sales revenue generated by sales of para-xylene to third parties, as well as a R$55.5 million, or 6.3%, increase in net sales revenue generated by sales of propylene to third parties.
Sales volume of ethylene to third parties declined by 20.6% to approximately 244,300 tons in 2007 from approximately 307,900 tons in 2006, primarily as a result of our consolidation of the results of Politeno for 12 months in 2007 as compared to nine months in 2006 as a result of the Politeno Acquisition on April 6, 2006. Sales of approximately 82,000 tons of ethylene to Politeno in the first quarter of 2006 were accounted for as sales to third parties. Our average price for ethylene declined by 2.5% to R$2,209 per ton in 2007 from R$2,266 per ton in 2006.
Sales volume of coperaf-1 to third parties declined by 41.0% to approximately 50,000 tons in 2007 from approximately 84,800 tons in 2006, primarily as a result of our increased internal use of coperaf-1 as a raw material in our production of other basic petrochemicals during a portion of 2007 when sales of these basic petrochemicals generated greater margins than sales of coperaf-1. Domestic sales volume of coperaf-1 to third parties declined by 25.2% in 2007, while export sales volume of coperaf-1 declined by 82.2% . The average domestic price for coperaf-1 declined by 7.8% to R$1,605 per ton in 2007 from R$1,740 per ton in 2006 and the average export price for coperaf-1 declined by 13.2% to R$1,229 per ton in 2007 from R$1,416 per ton in 2006.
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Sales volume of para-xylene to third parties increased by 53.5% to approximately 121,400 tons in 2007 from approximately 79,100 tons in 2006, primarily as a result of the increased availability of para-xylene for sale to third parties following the temporary closure of our PET plant in May 2007 and an increase in our production of para-xylene. We made no sales of para-xylene to third parties in the domestic market in 2007, primarily due to the declining demand by PET producers in Brazil for this product as a result of the substitution of lower cost imported polyesther fiber for PET as well as the increased demand for this product by our Mexican customers. Export sales volume of para-xylene to third parties increased by 214.8% in 2007. The average export price for para-xylene declined by 8.6% to were R$2,014 per ton in 2007 from R$2,204 per ton in 2006.
Sales volume of propylene to third parties increased by 5.3% to approximately 459,100 tons in 2007 from approximately 436,000 tons in 2006, primarily as a result of increased domestic demand for propylene and a competitive opportunity available to our company due to delays in deliveries of propylene from some of Petrobras’ refineries to their customers. Domestic sales volume of propylene to third parties increased by 12.1% in 2007, principally due to increased domestic demand for propylene and our reallocation of some of our production from the export market to the domestic market, in which we receive higher margins, while export sales volume of propylene declined by 15.1% . The average domestic price for propylene declined by 0.6% to R$2,094 per ton in 2007 from R$2,106 per ton in 2006, while the average export price for propylene increased by 3.8% to R$1,895 per ton in 2007 from R$1,825 per ton in 2006.
Cost of Sales and Services Rendered and Gross Profit.Cost of sales and services rendered of the Basic Petrochemicals segment increased by 5.8% in 2007. This increase was primarily attributable to the increase in sales volume in 2007. The effect of the increase in sales volume was partially offset by the decline in the average cost of naphtha to R$1,303 per ton in 2007 from R$1,252 per ton in 2006, which resulted principally from the appreciation of thereal against the dollar. Naphtha accounted for 83.1% of the Basic Petrochemicals segment’s cost of sales in 2007 and 86.6% in 2006.
Gross profit of the Basic Petrochemicals segment declined by 1.0% in 2007 and gross margin declined to 12.2% in 2007 compared to 12.9% in 2006.
Operating Income.Operating income of the Basic Petrochemicals segment (which excludes financial income, financial expense and results from equity accounting) increased by 5.6% in 2007, principally as a result of (1) R$15.9 million in other operating income, net, in 2007, primarily as a result of the reclassification of certain revenue, primarily sales of scrap and non-operational products in December 2007, compared to R$10.4 million in other operating expense, net in 2006, and (2) a R$14.4 million decrease in selling general and administrative expenses, primarily as a result of the non-recurrence of losses incurred under certain commodities hedging contracts that we entered into in 2006. These effects were partially offset by a R$9.4 million decline in gross profit. Operating margin of the Basic Petrochemicals segment in 2007 was 7.9% compared to 7.8% in 2006.
Polyolefins
Net Sales Revenue. Net sales revenue of the Polyolefins segment increased by 18.7% in 2007. This increase was primarily attributable to a 23.1% increase in net sales revenue generated by sales of polyethylene, as well as an 11.3% increase in net sales revenue generated by sales of polypropylene. Net sales revenue generated by export sales of the Polyolefins segment increased by 9.3% to R$1,391.3 million in 2007 from R$1,272.8 million in 2006.
Sales volume of polyethylene increased by 9.3% to approximately 426,900 tons in 2007 from approximately 390,500 tons in 2006, primarily as a result of our consolidation of the results of Politeno for 12 months in 2007 as compared to nine months in 2006 as a result of the Politeno Acquisition on April 6, 2006. Domestic sales volume of polyethylene increased by 20.1% in 2007, principally as a result of increased domestic demand, and export sales volume of polyethylene increased by 9.3% . The average domestic price for polyethylene increased by 8.1% to R$3,546 per ton in 2007 from R$3,279 per ton in 2006, while the average export price for polyethylene increased by 1.2% to R$2,774 per ton in 2007 from R$2,741 per ton in 2006.
Sales volume of polypropylene increased by 7.9% to approximately 571,600 tons in 2007 from approximately 529,900 tons in 2006, principally due to increased capacity utilization rates at our propylene plants. Domestic sales volume of polypropylene increased by 9.1% in 2007, principally due to increased domestic demand, while export sales volume of polypropylene increased by 0.4% . The average domestic price for polypropylene increased by 3.0% to R$3,444 per ton in 2007 from R$3,344 per ton in 2006, while the average export price for polypropylene increased by 2.5% to R$2,681 per ton in 2007 from R$2,614 per ton in 2006.
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Cost of Sales and Gross Profit. Cost of sales of the Polyolefins segment increased by 16.3% in 2007, primarily as a result of a 13.1% increase in the total sales volume of our Polyolefins Unit as a result of our consolidation of the results of Politeno for 12 months in 2007 as compared to nine months in 2006. Our Polyolefins Unit’s average cost for ethylene increased by 9.6% in 2007, and our Polyolefins Unit’s average cost for propylene increased by 1.9% in 2007.
Gross profit of the Polyolefins segment increased by 30.7% in 2007, and gross margin increased to 18.2% in 2007 compared to 16.6% in 2006.
Operating income.Operating income of the Polyolefins segment (which excludes financial income, financial expense and results from equity accounting) increased by 26.1% in 2007, principally as a result of a R$242.6 million increase in gross profit, the effects of which were partially offset by (1) a 24.0% increase in selling, general and administrative expenses, primarily due to our consolidation of the results of Politeno for 12 months in 2007 as compared to nine months in 2006 as a result of the Politeno Acquisition on April 6, 2006, and an increase in logistics expenses principally due to the increase in export sales, and (2) R$14.4 million in other operating expense, net, in 2007, principally composed of selling expenses that were reclassified as other operating expenses, primarily in December 2007, compared to R$22.5 million in other operating income, net in 2006, principally composed of non-recurring revenue recovery of R$13.1 million in connection with the reversal of a PIS tax provision in 2006. Operating margin of the Polyolefins segment in 2007 was 10.2% compared to 9.6% in 2006.
Vinyls
Net Sales Revenue. Net sales revenue of the Vinyls segment increased by 16.1% in 2007. This increase was primarily attributable to a 20.7% increase in net sales revenue generated by domestic sales of PVC. Net sales revenue generated by export sales of this segment increased by 25.8% to R$151.3 million in 2007 from R$120.2 million in 2006.
Sales volume of PVC increased by 16.5% to approximately 504,000 tons in 2007 from approximately 432,800 tons in 2006, principally as a result of an increase in opportunities to sell PVC due to a global imbalance in the supply and demand for PVC. Domestic sales volume of PVC increased by 16.1% in 2007, principally due to an increase in domestic demand, while export sales volume of PVC increased by 20.5%, principally due to increased global demand for PVC that outpaced increased production. The average domestic price for PVC increased by 3.9% to R$2,616 per ton in 2007 from R$2,518 per ton in 2006, while the average export price for PVC increased by 0.9% to R$2,000 per ton in 2007 from R$1,982 per ton in 2006.
Cost of Sales and Gross Profit. Cost of sales of the Vinyls segment increased by 15.5% in 2007, primarily as a result of the increased volume of sales of this segment and a 4.4% increase in the average price of ethylene.
Gross profit of the Vinyls segment increased by 18.5% in 2007, while gross margin increased to 19.6% in 2007 from 19.2% in 2006.
Operating Income. Operating income of the Vinyls segment (which excludes financial income, financial expense and results from equity accounting) declined by 16.7% in 2007, primarily as a result of a 64.0% increase in selling, general and administrative expenses as a result of increased accruals for profit sharing and increased storage and distribution expenses, which was partially offset by a R$54.9 million increase in gross profit. The operating margin of the Vinyls segment declined to 9.7% in 2007 from 13.5% in 2006.
Business Development
Net Sales Revenue. Net sales revenue of our Business Development segment increased by 1.4% in 2007. This increase was primarily attributable to the 5.2% increase in net sales revenue generated by sales of caprolactam in 2007, the effects of which were partially offset by a 4.6% decline in net sales revenue generated by sales of PET in 2007. Net sales revenue generated by export sales of this segment increased to R$128.7 million in 2007 from R$120.9 million in 2006.
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Sales volume of caprolactam increased by 3.4% to approximately 45,000 tons in 2007 from approximately 43,500 tons in 2006. Domestic sales volume of caprolactam decreased by 29.0% primarily as a result of the shutdown of the plant of one of our domestic customers in June 2006, while export sales volume of caprolactam increased by 50.4% in 2007, primarily as a result of our reallocation of our production to the export market following this plant closure. The average export price for caprolactam increased by 2.4% to R$4,478 per ton in 2007 from R$4,374 per ton in 2006, and the average domestic price for caprolactam increased by 6.3% to R$5,266 per ton in 2007 from R$4,954 per ton in 2006.
Sales volume of PET declined by 3.7% to approximately 61,600 tons in 2007 from approximately 64,000 tons in 2006. Domestic sales volume of PET increased by 19.3% in 2007 primarily as a result of our successful efforts to persuade our domestic PET customers to substitute our products for imported products that they had been consuming, while exports sales volume of PET declined to approximately 1,300 tons in 2007 from approximately 13,400 tons in 2006, primarily as a result of the reduced volume of PET available to export as a result of the recovery of our domestic sales. The average domestic price for PET declined by 3.4% to R$2,915 per ton in 2007 from R$3,019 per ton in 2006, while the average export price for PET increased by 4.9% to R$2,774 per ton in 2007 from R$2,644 per ton in 2006.
Cost of Sales and Gross Loss. Cost of sales of the Business Development segment declined by 6.5% in 2007. Gross loss of the Business Development segment decreased to a gross loss of R$20.6 million in 2007 from a gross loss of R$62.6 million in 2006, resulting in a negative gross margin of 4.2% in 2007 compared to a negative gross margin of 13.0% in 2006.
Operating Loss. Operating loss of the Business Development segment (which excludes financial income, financial expense and results from equity accounting) declined by 31.0%, principally as a result of the R$42.0 million decline in gross loss described above, the effects of which were partially offset by R$22.8 million in other operating expenses, net, in 2007, primarily as a result of the reclassification of some of our selling expenses as other operating expenses, particularly in June 2007, compared to R$1.9 million in other operating income, net in 2006. Operating margin of the Business Development segment was (12.2)% in 2007 compared to an operating margin of (18.0)% in 2006.
Copesul
Net Sales Revenue.Net sales revenue of the Copesul segment was R$5,516.1 million in the nine months ended December 31, 2007 (the period in 2007 in which we have fully consolidated the results of Copesul in our financial statements). Net sales revenue generated by sales of basic petrochemicals by the Copesul segment to our other segments was R$2,670.3 million, representing 48.4% of the net sales revenue of this segment. Net sales revenue generated by sales of basic petrochemicals to third parties was R$1,713.2 million, representing 31.1% of the net sales revenue of this segment.
Net sales revenue generated by sales of condensate was R$788.7 million, representing 14.3% of the net sales revenue of this segment. Net sales revenue generated by sales of utilities to third parties was R$92.9 million, representing 1.7% of the net sales revenue of this segment. Net sales revenue generated by sales of automotive gasoline was R$251.0 million, representing 4.6% of the net sales revenue of this segment. Net sales revenue generated by export sales of the Copesul segment was R$865.4 million, representing 15.7% of the net sales revenue of this segment.
Sales to third parties of the Copesul segment primarily consisted of:
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Sales volume of condensate to third parties was approximately 746,400 tons in the nine months ended December 31, 2007. Our average price for condensate was R$1,057 per ton in the nine months ended December 31, 2007. Sales volume of benzene to third parties was approximately 236,100 tons in the nine months ended December 31, 2007. Our average price for benzene was R$2,064 per ton in the nine months ended December 31, 2007. Sales volume of ethylene to third parties was approximately 191,900 tons in the nine months ended December 31, 2007. Our average price for ethylene was R$2,297 per ton in the nine months ended December 31, 2007.
Cost of Sales and Services Rendered and Gross Profit.Cost of sales and services rendered of the Copesul segment was R$4,924.7 million in the nine months ended December 31, 2007. The average cost of naphtha, which represented 88.9% of the cost of sales and services rendered of the Copesul segment, was R$1,314 per ton in the nine months ended December 31, 2007.
Gross profit of the Copesul segment was R$591.4 million in the nine months ended December 31, 2007 and gross margin was 10.7% in the nine months ended December 31, 2007.
Operating Income.Operating income of the Copesul segment (which excludes financial income, financial expense and results from equity accounting) was R$509.3 million in the nine months ended December 31, 2007. Operating margin of the Copesul segment in the nine months ended December 31, 2007 was 9.2% .
Ipiranga Petroquímica
Net Sales Revenue. Net sales revenue of the Ipiranga Petroquímica segment was R$1,551.4 million in the nine months ended December 31, 2007 (the period in 2007 in which we have consolidated the results of Ipiranga Petroquímica in our financial statements). Net sales revenue from sales of polyethylene were R$1,179.2 million, representing 76.0% of the net sales revenue of this segment in the nine months ended December 31, 2007, and net sales revenue from sales of polypropylene were R$372.2 million, representing 24.0% of the net sales revenue of this segment. Net sales revenue generated by export sales of the Ipiranga Petroquímica segment was R$410.8 million in the nine months ended December 31, 2007.
Sales volume of polyethylene was approximately 350,700 tons in the nine months ended December 31, 2007. Domestic sales volume of polyethylene was approximately 226,300 tons, and export sales volume of polyethylene was approximately 124,400 tons. The average domestic price for polyethylene was R$3,749 per ton in the nine months ended December 31, 2007, while the average export price for polyethylene was R$2,658 per ton in the nine months ended December 31, 2007.
Sales volume of polypropylene was approximately 111,000 tons in the nine months ended December 31, 2007. Domestic sales volume of polypropylene was approximately 78,700 tons in the nine months ended December 31, 2007, while export sales volume of polypropylene was approximately 32,300 tons. The average domestic price for polypropylene was R$3,713 per ton in the nine months ended December 31, 2007, while the average export price for polypropylene was R$2,479 per ton in the nine months ended December 31, 2007.
Cost of Sales and Gross Profit. Cost of sales of the Ipiranga Petroquímica segment was R$1,232.5 million in the nine months ended December 31, 2007. The Ipiranga Petroquímica segment’s average cost for ethylene was R$2,303 per ton during the nine months ended December 31, 2007, and the Ipiranga Petroquímica segment’s average cost for propylene was R$2,230 per ton during the nine months ended December 31, 2007.
Gross profit of the Ipiranga Petroquímica segment was R$318.9 million in the nine months ended December 31, 2007, and gross margin was 20.6% in the nine months ended December 31, 2007.
Operating Income.Operating income of the Ipiranga Petroquímica segment (which excludes financial income, financial expense and results from equity accounting) was R$202.1 million in the nine months ended December 31, 2007. Operating margin of the Ipiranga Petroquímica segment in the nine months ended December 31, 2007 was 13.0% .
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Ipiranga Química
Net Sales Revenue. Net sales revenue of the Ipiranga Química segment was R$392.6 million in the nine months ended December 31, 2007 (the period in 2007 in which we have consolidated the results of Ipiranga Química in our financial statements). Net sales revenue from sales of solvents was R$136.4 million, representing 34.7% of the net sales revenue of this segment in the nine months ended December 31, 2007, net sales revenue from sales of polymers was R$106.3 million, representing 27.1% of the net sales revenue of this segment, and net sales revenue from sales of general purpose chemicals was R$41.1 million, representing 38.2% of the net sales revenue of this segment. Sales volume of solvents was approximately 62,000 tons in the nine months ended December 31, 2007, sales volume of polymers was approximately 26,900 tons, and sales volume of general purpose chemicals was approximately 56,800 tons.
Cost of Sales and Gross Profit. Cost of sales of the Ipiranga Química segment was R$338.9 million in the nine months ended December 31, 2007. Gross profit of the Ipiranga Química segment was R$53.7 million in the nine months ended December 31, 2007, and gross margin was 13.7% in the nine months ended December 31, 2007.
Operating Income.Operating income of the Ipiranga Química segment (which excludes financial income, financial expense and results from equity accounting) was R$9.6 million in the nine months ended December 31, 2007. Operating margin of the Ipiranga Química segment in the nine months ended December 31, 2007 was 2.4% .
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
Consolidated Results
The following table sets forth consolidated financial information for the years ended December 31, 2006 and 2005.
Year Ended December 31, | ||||
2006(1) | 2005 | |||
(in millions ofreais) | ||||
Net sales revenue | R$ 12,992.7 | R$ 13,075.1 | ||
Cost of sales and services rendered | (10,792.1) | (10,361.7) | ||
Gross profit | 2,200.6 | 2,713.4 | ||
Selling, general and administrative expenses | (951.5) | (787.1) | ||
Depreciation and amortization | (385.0) | (355.6) | ||
Other operating income, net | 186.1 | 22.8 | ||
Results from equity accounting(2) | (28.8) | (109.8) | ||
Financial expenses, net | (938.4) | (709.4) | ||
Operating income | 83.0 | 774.3 | ||
Non-operating expenses, net | 7.1 | (25.2) | ||
Income before income tax and social contribution and minority interest | 90.1 | 749.1 | ||
Income tax and social contribution | 12.8 | (177.3) | ||
Income before minority interest | 102.9 | 571.8 | ||
Minority interest | (1.6) | 54.0 | ||
Net income | R$ 101.3 | R$ 625.8 | ||
______________ | |
(1) | As a result of the Politeno Acquisition described under “Item 4. Information On The Company— History and Development of Our Company,” includes fully consolidated results of Politeno for periods as from April 1, 2006. |
(2) | Results from equity accounting comprises the following line items in our consolidated statement of operations: equity in the results, amortization of goodwill (negative goodwill), net, foreign exchange variation and tax incentives and other. |
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Net Sales Revenue
Net sales revenue increaseddeclined by 5.5%0.6% in 2005,2006, primarily as a result of 11.5% growtha 4.7% decline in net sales revenue of our Basic Petrochemicals segment, and 12.3% growtha 14.1% decline in net sales of our Vinyls segment, a 12.8% decline in the contribution to our net sales revenue by our jointly controlled companies, and a 15.1% decline in net sales of our Business Development segment. The effects of these declines were partially offset by a 21.9% increase in net sales of our Polyolefins segment. Without giving effect to the proportional consolidation of our jointly controlled companies, our net sales revenue increased by 5.2%0.9% in 2005.2006.
Cost of Sales and Services Rendered and Gross Profit
Cost of sales and services rendered increased by 12.3%4.2% in 2005, primarily as2006, principally due to a result of 15.2% growth in cost of sales and services rendered of our Basic Petrochemicals segment and 26.2% growth25.2% increase in the cost of sales of our Polyolefins segment. The increases in cost of sales and services rendered for each of these segments wassegment primarily related to the higher overall direct and indirect cost of naphtha as a result of higher international market prices of naptha.Politeno Acquisition. Without giving effect to the proportional consolidation of our jointly controlled companies, our cost of sales and services rendered increased by 12.2%6.0% in 2005.2006.
As a result, gross profit declined by 14.3%18.9% in 2005.2006. Without giving effect to the proportional consolidation of our jointly controlled companies, gross profit declined by 16.2%20.0% in 2005.2006.
Gross profit as a percentage of net sales revenue, or gross margin, for 20052006 was 20.8%16.9% compared to 25.6%20.8% in 2004.2005. Without giving effect to the proportional consolidation of our jointly controlled companies, gross margin decreased to 19.8%15.7% for 20052006 compared to 24.8%19.8% in 2004.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by 16.3%20.9% in 2005,2006, primarily as a result of (1) ana R$30 million increase in distribution logistics and storage expenses, primarily as a result of increased geographic diversity of our customers, (2) a R$59.625 million increase in export expenses and a R$5 million increase in fixed costs, primarily as a result of our increased export sales and our establishment of sales offices in Argentina and The Netherlands, (3) a R$16 million increase in the provision for profit sharingdoubtful accounts, primarily due to an adjustment to the provision for doubtful accounts at Politeno to align Politeno’s provision with our criteria for this provision, and (2) an increase of(4) R$22.815 million in personnelnon-recurring expenses duerelating to annual salary adjustments at the endintegration of 2004.Politeno and restructuring of the Polyolefins, PET and caprolactam businesses.
Selling, general and administrative expenses represented 7.3% of net sales revenue in 2006 compared to 6.0% of net sales revenue in 2005 compared to 5.5% of net sales revenue in 2004.2005. Without giving effect to the proportional consolidation of our jointly controlled companies, selling, general and administrative expenses increased by 16.5%29.3% in 2005,2006, and selling, general and administrative expenses represented 7.5% of net sales revenue in 2006 compared to 5.8% of net sales revenue in 2005 compared to 5.3% of net sales revenue in 2004.2005.
Depreciation and Amortization
Investment in Associated Companies, Net
Investment in associated companies, net,Depreciation and amortization increased by 2.0%8.3% in 2005,2006, primarily as a result of the incurrenceincreases in property, plant and equipment as a result of other expense(1) the merger of R$1.4Polialden with our company on May 31, 2006, (2) the reclassification of programmed maintenance shutdown expenses as property, plant and equipment on January 1, 2006, and (3) our capital expenditures in 2005 compared to other incomeconnection with the implementation of R$16.6 million in 2004 and a R$5.8 million reduction of tax incentive benefits, partially offset by the incurrence of a R$3.6 million foreign exchange gain in 2005 compared to a R$9.6 million foreign exchange loss recorded in 2004 and the absence of a provision for investment losses in 2005. Without giving effect to the proportional consolidation of our jointly controlled companies, investment in associated companies, net, declined by 14.6% in 2005.
Depreciation and Amortization
Depreciation and amortization declined by 1.1% in 2005.Formula Braskem. Without giving effect to the proportional consolidation of our jointly controlled companies, depreciation and amortization decreasedincreased by 1.0%8.4% in 2005.2006.
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Other Operating Income, Net
Financial Expenses, Net
Financial expenses,Other operating income, net decreased by 42.7%increased to R$186.1 million in 2006 compared to R$22.8 million in 2005, primarily as a result of (1) a non-recurring revenue recovery of R$112.0 million in connection with the reversal of a tax provision for PIS/COFINS as a result of a favorable decision of the Brazilian Federal Supreme Court in certain suits that we had brought challenging the constitutionality of Law No. 9,718/98, and (2) a R$41.5 million increase in rental of facilities and assignment of right of use, primarily as a result of our contribution of our polypropylene production process technology to Paulínia. Without giving effect to the proportional consolidation of our jointly controlled companies, other operating income, net increased by 124.8% in 2006.
Results from Equity Accounting
Results from equity accounting declined by 73.8% in 2006, primarily as a result of a decline of 62.1% in amortization of (goodwill) negative goodwill, net, principally as a result of the elimination of the amortization of goodwill relating to Polialden as a result of the merger of Polialden with our company on May 31, 2006, as well as the realization of negative goodwill in the amount of R$53.0 million in 2006. The effects of this decline were partially offset by a 47.7% decline in tax incentives, primarily as a result of the expiration of certain tax incentives relating to technology utilized by Copesul. Without giving effect to the proportional consolidation of our jointly controlled companies, results from equity accounting increased by 164.6% in 2006.
real Financial Expenses, Net/
Financial expenses, net, increased by 32.3% in 2006, primarily as a result of (1) a R$117.8 million increase in taxes and charges on financial transactions, primarily as a result of the increase in debt in foreign currency in 2006, and (2) a R$100.4 million increase in losses on operational and financial derivatives transactions, primarily as a result of losses incurred under certain commodity hedging contracts and exchange rate hedges that we entered into in 2006. The effects of these increases were partially offset by the effect of the real/U.S. dollar exchange rate on our U.S. dollar-denominated and U.S. dollar-indexed assets.assets and liabilities. As a result of the 13.4%8.7% appreciation of therealagainst the U.S. dollar in 2006, we recorded:
As a result of the 11.8% appreciation of therealagainst the U.S. dollar in 2005, we recorded:
As a result of the 8.9% appreciation of therealagainst the U.S. dollar in 2004, we recorded:
Without giving effect to the proportional consolidation of our jointly controlled companies, financial expenses, net decreased by 43.4% in 2005.
Other Operating Income, Net
Other operating income, net decreased by 47.0% in 2005, primarily as a result of a decrease in recovery of taxes and compulsory deposits to R$3.4 million in 2005 from R$16.5 million in 2004. Without giving effect to the proportional consolidation of our jointly controlled companies, other operating income, net increased by 98.3%39.2% in 2005.
Operating Income
Operating income decreased by 6.3%89.3% in 2005.2006. Operating income represented 0.6% of net sales revenue in 2006 compared to 5.9% of net sales revenue in 2005 compared to 6.7% of net sales revenue in 2004. Without giving effect to the proportional consolidation of our jointly controlled companies, operating income increased by 0.1% in 2005 and represented 6.3% of net sales revenue in 2005 compared to 6.6% of net sales revenue in 2004.
Non-Operating Expenses, Net
Non-operating expenses, net decreased by 15.4% in 2005, primarily as a result of the effect of gains on investments recognized in 2005. Without giving effect to the proportional consolidation of our jointly controlled companies, operating loss was R$21.7 million in 2006 compared to operating income of R$735.1 million in 2005, and represented (0.2)% of net sales revenue in 2006 compared to 6.3% of net sales revenue in 2005.
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Non-Operating Income (Expense), Net
Non-operating income, net was R$7.1 million in 2006 compared to non-operating expense, net of R$25.2 million in 2005, primarily as a result of non-recurring expenses increasedof R$22.4 million incurred in 2005 principally related to environmental remediation that we performed at our Alagoas plant. Without giving effect to the proportional consolidation of our jointly controlled companies, non-operating income, net was R$8.1 million in 2006 compared to non-operating expense, net of R$24.7 million in 2005 compared to R$29.2 million in 2004.2005.
Income Tax and Social Contribution
Income tax and social contribution increased by 108.5%was a benefit of R$12.8 million in 2005. This increase resulted primarily from a deferred income tax loss of R$29.7 million recorded in 20052006 compared to a deferred income tax benefitan expense of R$141.4177.3 million recorded in 2004,2005, primarily as a result of our reduced taxable income in 2006 and a R$75.9 million increase in our deferred income tax benefit that we recorded in 2004 in connection withasset as a result of our merger with Trikem.Polialden. Furthermore, our aggregate tax loss carryforwards increased by R$51.9 million in 2006 compared to a decrease in our aggregate tax loss carryforwards of R$24.7 million in 2005. Without giving effect to the proportional consolidation of our jointly controlled companies, income tax and social contribution was a benefit of R$97.0 million in 2006 compared to an expense of R$87.7 million in 2005 compared to a benefit of R$10.5 million in 2004.2005.
Minority Interest
Minority interest resulted in a loss of R$1.6 million in 2006 compared to a gain of R$54.154.0 million in 2005, compared to an expense of R$24.6 million, primarily as a result of the allocationelimination of Polialden’s accumulated profit reserves tothe minority interest in Polialden as a result of our company through the payment of dividendsmerger with Polialden on Polialden’s common shares in the amount of R$58.1 million in 2005, which generated a loss to the holders of preferred shares of Polialden.May 31, 2006. Without giving effect to the proportional consolidation of our jointly controlled companies, minority interest was a loss of R$1.6 million in 2006 compared to a gain of R$54.154.0 million in 20052005.
Net Income
We recorded net income of R$101.3 million, or 0.8% of net sales revenue, in 2006 compared to an expense of R$24.6 million in 2004.
Net Income
We recorded net income of R$625.8 million, or 4.8% of net sales revenue, in 2005 compared to net income of R$687.1 million, or 5.5% of net sales revenue, in 2004.
Business Segment Results
The following table sets forth consolidated financial information for our business segments for the years ended December 31, 20052006 and 2004.2005.
Year Ended December 31, | ||||
2006 | 2005 | |||
(in millions ofreais,except | ||||
percentages) | ||||
Basic Petrochemicals | ||||
Net sales revenue | R$6,883.6 | R$7,226.7 | ||
Cost of sales and services rendered | (5,994.8) | (6,138.5) | ||
Gross profit | 888.8 | 1,088.2 | ||
Operating income (1) | 539.0 | 895.0 | ||
Gross margin (%) | 12.9% | 15.1% | ||
Operating margin (%) | 7.8% | 12.4% | ||
Polyolefins(2) | ||||
Net sales revenue | R$4,775.8 | R$3,919.0 | ||
Cost of sales | (3,985.4) | (3,182.8) | ||
Gross profit | 790.4 | 736.2 | ||
Operating income (1) | 458.0 | 553.3 | ||
Gross margin (%) | 16.6% | 18.8% | ||
Operating margin (%) | 9.6% | 14.1% |
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Year ended December 31, | ||||||||
(in millions ofreais, except percentages) | 2005 | 2004 | ||||||
Basic Petrochemicals | ||||||||
Net sales revenue | R$ | 7,226.7 | R$ | 6,480.0 | ||||
Cost of sales and services rendered | (6,138.5 | ) | (5,330.1 | ) | ||||
Gross profit | 1,088.2 | 1,149.9 | ||||||
Operating income(1) | 895.0 | 955.7 | ||||||
Gross margin (%) | 15.1% | 17.7% | ||||||
Operating margin (%) | 12.4% | 14.7% | ||||||
Polyolefins | ||||||||
Net sales revenue | R$ | 3,919.0 | R$ | 3,489.4 | ||||
Cost of sales | (3,182.8 | ) | (2,523.0 | ) | ||||
Gross profit | 736.2 | 966.4 | ||||||
Operating income(1) | 553.3 | 767.7 | ||||||
Gross margin (%) | 18.8% | 27.7% | ||||||
Operating margin (%) | 14.1% | 22.0% | ||||||
Vinyls | ||||||||
Net sales revenue | R$ | 1,794.1 | R$ | 1,858.8 | ||||
Cost of sales | (1,271.9 | ) | (1,157.1 | ) | ||||
Gross profit | 522.2 | 701.7 | ||||||
Operating income(1) | 438.8 | 635.9 | ||||||
Gross margin (%) | 29.1% | 37.8% | ||||||
Operating margin (%) | 24.5% | 34.2% | ||||||
Business Development | ||||||||
Net sales revenue | R$ | 569.0 | R$ | 620.8 | ||||
Cost of sales | (552.9 | ) | (564.9 | ) | ||||
Gross profit | 16.1 | 55.9 | ||||||
Operating income(1) | 6.8 | 32.9 | ||||||
Gross margin (%) | 2.8% | 9.0% | ||||||
Operating margin (%) | 1.2% | 5.3% |
Year Ended December 31, | ||||
2006 | 2005 | |||
(in millions ofreais,except | ||||
percentages) | ||||
Vinyls | ||||
Net sales revenue | R$1,541.7 | R$1,794.1 | ||
Cost of sales | (1,245.3) | (1,271.9) | ||
Gross profit | 296.4 | 522.2 | ||
Operating income (1) | 208.1 | 438.8 | ||
Gross margin (%) | 19.2% | 29.1% | ||
Operating margin (%) | 13.5% | 24.5% | ||
Business Development | ||||
Net sales revenue | R$483.1 | R$569.0 | ||
Cost of sales | (545.7) | (552.9) | ||
Gross profit (loss) | (62.6) | 16.1 | ||
Operating income (loss)(1) | (86.8) | 6.8 | ||
Gross margin (%) | (13.0)% | 2.8% | ||
Operating margin (%) | (18.0)% | 1.2% |
_______________ | |
(1) | Operating income does not include financial income, financial expense and |
(2) | As a result of the Politeno Acquisition described under “Item 4. Information On The Company— History and Development of Our Company,” includes fully consolidated results of Politeno for periods as from April 1, 2006. |
Basic Petrochemicals
Net Sales Revenue. Net sales revenue of the Basic Petrochemicals segment increaseddeclined by 11.5%4.7% in 2005.2006. Significant factors contributing to this increasedecline were:
Net sales revenue generated by sales of basic petrochemicals by our Basic Petrochemicals segment to our other segments increased by 16.9%28.9% in 2006 to R$2,272.1 million from R$1,763.0 million in 2005, principally due to R$1,763.0 million from R$1,508.1 million in 2004,the reclassification of ethylene sales to Politeno as internal sales for the period after April 6, 2006, the date of the Politeno Acquisition, and net sales revenue generated by sales of utilities by our Basic Petrochemicals segment to our other segments increased by 11.5%16.0% in 20052006 to R$160.3 million from R$138.2 million from R$123.9 million in 2004.2005. Net sales revenue generated by sales of utilities to third parties increased by 20.4%5.9% in 20052006 to R$374.5 million from R$353.6 million from R$293.6 million in 2004.2005. Net sales revenue generated by export sales of the Basic Petrochemicals segment increaseddeclined by 12.0%6.1% in 20052006 to R$995.0 million from R$1,059.9 million in 2005.
Domestic sales volume of ethylene to third parties declined by 47.0% to approximately 307,900 tons in 2006 from approximately 581,100 in 2005 principally due to (1) the reclassification of ethylene sales to Politeno as internal sales for the period after April 6, 2006, the date of the Politeno Acquisition, (2) reduced demand by second generation producers in the Northeastern Complex as a result of operational problems experienced by several of our customers, and (3) a non-programmed maintenance shutdown of our Olefins 1 unit during December 2006 for 13 days, as a result of which we were able to postpone the next scheduled maintenance shutdown of this unit by 12 months. The average domestic price for ethylene increased by 3.8% to R$2,270 per ton in 2006 from R$946.1 million2,187 per ton in 2004.2005.
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Sales volume of propylene to third parties declined by 9.1% to approximately 436,000 tons in 2006 from approximately 479,500 tons in 2005. Domestic sales volume of propylene to third parties declined 20.0% principally due to (1) reduced demand by 1.8% to approximately 408,200 tonssecond generation producers in 2005 from approximately 415,600 tons in 2004. Average domestic pricesthe Northeastern Complex as a result of operational problems experienced by several of our customers, and (2) a non-programmed maintenance shutdown of our Olefins 1 unit during December 2006 for 13 days, while export sales volume of propylene increased by 19.5%53.6%, principally due to our strategic decision to increase our exports of propylene despite the lower margins available in the international market rather than lower our capacity utilization rate in response to the reduced domestic demand for propylene. The average domestic price for propylene declined by 0.9% to R$2,106 per ton in 2006 from R$2,124 per ton in 2005, fromand the average export price for propylene declined 11.4% to R$1,7771,825 per ton in 2004.2006 from R$2,059 per ton in 2005.
Sales volume of para-xylene to third parties declined by 36.9% to approximately 79,100 tons in 2006 from approximately 125,400 tons in 2005. Domestic sales volume of ethylenepara-xylene to third parties declined 67.7% principally due to the reduced production of polyester fiber in Brazil as end users substituted less expensive polyester fiber for domestically produced polyester fiber. In response to this decline we exported approximately 38,600 tons of para-xylene, a significant portion of which was sold to Mexican customers. The average domestic price for para-xylene increased by 6.6% to R$2,406 per ton in 2006 from R$2,256 per ton in 2005, and the average export price for para-xylene was R$2,307 per ton in 2006.
Sales volume of benzene to third parties declined by 11.1% to approximately 340,100 tons in 2006 from approximately 382,500 tons in 2005, primarily due to (1) a non-programmed maintenance shutdown of our Olefins 1 unit during December 2006 for 13 days, and (2) a change in the mix of products produced in 2006 that effectively reduced our benzene production capacity during 2006. Domestic sales volume of benzene to third parties increased 7.5%, principally due to the increased demand by 3.4% to approximately 581,100 tons in 2005 from approximately 561,800 tons in 2004. Average domestic prices for ethylene increased by 6.3% to R$2,187 per ton in 2005 from R$2,057 per ton in 2004.
Sales volumeproducers of automotive gasoline to third parties increased by 10.0% to approximately 444,300 cubic meters in 2005 from approximately 403,800 cubic meters in 2004. Domestic sales volume of automotive gasoline to third parties increased by 57.9% in 2005,nylon fiber, while export sales volume of automotive gasolinebenzene declined by 40.5%. Average21.7%, principally due to the reduced availability of benzene available for export as a result of increased domestic pricesdemand. The average domestic price for automotive gasoline increasedbenzene declined by 24.1%10.0% to R$9261,971 per cubic meterton in 2006 from R$2,190 per ton in 2005 from R$746 per cubic meter in 2004 and the average export pricesprice for automotive gasolinebenzene increased by 10.4%6.5% to R$9402,010 per cubic meterton in 20052006 from R$8511,887 per cubic meterton in 2004.2005.
Cost of Sales and Services Rendered and Gross Profit. Cost of sales and services rendered of the Basic Petrochemicals segment increaseddeclined by 15.2%2.3% in 2005.2006. This increasedecline was primarily attributable to the lower volume of production of our Basic Petrochemicals segment, the effects of which were partially offset by the increase in the average cost of naphtha to R$1,178.4 per ton in 2005 from R$1,077.2 per ton in 2004 as well as the increase in sales volume in 2005.during 2006. Naphtha accounted for 86.6% of the Basic Petrochemicals segment’s cost of sales in 20052006 and 82.4%86.6% in 2004.2005.
Gross profit of the Basic Petrochemicals segment decreased by 5.4%18.3% in 20052006 and gross margin decreased to 12.9% in 2006 compared to 15.1% in 2005 compared to 17.7% in 2004.2005.
Operating Income. Operating income of the Basic Petrochemicals segment (which excludes financial income, financial expense and results from investment in associated companies)equity accounting) decreased by 6.4%39.8% in 2005,2006, principally as a result of a R$61.7 million(1) the decline in gross profit andof this segment, (2) a 17.1%35.4% increase in selling, general and administrative expenses, primarilyprincipally as a result of our investment in 2005 in new supply chain and technology departmentslosses incurred under certain commodity hedging contracts that we expect will provide greater efficienciesentered into in these areas. These effects were partially offset by an increase2006, and (3) our incurrence of other operating expenses, net of R$10.4 million in 2006 compared to other operating income, net toof R$57.1 million in 2005, comparedprimarily due to R$22.2 millionnon-recurring sales of iron scrap in 2004, principally as a result of2005 and our recovery of an account receivable in 2005 in the amount of R$18.6 million that we had previously written off. Operating margin of the Basic Petrochemicals segment was 7.8% in 2005 was 12.4%2006 compared to 14.7%12.4% in 2004.2005.
Polyolefins
Polyolefins
Net Sales Revenue. Net sales revenue of the Polyolefins segment increased by 12.3%21.9% in 2005.2006. This increase was primarily attributable to:
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Net sales revenue generated by export sales of the Polyolefins segment increased by 43.2%31.0% to R$1,272.8 million in 2006 from R$971.5 million in 2005 from R$678.6 million in 2004.
Sales volume of polypropylene increased by 12.3%2.4% to approximately 529,900 tons in 2006 from approximately 517,500 tons in 2005 from approximately 461,000 tons in 2004.2005. Domestic sales volume of polypropylene increased by 0.3%7.9% in 2005,2006, principally due to low Brazilian economic growth, increased competition fromthe expansion of production by some of our customers, while export sales volume of polypropylene imports anddeclined by 21.4%, principally due to the reduced demandavailability of polypropylene available for polypropylene products in the agricultural sectorexport as a result of the poor Brazilian harvest, while exports sales volume of polypropylene increased by 129.6%. Average domestic pricesdemand. The average domestic price for polypropylene increased by 6.0% toin 2006 remained stable at R$3,344 per ton, in 2005 from R$3,155 per ton in 2004, while the average export pricesprice for polypropylene stated inreais declinedincreased by 4.6%5.1% to R$2,614 per ton in 2006 from R$2,487 per ton in 2005 from R$2,604 per ton in 2004, primarily as a result of the appreciation of thereal against the U.S. dollar during 2005.
Sales volume of polyethylene increased by 9.0%29.6% to approximately 995,200 tons in 2006 from approximately 768,200 tons in 2005 from approximately 704,700 tons in 2004.2005. Domestic sales volume of polyethylene increased by 0.7%20.4% in 2005, principally due to low Brazilian economic growth, while exports2006 and export sales volume of polyethylene increased by 29.1%. Average46.9% in 2006, principally due to the effects of the Politeno Acquisition. The average domestic pricesprice for polyethylene increased by 2.9%6.7% to R$3,279 per ton in 2006 from R$3,072 per ton in 2005, from R$2,987 per ton in 2004, while the average export pricesprice for polyethylene stated inreais declinedincreased by 0.3%0.6% to R$2,741 per ton in 2006 from R$2,725 per ton in 2005 from R$2,733 per ton in 2004, primarily as a result of the appreciation of thereal against the U.S. dollar during 2005.
Cost of Sales and Gross Profit. Cost of sales of the Polyolefins segment increased by 26.2%25.2% in 20052006 compared to 2004,2005, primarily as a result of (1) the effectincreased volume of sales of polyolefins products driven by the Politeno Acquisition, and (2) the increased cost of the significant increase in the price of naphtha on ethylene and propylene, which are the principal raw materials of our Polyolefins Unit, and (2) our increased sales volume of polypropylene due to the 65,000 ton increase in our annual polypropylene capacity.feedstocks used by this segment. Our average cost for ethylene increased by 9.2%5.9% during 2005,2006, and our average cost for propylene increased by 19.3%6.9% during 2005.2006.
Gross profit of the Polyolefins segment declinedincreased by 23.8%7.4% in 2005 and2006, while gross margin declined to 16.6% in 2006 compared to 18.8% in 2005 compared to 27.7% in 2004.2005.
Operating Income. Operating income of the Polyolefins segment (which excludes financial income, financial expense and results from investment in associated companies)equity accounting) decreased by 27.9%17.2% in 2005,2006, primarily as a result of (1) a R$230.2 million decrease in gross profit and, to a lesser extent, a 15.0%50.4% increase in selling, general and administrative expenses, primarily as a result of (1) an increase in personnel expensesprincipally due to annual salary adjustments at the end of 2004 and 2005, and (2) an increase in royaltyhigher expenses as a result of our increased production of LLDPEthe Politeno Acquisition, and very low density polyethylene using metallocene technology. This effect was partially offset by an increase(2) a 57.6% decrease in other operating income, net. These effects were partially offset by the increase in this segment’s gross profit. Other operating income, net, to R$53.0 million in 2005 compared to R$6.3 million in 2004, primarily asincluded a result of a recorded gain of R$58.2 million related to the contribution of our polypropylene production process technology to Paulínia.nia and other operating income, net included our recovery of additional corporate income tax in the amount of R$13.1 million in 2006. Operating margin of the Polyolefins segment decreased to 9.6% in 2006 compared to 14.1% in 2005 compared to 22.0% in 2004.2005.
Vinyls
Vinyls
Net Sales Revenue. Net sales revenue of the Vinyls segment decreaseddeclined by 3.5%14.1% in 2005.2006. This decreasedecline was primarily attributable to a 9.5%7.4% decline in net sales revenue generated by sales of PVC, a 22.7% decline in net sales revenue generated by sales of caustic soda and a 45.5%45.1% decline in net sales revenue generated by export sales of EDC. The effects of these declines was partially offset by a 33.7% increase in net sales revenue generated by sales of caustic soda. Net sales revenue generated by export sales of this segment declined by 13.8%45.6% to R$120.2 million in 2006 from R$220.9 million in 2005 from R$256.2 million in 2004.2005.
Sales volume of PVC declined by 2.1% to approximately 432,800 tons in 2006 from approximately 441,900 tons in 2005, principally due to the effects of a general maintenance shutdown of our PVC plant in Camaçari that was carried in May 2006 and lasted 14 days. Domestic sales volume of PVC increased by 3.3%5.7% in 2006, mainly to the growth of domestic demand, while export sales volume of PVC declined by 48.6%, principally due to the reduced availability of PVC available for export as a result of increased domestic demand. The average domestic price for PVC decreased by 8.3% to R$2,518 per ton in 2006 from R$2,747 per ton in 2005, while the average export price for PVC increased by 7.0% to R$1,982 per ton in 2006 from R$1,852 per ton in 2005.
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Export sales volume of EDC declined by 14.8% to approximately 441,900104,100 tons in 2006 from approximately 122,200 tons in 2005, primarily as a result of the expiration of a long-term supply agreement with Sojitz Corporation (formerly known as Nissho Iwai Corporation), or Sojitz, during 2006 the effects of which were partially offset by our increase in spot market sales of EDC. The average export price for EDC declined by 35.5% to R$507 per ton in 2006 from approximately 427,700 tonsR$786 per ton in 2004.2005.
Domestic sales volume of PVC decreasedcaustic soda declined by 3.9%7.0% to approximately 423,900 tons in 2006 from approximately 455,600 tons in 2005, principally due to our loss of market share, increased imports of PVC resins and our decision not to lower prices during the first half of 2005, while export sales volume of PVC increased by 89.1%. Average domestic prices for PVC decreased by 9.7% to R$2,747 per ton in 2005 from R$3,042 per ton in 2004, while average export prices for PVC declined by 22.7% to R$1,852 per ton in 2005 from R$2,397 per ton in 2004.
Export sales volume of EDC decreased by 22.4% to approximately 122,200 tons in 2005 from approximately 157,600 tons in 2004, due to the reduction of the portion of our EDCreduced production that was available for sale because of our increased use of EDC for our own PVC production. Average export prices for EDC declined by 29.7% to R$786 per ton in 2005 from R$1,118 per ton in 2004.
Domestic sales volume of caustic soda increasedin 2006 as a result of temporary operational problems experienced by 2.6% to approximately 455,600 tons in 2005 from approximately 444,000 tons in 2004, principally due to an increase in our market share. AverageAlagoas caustic soda plant. The average domestic pricesprice for caustic soda increaseddeclined by 28.0%14.4% to R$844 per ton in 2006 from R$986 per ton in 2005 from R$770 per ton in 2004.2005.
Cost of Sales and Gross Profit. Cost of sales of the Vinyls segment increaseddeclined by 9.9%2.1% in 20052006 compared to 2004,2005, primarily as a result of an 8.4% increaseour reduced volume of sales, the effects of which were partially offset by increases in the costprices of ethylene.ethylene and electric power.
Gross profit of the Vinyls segment declined by 25.6%43.2% in 2005,2006, while gross margin decreased to 19.2% in 2006 from 29.1% in 2005 from 37.8% in 2004.2005.
Operating Income. Operating income of the Vinyls segment (which excludes financial income, financial expense and results from investment in associated companies)equity accounting) declined by 31.0%52.6% in 2005, primarily as a result of a R$179.5 million decreasethe decline in gross profit.profit of this segment and, to a lesser extent, a 37.9% increase in selling, general and administrative expenses, principally as a result of some additional delivery expenses and an increase on our allowance for doubtful accounts. The operating margin of the Vinyls segment declined to 13.5% in 2006 from 24.5% in 2005 from 34.2% in 2004.2005.
Business Development
Net Sales Revenue. Net sales revenue of our Business Development segment declined by 8.3%15.1% in 2005.2006. This decreasedecline was primarily attributable to a 20.2% decrease5.5% decline in net sales revenue generated by sales of PET during 2005, the effects of which were partially offset by2006 and a 5.3% increase21.1% decline in net sales revenue generated by sales of caprolactam during 2005.2006. Net sales revenue generated by export sales of this segment increased to R$120.9 million in 2006 from R$87.8 million in 2005 from R$56.8 million in 2004.2005.
Sales volume of PET declinedincreased by 18.6%5.9% to approximately 64,000 tons in 2006 from approximately 60,400 tons in 2005, from approximately 74,300 tons in 2004, primarily as a result of our reduced production as a result of a general maintenance shutdown of our PET plantan increase in April 2005.export sales to the European market. Domestic sales volume of PET decreased by 14.5%10.6% in 20052006 primarily as a result of competitionthe increase in imports of PET into Brazil from low-price PET imports,Asia, while exportsexport sales volume of PET increased by approximately 250% as a result of our development of customers in foreign markets. The average domestic price for PET declined by 52.7%. Average domestic prices for PET decreased by 1.6%14.9% to R$3,019 per ton in 2006 from R$3,547 per ton in 2005, from R$3,605 per ton in 2004, while the average export pricesprice for PET declined by 15.8%2.9% to R$2,644 per ton in 2006 from R$2,723 per ton in 2005 from R$3,235 per ton in 2004.2005.
Sales volume of caprolactam declined by 1.8%9.9% to approximately 43,500 tons in 2006 from approximately 48,300 tons in 2005 from approximately 49,100 tons in 2004.2005. Domestic sales volume of caprolactam decreased by 23.2%22.0% in 2005,2006 primarily as a result of the permanent closure of a plant by one of our customers, while exportsexport sales volume of caprolactam increased by 147.8%. Average16.5% due to our strategic decision to increase our exports of caprolactam despite the lower margins available in the international market rather than lower our capacity utilization rate in response to the reduced domestic pricesdemand for caprolactam. The average domestic price for caprolactam increaseddeclined by 11.7%17.1% to R$4,954 per ton in 2006 from R$5,975 per ton in 2005, fromand the average export price for caprolactam declined by 13.5% to R$5,3494,374 per ton in 2004, and average export prices for caprolactam increased by 1.8% to2006 from R$5,059 per ton in 2005 from R$4,971 per ton in 2004.2005.
Cost of Sales and Gross ProfitLoss. Cost of sales of the Business Development segment decreased by 2.1%1.3% in 2005.2006.
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Gross profitloss of the Business Development segment decreased by 71.2%was R$62.6 million in 2006 compared to gross profit of R$16.1 million in 2005, resulting in a gross margin of (13.0)% in 2006 compared to 2.8% in 2005 compared to 9.0% in 2004.2005.
Operating Income (Loss). Operating incomeloss of the Business Development segment (which excludes financial income, financial expense and results from investmentequity accounting) was R$86.8 million in associated companies) declined by 79.3%2006 compared to operating income of R$6.8 million in 2005, principally as a result of the incurrence of a R$39.8 million decreasegross loss by this segment in gross profit. The effects of this decrease were partially offset by a 26.9% decrease in selling, general and administrative expenses and an increase in other operating income, net to R$9.2 million in 2005 compared to R$2.6 million in 2004.2006. Operating margin of the Business Development segment decreasedwas (18.0)% in 2006 compared to 1.2% in 2005 from 5.3% in 2004.
Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
Consolidated Results
The following table sets forth consolidated financial information for the years ended December 31, 2004 and 2003.
Year ended December 31, | ||||||||
(In millions ofreais) | 2004 | 2003 | ||||||
Net sales revenue | R$ | 12,389.5 | R$ | 10,300.2 | ||||
Cost of sales and services rendered | (9,223.0 | ) | (8,224.6 | ) | ||||
Gross profit | 3,166.5 | 2,075.6 | ||||||
Selling, general and administrative expenses | (677.0 | ) | (488.4 | ) | ||||
Investment in associated companies, net(1) | (107.6 | ) | (170.5 | ) | ||||
Depreciation and amortization | (359.7 | ) | (193.5 | ) | ||||
Financial expenses, net | (1,238.6 | ) | (711.6 | ) | ||||
Other operating income, net | 43.0 | 55.5 | ||||||
Operating income | 826.6 | 567.1 | ||||||
Non-operating expenses, net | (29.8 | ) | (4.5 | ) | ||||
Income before income tax and social contribution and minority interest | 796.8 | 562.6 | ||||||
Income tax and social contribution | (85.1 | ) | (121.3 | ) | ||||
Income before minority interest | 711.7 | 441.3 | ||||||
Minority interest | (24.6 | ) | (226.2 | ) | ||||
Net income | R$ | 687.1 | R$ | 215.1 | ||||
Net Sales Revenue
Net sales revenue increased by 20.3% in 2004, primarily as a result of the growth in net sales revenue in each of our segments (as discussed below), particularly the 36.0% growth in net sales revenue of our Basic Petrochemicals segment and the 35.5% growth in net sales revenue of our Vinyls segment. Without giving effect to the proportional consolidation of our jointly controlled companies, our net sales revenue increased by 20.2% in 2004.
Cost of Sales and Services Rendered and Gross Profit
Cost of sales and services rendered increased by 12.1% in 2004, primarily as a result of the 29.6% growth in cost of sales and services rendered of our Basic Petrochemicals segment, as well as the 14.9% growth in cost of sales of our Vinyls segment and the 35.5% growth in the cost of sales of our Business Development segment. The increases in cost of sales and services rendered of each of these segments was primarily related to the higher overall direct and indirect cost of naphtha as a result of higher international market prices of naptha. Without giving effect to the proportional consolidation of our jointly controlled companies, our cost of sales and services rendered increased by 13.1% in 2004.
As a result, gross profit increased by 52.6% in 2004. Without giving effect to the proportional consolidation of our jointly controlled companies, gross profit increased by 48.1% in 2004.
Gross profit as a percentage of net sales revenue, or gross margin, for 2004 was 25.6% compared to 20.2% in 2003. Without giving effect to the proportional consolidation of our jointly controlled companies, gross margin increased to 24.8% for 2004 compared to 20.1% in 2003.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by 38.6% in 2004, primarily as a result of:
Selling, general and administrative expenses represented 5.5% of net sales revenue in 2004 compared to 4.7% of net sales revenue in 2003. Without giving effect to the proportional consolidation of our jointly controlled companies, selling, general and administrative expenses increased by 44.6% in 2004, and selling, general and administrative expenses represented 5.3% of net sales revenue in 2004 compared to 4.4% of net sales revenue in 2003.
Investment in Associated Companies, Net
Investment in associated companies, net, decreased by 36.9% in 2004, primarily as a result of a decrease in amortization of goodwill, principally related to Copesul and Politeno, partially offset by reduced tax incentive benefits and by the R$9.6 million foreign exchange loss recorded in 2004 compared to the R$22.4 million foreign exchange gain recorded in 2003. Without giving effect to the proportional consolidation of our jointly controlled companies, investment in associated companies, net, was a gain of R$73.7 million in 2004 compared to an expense of R$119.4 million in 2003.
Depreciation and Amortization
Depreciation and amortization increased by 85.9% in 2004, primarily as a result of:
Without giving effect to the proportional consolidation of our jointly controlled companies depreciation and amortization increased by 88.0% in 2004.
Financial Expenses, Net
Financial expenses, net, increased by 74.1% in 2004, primarily as a result of the effects of thereal/U.S. dollar exchange rate on our U.S. dollar-denominated and U.S. dollar-indexed assets and liabilities and the increased principal amount of foreign-currency denominated debt in 2004. As a result of the 8.9% appreciation of therealagainst the U.S. dollar in 2004, we recorded:
As a result of the 22.3% appreciation of therealagainst the U.S. dollar in 2003, we recorded:
Without giving effect to the proportional consolidation of our jointly controlled companies, financial expenses, net increased by 79.8% in 2004.
Other Operating Income, Net
Other operating income, net decreased by 22.5% in 2004, primarily as a result of:
These effects were partially offset by a decrease in taxes on intercompany sales as we were no longer required to record taxes on intercompany sales to OPP Química and Nitrocarbono following the mergers of these companies with us in 2004, which taxes amounted to R$24.2 million in 2003. Without giving effect to the proportional consolidation of our jointly controlled companies, other operating income, net decreased by 31.3%.
Operating Income
Operating income increased by 45.8% in 2004. Operating income represented 6.7% of net sales revenue in 2004 compared to 5.5% of net sales revenue in 2003. Without giving effect to the proportional consolidation of our jointly controlled companies, operating income increased by 37.0% in 2004 and represented 6.6% of net sales revenue in 2004 compared to 5.8% of net sales revenue in 2003.
Non-Operating Expenses, Net
Non-operating expenses, net increased to R$29.8 million in 2004 compared to R$4.5 million in 2003. This increase resulted primarily from a reversal of a loss on investment of R$26.9 million in 2003. Without giving effect to the proportional consolidation of our jointly controlled companies, non-operating expenses increased to R$29.2 million in 2004 compared to R$4.6 million in 2003.
Income Tax and Social Contribution
Income tax and social contribution decreased by 29.8% in 2004. This decrease resulted primarily from the increase in deferred income tax of R$25.6 million in 2003 to R$141.4 million in 2004, primarily as a result of a
deferred income tax benefit that we recorded in 2004 in connection with our merger with Trikem. Without giving effect to the proportional consolidation of our jointly controlled companies, income tax and social contribution was a benefit of R$10.5 million in 2004 compared to an expense of R$91.8 million in 2003.
Minority Interest
Minority interest decreased by 89.1% in 2004, primarily as a result of elimination of the minority interest in Trikem as a result of our merger with Trikem in January 2004. Without giving effect to the proportional consolidation of our jointly controlled companies, minority interest also decreased by 89.1% in 2004.
Net Income
We recorded net income of R$687.1 million, or 5.5% of net sales revenue, in 2004 compared to net income of R$215.1 million, or 2.1% of net sales revenue, in 2003.
Business Segment Results
The following table sets forth consolidated financial information for our business segments for the years ended December 31, 2004 and 2003.
Year ended December 31, | ||||||||
(in millions ofreais, except percentages) | 2004 | 2003 | ||||||
Consolidated | ||||||||
Basic Petrochemicals | ||||||||
Net sales revenue | R$ | 6,480.0 | R$ | 4,765.3 | ||||
Cost of sales and services rendered | (5,330.1 | ) | (4,111.5 | ) | ||||
Gross profit | 1,149.9 | 653.8 | ||||||
Operating income(1) | 955.7 | 499.9 | ||||||
Gross margin (%) | 17.7 | % | 13.7 | % | ||||
Operating margin (%) | 14.7 | % | 10.5 | % | ||||
Polyolefins | ||||||||
Net sales revenue | R$ | 3,489.4 | R$ | 3,386.8 | ||||
Cost of sales | (2,523.0 | ) | (2,719.7 | ) | ||||
Gross profit | 966.4 | 667.1 | ||||||
Operating income(1) | 767.7 | 529.5 | ||||||
Gross margin (%) | 27.7 | % | 19.7 | % | ||||
Operating margin (%) | 22.0 | % | 15.6 | % | ||||
Vinyls | ||||||||
Net sales revenue | R$ | 1,858.8 | R$ | 1,371.8 | ||||
Cost of sales | (1,157.1 | ) | (1,007.0 | ) | ||||
Gross profit | 701.7 | 364.8 | ||||||
Operating income(1) | 635.9 | 313.7 | ||||||
Gross margin (%) | 37.8 | % | 26.6 | % | ||||
Operating margin (%) | 34.2 | % | 22.9 | % | ||||
Business Development | ||||||||
Net sales revenue | R$ | 620.8 | R$ | 455.3 | ||||
Cost of sales | (564.9 | ) | (416.8 | ) | ||||
Gross profit | 55.9 | 38.5 | ||||||
Operating income(1) | 32.9 | 28.8 | ||||||
Gross margin (%) | 9.0 | % | 8.5 | % | ||||
Operating margin (%) | 5.3 | % | 6.3 | % |
Basic Petrochemicals
Net Sales Revenue. Net sales revenue of the Basic Petrochemicals segment increased by 36.0% in 2004. Significant factors contributing to this increase were:
Net sales revenue generated by sales of basic petrochemicals by our Basic Petrochemicals segment to our other segments increased by 65.6% in 2004 to R$1,508.1 million from R$910.7 million in 2003, and net sales revenue generated by sales of utilities by our Basic Petrochemicals segment to our other segments increased by 19.4% in 2004 to R$123.9 million from R$103.8 million in 2003.
Net sales revenue generated by sales of utilities to third parties increased by 4.6% in 2004 to R$293.6 million from R$280.7 million in 2003. Net sales revenue generated by export sales of the Basic Petrochemicals segment increased by 52.9% in 2004 to R$946.1 million from R$618.8 million in 2003.
Export sales volume of benzene increased by 20.3% to approximately 169,500 tons in 2004 from approximately 140,900 tons in 2003, principally due to our strategic decision to increase our exports of benzene to take advantage of the high prices available in the international market. As a result, domestic sales volume of benzene to third parties declined by 2.2% to approximately 154,400 tons in 2004 from approximately 157,900 tons in 2003. Average export prices for benzene increased by 82.2% to R$2,359 per ton in 2004 from R$1,295 per ton in 2003, while average domestic prices for benzene increased by 58.9% to R$2,395 per ton in 2004 from R$1,507 per ton in 2003.
Domestic sales volume of ethylene to third parties increased by 0.5% to approximately 561,800 tons in 2004 from approximately 559,100 tons in 2003. Average domestic prices for ethylene increased by 21.4% to R$2,057 per ton in 2004 from R$1,694 per ton in 2003.
Domestic sales volume of propylene to third parties increased by 4.1% to approximately 415,600 tons in 2004 from approximately 399,200 tons in 2003, principally due to increased demand by other second generation producers of petrochemicals derived from propylene as a result of the economic recovery in Brazil. Average domestic prices for propylene increased by 18.9% to R$1,777 per ton in 2004 from R$1,495 per ton in 2003.
Cost of Sales and Services Rendered and Gross Profit. Cost of sales and services rendered of the Basic Petrochemicals segment increased by 29.6% in 2004. This increase was primarily attributable to the increase in the average cost of naphtha to R$1,077.2 per ton in 2004 from R$886.1 per ton in 2003 as well as the increase in sales volume in 2004. Naphtha accounted for 82.4% of the Basic Petrochemicals segment’s cost of sales in 2004 and 84.6% in 2003.
Gross profit of the Basic Petrochemicals segment increased by 75.9% in 2004 and gross margin increased to 17.7% in 2004 compared to 13.7% in 2003.
Operating Income. Operating income of the Basic Petrochemicals segment (which excludes financial income, financial expense and results from investment in associated companies) increased by 91.2% in 2004, principally as a result of a R$496.1 million increase in gross profit. Operating margin of the Basic Petrochemicals segment in 2004 was 14.7% compared to 10.5% in 2003.
Polyolefins
Net Sales Revenue. Net sales revenue of the Polyolefins segment increased by 3.0% in 2004. This increase was primarily attributable to:
The effects of these increases were substantially offset by the elimination of certain export transactions that were undertaken in 2003 to support export finance transactions and that were included in net sales revenue generated by export sales of this segment. Net sales revenue generated by export sales of the Polyolefins segment decreased by 45.0% to R$678.6 million 2004 from R$1,233.7 million in 2003.
Domestic sales volume of polyethylene increased by 11.8% to approximately 498,700 tons in 2004 from approximately 446,100 tons in 2003, principally due to increased sales of flexible packaging for food, particularly frozen meat for export, snacks and cookies, as well as long shelf-life beverages. Average domestic prices for polyethylene increased by 16.2% to R$2,984 per ton in 2004 from R$2,567 per ton in 2003.
Domestic sales volume of polypropylene increased by 11.6% to approximately 418,500 tons in 2004 from approximately 374,900 tons in 2003, principally due to the performance of the automotive and the electrical/electronic industries and agricultural sectors. Average domestic prices for polypropylene increased by 17.3% to R$3,155 per ton in 2004 from R$2,689 per ton in 2003.
Export sales volume of polyethylene decreased by 7.2% to approximately 205,900 tons in 2004 from approximately 221,900 tons in 2003, principally due to our decision to sell a greater volume of polyethylene products domestically in light of increased demand in the domestic market. Average export prices for polyethylene increased by 31.9% to R$2,733 per ton in 2004 from R$2,072 per ton in 2003.
Cost of Sales and Gross Profit. Cost of sales of the Polyolefins segment decreased by 7.2% in 2004 compared to 2003 despite the 5.1% increase in sales volume, primarily as a result of the cessation of purchases related to certain export transactions that were undertaken in 2003 to support export finance transactions. This effect was partially offset by a 22.5% increase in the cost of ethylene and a 13.7% increase in the cost of propylene.
Gross profit of the Polyolefins segment increased by 44.9% in 2004, while gross margin increased to 27.7% in 2004 compared to 19.7% in 2003.
Operating Income. Operating income of the Polyolefins segment (which excludes financial income, financial expense and results from investment in associated companies) increased by 45.0% in 2004, primarily as a result of a R$299.3 million increase in gross profit. This effect was partially offset by a R$59.8 million increase in selling, general and administrative expenses as a result of higher sales volumes of polyolefins in the domestic market and an increase in the provision for doubtful accounts of this segment. Operating margin of the Polyolefins segment increased to 22.0% in 2004 compared to 15.6% in 2003.
Vinyls
Net Sales Revenue. Net sales revenue of the Vinyls segment increased by 35.5% in 2004. This increase was primarily attributable to a 46.6% increase in net sales revenue generated by domestic sales of PVC, supplemented by a 61.9% increase in net sales revenue generated by export sales of EDC and a 17.8% increase in net sales revenue generated by domestic sales of caustic soda. Net sales revenue generated by export sales of this segment increased by 25.8% to R$256.2 million in 2004 from R$203.7 million in 2003.
Domestic sales volume of PVC increased by 15.2% to approximately 394,400 tons in 2004 from approximately 342,400 tons in 2003, principally due to increased sales by the footwear, laminate and wire and cable industries, as well as by the commencement of a recovery of the construction sector. Average domestic prices for PVC increased by 27.3% to R$3,042 per ton in 2004 from R$2,390 per ton in 2003.
Export sales volume of EDC decreased by 1.6% to approximately 157,600 tons in 2004 from approximately 160,100 tons in 2003. Average export prices for EDC increased by 64.4% to R$1,118 per ton in 2004 from R$680 per ton in 2003.
Domestic sales volume of caustic soda increased by 4.1% to approximately 444,000 tons in 2004 from approximately 426,600 tons in 2003, principally due to the increased demand of our clients in the aluminum, paper and cellulose industries. Average domestic prices for caustic soda increased by 13.1% to R$770 per ton in 2004 from R$681 per ton in 2003.
Cost of Sales and Gross Profit. Cost of sales of the Vinyls segment increased by 14.9% in 2004 compared to 2003. This increase was primarily attributable to increases in some of our production costs, principally due to a 17.1% increase in the cost of ethylene, and an increase of 4.7% in the total sales volume of this segment.
Gross profit of the Vinyls segment increased by 92.4% in 2004, while gross margin increased to 37.8% in 2004 from 26.6% in 2003.
Operating Income. Operating income of the Vinyls segment (which excludes financial income, financial expense and results from investment in associated companies) increased by 102.7% in 2004, primarily as a result of a R$336.9 million increase in gross profit. This effect was partially offset by a R$25.3 million increase in selling, general and administrative expenses, primarily as a result of the increase of our domestic sales volume of vinyls and an increase in the provision for doubtful accounts of this segment. The operating margin of the Vinyls segment increased to 34.2% in 2004 from 22.9% in 2003.
Business Development
Net Sales Revenue. Net sales revenue of our Business Development segment increased by 36.3% in 2004. This increase was primarily attributable to a 41.7% increase in net sales revenue generated by domestic sales of PET during 2004, a 27.6% increase in net sales revenue generated by domestic sales of caprolactam during 2004 and an increase in net sales revenue generated by export sales of PET to R$26.2 million in 2004 compared to R$3.5 million in 2003. Net sales revenue generated by export sales of this segment increased to R$56.8 million in 2004 from R$34.4 million in 2003.
Domestic sales volume of PET increased by 20.1% to approximately 66,200 tons in 2004 from approximately 55,100 tons in 2003, primarily as a result of the increase in our PET plant’s annual production capacity from 70,000 tons to 78,000 tons during 2004. Average domestic sales prices of PET increased by 18.0% to R$3,605 per ton in 2004 from R$3,056 per ton in 2003.
Domestic sales volume of caprolactam increased by 1.2% to approximately 43,000 tons in 2004 from approximately 42,500 tons in 2003. Average domestic sales prices of caprolactam increased by 26.2% to R$5,349 per ton in 2004 from R$4,237 per ton in 2003.
Export sales volume of PET was approximately 8,100 tons in 2004 compared to approximately 1,200 tons in 2003. Average export sales prices of PET increased by 12.0% to R$3,235 per ton in 2004 from R$2,888 per ton in 2003.
Cost of Sales and Gross Profit. Cost of sales of the Business Development segment increased by 35.5% in 2004, primarily reflecting increases in some of our production costs, primarily a 65.7% increase in the cost of
benzene, and the effects of a 5.9% increase in sales volume of this segment.
Gross profit of the Business Development segment increased by 45.2% in 2004, resulting in a gross margin of 9.0% compared to 8.5% in 2003.
Operating Income. Operating income of the Business Development segment (which excludes financial income, financial expense and results from investment in associated companies) increased by 14.2% in 2004, principally as a result of a R$17.4 million increase in gross profit. Operating margin of the Business Development segment decreased to 5.3% in 2004 from 6.3% in 2003.
Liquidity and Capital Resources
Our principal cash requirements consist of the following:
Our principal sources of liquidity have traditionally consisted of the following:
During 2005,2007, cash flow generated by operations was used primarily for investing activities, for working capital requirements and to service our outstanding debt obligations. At December 31, 2005,2007, our consolidated cash and cash equivalents and other investments amounted to R$2,281.52,258.6 million, including R$178.391.9 million that has been included in our consolidated financial statements due to the effects of proportional consolidation and to which we do not generally have access because we jointly control our proportionally consolidated companies with third parties. At December 31, 2005,2007, we had working capital of R$1,373.7673.4 million. Without giving effect to the proportional consolidation of our jointly controlled companies, we had working capital of R$779.4636.5 million at December 31, 2005.2007.
Projected Sources and Uses of Cash
We anticipate that we will be required to spend approximately R$2,505.39,726.7 million to meet our short-term contractual obligations and commitments and budgeted capital expenditures in 2006,2008, without giving effect to proportional consolidation. We expect that we will meet these cash requirements through a combination of cash generated from operating activities and cash generated by financing activities, including new debt financings and the refinancing of our existing short-term indebtedness as it becomes due.
We anticipate that we will be required to spend approximately R$7,788.916,369.8 million to meet our long-term contractual obligations and commitments and budgeted capital expenditures through 2008,2010, without giving effect to proportional consolidation. We anticipate that we will meet these cash requirements through a combination of: (1) cash generated from operating activities; (2) cash generated by financing activities, including new debt financings and the refinancing of our indebtedness as it becomes due; and (3) dividends received from our subsidiaries and jointly controlled companies.
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We have commitments from several financial institutions to provide us with financing in the future, including:
These commitments are subject to conditions precedent which we believe that we will be able to satisfy in connection with any amounts drawn under these facilities. We pay commitment fees to these financial institutions in connection with their commitments.
Cash Flows
Cash Flows from Operating Activities
Net cash provided by operating activities was R$2,393.8 million in 2007, R$405.3 million in 2006 and R$1,719.4 million in 2005, R$1,916.0 million in 2004 and R$596.9 million in 2003.2005. Without giving effect to the proportional consolidation of our jointly controlled companies, net cash providedused by operating activities was R$2,343.2 million in 2007, R$115.7 million in 2006 and R$2,109.1 million in 2005, R$1,662.0 million in 2004 and R$431.9 million in 2003.2005.
The most significant factors in the generation of our consolidated cash flows from operating activities in 2007 consisted of the following:
These positive factors contributing to our cash flows from operations were partially offset by the effect of the R$556.4 million decrease in our liabilities for taxes and contributions payable which resulted primarily from (1) payments that we made to the Brazilian tax authorities under adverse rulings in certain suits brought by our company requesting the acknowledgement of IPI tax credits for certain purchases of raw materials by OPP Química, Trikem and Polialden, and (2) the reversal of a provision for PIS and COFINS taxes as a result of favorable rulings in certain suits brought by our company challenging the change to the methodology of assessing these taxes.
The most significant factors in the generation of our consolidated cash flows from operating activities in 2006 were:
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These positive factors contributing to our cash flows from operations were partially offset by the effects of R$462.5 million increase in our taxes recoverable resulting from: (1) an increase in our ICMS credit balance as a result of our consolidation of Politeno following the Politeno Acquisition, and (2) the recognition of PIS and COFINS’s extemporaneous credit on our inputs and services used in our productive process.
The most significant factors in the generation of our consolidated cash flows from operating activities in 2005 were:
These positive factors contributing to our cash flows from operations were partially offset by the effects of a R$130.3 million increase in our taxes recoverable resulting primarily from our increased level of exports in 2005.
The most significant factors in the generation of our consolidated cash flows from operating activities in 2004 were:
These positive factors contributing to our cash flows from operations in 2004 were partially offset by the effects of:
The significant factors that led to the generation of our consolidated cash flows from operating activities in 2003 included our net income of R$215.1 million, and a R$321.2 million decrease in our taxes recoverable primarily as a result of the use of our tax credits to offset R$364.9 million of our federal tax assessment in 2003. These positive factors contributing to our cash flows from operations in 2003 were partially offset by the effects of, among other factors:
Cash Flows Used in Investing Activities
Investing activities used net cash of R$3,577.1 million in 2007, R$1,213.1 million in 2006 and R$1,048.0 million during 2005, R$1,014.4 million during 2004 and R$469.4 million in 2003.2005. Without giving effect to the proportional consolidation of our jointly controlled companies, investing activities used net cash of R$3,282.6 million in 2007, R$992.7 million in 2006 and R$973.5 million in 2005.
During 2007, investing activities for which we used cash on a consolidated basis primarily consisted of (1) additions to property, plant and equipment, including our proportional share of the cost of the property, plant and equipment of Paulínia, investments in equipment replacement and additions to equipment related to the implementation of our Formula Braskem program, (2) payments to Ultrapar under the Ipiranga Investment Agreement and payments made for the 7.6% of the total share capital of Ipiranga Petroquímica not owned by Ipiranga Química, and (3) payments in connection with the merger of EDSP58 into Copesul and the merger of EDSP67 into Ipiranga Petroquímica. In addition, we used R$263.0. million to perform maintenance on our plants during 2005, R$815.9 millionscheduled shutdowns during 20042007 and R$494.8129.4 million in 2003.our safety, health and environmental programs.
During 2006, investing activities for which we used cash on a consolidated basis primarily consisted of (1) the payment of R$237.5 million, representing the portion of the purchase price that was due upon the closing of the Politeno Acquisition, (2) additions to equipment related to the increase of our annual polyethylene production capacity in the Northeastern Complex by 30,000 tons and the increase of our annual isoprene production capacity by 8,800 tons, and (3) additions to equipment related to the implementation of our Braskem+ and Formula Braskem programs. In addition, we used R$150.0 million to perform maintenance on our plants during scheduled shutdowns during 2006 and R$152.0 million in our safety, health and environmental programs.
During 2005, investing activities for which we used cash on a consolidated basis primarily consisted of additions to equipment related to the increase of our annual PVC production capacity at our Alagoas PVC plant by 50,000 tons, the increase of our annual polyethylene production capacity in the Northeastern Complex by 30,000 tons and capital expenditures that are expected to increaseincreased our annual polyethylene production capacity in the Northeastern Complex by 30,000 tons when completed in 2006. In addition, we used R$150.0 million to perform maintenance on our plants during scheduled shutdowns during 2005 and R$150.0 million in our safety, health and environmental programs.
During 2004, investing activities for which we used cash on a consolidated basis primarily consisted of additions to equipment related to the increase of our annual polypropylene production capacity in the Southern Complex by 100,000 tons, the increase of our annual paraxylene production capacity in the Northeastern Complex by 50,000 tons and capital expenditures related to the increase of our annual PVC production capacity at our Alagoas PVC plant by 50,000 tons. In addition, we used R$210.1 million to perform maintenance of our plants during scheduled shutdowns during 2004.
In 2003, investing activities for which we used cash on a consolidated basis primarily consisted of additions to property, plant and equipment related to upgrading, maintaining and modernizing the Olefins 1 unit of our Basic Petrochemicals Unit during a scheduled shutdown.
Cash Flows from Financing Activities
Financing activities provided net cash of R$1,526.3 million in 2007 and R$219.2 million in 2006, and used net cash of R$329.7 million during 2005 and provided net cash of R$166.0 million during 2004 and R$379.1 million in 2003.2005. Without giving effect to the proportional consolidation of our jointly controlled companies, financing activities provided net cash of R$1,283.6 million in 2007 and R$375.9 million in 2006, and used net cash of R$754.4 million during 2005,in 2005.
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During 2007, our principal sources of long-term borrowed funds consisted of (1) US$953.2 million aggregate principal amount borrowed under the Acquisition Credit Agreement, (2) US$150.0 million aggregate principal amount borrowed under our prepayment credit export facility, and provided net(3) US$125.0 million aggregate principal amount borrowed under two credit export note facilities.
During 2007, we used cash to prepay (1) US$125.0 million under our syndicated secured export prepayment facility due 2009, and (2) R$155.1 million under our 12th issue of debentures.
During 2006, our principal sources of long-term borrowed funds consisted of issuances of our 9.00% Perpetual Bonds in an aggregate principal amount of US$200.0 million, our 8.00% Notes due 2017 in an aggregate principal amount of US$275.0 million, our 14th issue of debentures in an aggregate principal amount of R$309.5500.0 million, during 2004 and borrowings under a credit export note facility in an aggregate amount of US$78.0 million.
During 2006, we used cash:
During 2005, our principal sources of long-term borrowed funds consisted of:
During 2005, we used cash to repay:
We also repaid R$124.7 million of borrowings under four loan agreements with Copesul Trading International Inc., a related party, during 2005.
During 2004, we recorded a capital increase of R$1,211.0 million as a result of our sale of 53,820,000 of our class A preferred shares in a global offering, principally conducted in the United States and Brazil. During 2004, our principal sources of long-term borrowed funds consisted of:
During 2004, we used cash to repay:
We also borrowed R$39.9 million on market terms from related parties, principally from Copesul Trading International Inc., to finance our working capital requirements during 2004 and repaid R$109.2 million of borrowings from Copesul Trading International Inc.
In 2003, our principal source of long-term borrowed funds consisted of issuances in an aggregate amount of US$461.0 million under our medium-term note program and US$30.0 million of proceeds of a syndicated, secured pre-export finance facility. We used cash in 2003 to repay R$389.3 million of our outstanding long-term debt and to repay R$1,259.4 million of our outstanding short-term debt as part of our strategy to increase the average maturity of our indebtedness. We borrowed R$833.6 million on market terms from related parties, principally from Copesul Trading International Inc. and Petroflex, to finance our working capital requirements during 2003 and repaid R$843.2 million to these related parties.
Between May 20, 2002 and March 31, 2005, we did not have retained earnings (but rather had an accumulated deficit) and accordingly did not pay dividends or interest attributable to stockholders’ equity in 2003 or 2004. In December, 2004, we offset our accumulated deficit against our tax incentive reserve. On April 12, 2005, we paid a distribution of R$204.2 million, including R$170.0 million that was paid in the form of interest attributable to shareholders’ equity and R$34.2 million that was paid in the form of dividends.
On April 18, 2006, we paid a distribution of R$325.7 million, including R$270.0 million that was paid in the form of interest attributable to shareholders’ equity and R$55.7 million that was paid in the form of dividends. On April 9, 2007, we paid dividends in the aggregate amount of R$36.9 million. On April 17, 2008, we paid dividends in the aggregate amount of R$278.5 million.
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Unless our board of directors deems it inconsistent with our financial position, payment of dividends is mandatory under our by-laws and also is required under agreements with two of our shareholders and, consequently, may give rise to a significant cash requirementrequirements in future periods. Without giving effect to the proportional consolidation of our jointly controlled companies, we recorded dividend payments and interest attributable to shareholders’ equity of R$43.8 million in 2007, R$344.1 million in 2006 and R$209.3 million in 2005 R$4.2 million in 2004 and R$72.3 million in 2003 in our consolidated financial statements.
On May 3, 2006, we announced that our board of directors had authorized a share repurchase program under which we were authorized to repurchase up to 13,896,133 class A preferred shares and up to 1,400,495 common shares at market prices over the São Paulo Stock Exchange at any time and from time to time prior to October 31, 2006. We repurchased 13,131,054 of our class A preferred shares under our share repurchase program for a total purchase price of R$182.0 million. On March 6, 2008, we announced that our shareholders had authorized the cancellation of 16,595,000 of our class A preferred shares that were held in treasury with a book value of R$244.5 million.
On February 19, 2008, we announced that our board of directors had authorized a share repurchase program under which we are authorized to repurchase up to 19,862,411 class A preferred shares at market prices over the São Paulo Stock Exchange at any time and from time to time between March 7, 2008 and March 6, 2009 for a total purchase price of up to R$252.3 million. As of June 27, 2008, we have repurchased 1,669,000 of our class A preferred shares under our share repurchase program for an aggregate purchase price of R$22.0 million.
Indebtedness and Financing Strategy
At December 31, 2005,2007, our total outstanding indebtedness on a consolidated basis excluding related party debt, was R$5,361.18,381.9 million, consisting of R$904.31,180.0 million of short-term indebtedness, including current portion of long-term indebtedness (or 16.9%14.1% of our total indebtedness), and R$4,456.87,201.9 million of long-term indebtedness (or 83.1%85.9% of our total indebtedness). At December 31, 2007, we had no outstanding indebtedness to related parties on a consolidated basis. Without giving effect to the proportional consolidation of our jointly controlled companies, at December 31, 2005,2007, our total outstanding indebtedness was R$5,003.88,101.0 million, consisting of R$620.21,176.0 million of short-term indebtedness, including current portion of long-term indebtedness, and R$4,383.66,925.0 million of long-term indebtedness.
On a consolidated basis, ourreal-denominated indebtedness at December 31, 20052007 was R$2,614.52,503.5 million (29.9%), and our foreign currency-denominated indebtedness was R$2,746.6 million.5,878.4 million (70.1%) . Without giving effect to the proportional consolidation of our jointly controlled companies, ourrealreal--denominateddenominated indebtedness at December 31, 20052007 was R$2,329.92,260.3 million, and our foreign currency-denominated indebtedness was R$2,673.95,840.5 million. At December 31, 2005, our total outstanding indebtedness to related parties on a consolidated basis was R$6.1 million.
Our financing strategy has been to continue to extend the average maturity of our outstanding indebtedness, including by repaying short-term debt through longer-term borrowings and issuing longer-term debt securities, including the notes offered hereby, in order to increase our liquidity levels and improve our strategic, financial and operational flexibility. Our financing strategy over the next several years involves maintaining adequate liquidity and a debt maturity profile that is compatible with our anticipated cash flow generation.generation and anticipated capital expenditures. In addition, we do not expect our capital expenditures to affect adversely affect the quality of our debt leverage ratios or our disciplined approach to capital allocation.
Short-Term Indebtedness
Our consolidated short-term debt, including debentures and current portion of long-term debt, but excluding related party debt, decreased towas R$904.31,180.0 million at December 31, 2005 from R$1,790.9 million at December 31, 2004.2007. Without giving effect to the proportional consolidation of our jointly controlled companies, our short-term debt decreased towas R$620.21,176.0 million at December 31, 2005, compared to R$1,522.1 million at December 31, 2004.2007.
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We maintain short-term finance lines denominated inreaiswith a number of financial institutions in Brazil. Although we have no committed lines of credit with these financial institutions, we believe that we will continue to be able to obtain sufficient credit to finance our working capital needs based on current market conditions. At
December 31, 2005,2007, the consolidated outstanding balance under our working capital lines denominated inreaiswas R$73.8128.8 million. Without giving effect to the proportional consolidation of our jointly controlled companies, we did not have anthe outstanding balance under our working capital lines denominated inreais. was R$128.8 million.
We also obtain advances on certain export contracts from a variety of Brazilian financial institutions. These advances generally have a maturity of less than one year and relatively low interest rates. These advances on export contracts are generally secured by receivables to be generated from future export sales under those contracts. At December 31, 2005, our consolidated outstanding advances on export contracts totaled R$36.3 million (US$15.5 million). See note 15 to our consolidated financial statements included in this annual report. Without giving effect to the proportional consolidation of our jointly controlled companies, at December 31, 2005, we did not have any outstanding advances on export contracts.
In addition, we have incurred import financing for raw materials from various domestic and international institutions. These advances have a maturity of less than one year and bear interest at LIBOR plus a spread which varied between 0.45% and 2.50% during the year.5.65% in 2007. These financings are generally evidenced by promissory notes. At December 31, 2005,2007, our consolidated outstanding advances under our import financing arrangements totaled R$50.220.4 million (US$21.411.5 million). Without giving effect to the proportional consolidation of our jointly controlled companies, our outstanding advances under our import financing arrangements at December 31, 2005 were2007 totaled R$31.120.4 million (US$13.311.5 million).
Long-Term Indebtedness
The following table sets forth selected information with respect to certain of our principal outstanding long-term debt instruments at December 31, 2005.
2007.
| Outstanding
Principal |
|
| |||||||||
Amount at | ||||||||||||
Instrument | December 31, 2007 | Final Maturity | Principal Covenants | |||||||||
Debentures: | ||||||||||||
| R$ | |||||||||||
| Financial ratios | |||||||||||
| R$ | |||||||||||
Medium-Term Notes: | ||||||||||||
12.50% Notes due 2008 | US$ | November 2008 | ||||||||||
| ||||||||||||
| ||||||||||||
| US$ | |||||||||||
| ||||||||||||
| ||||||||||||
| ||||||||||||
| US$ |
| Limitations on liens | |||||||||
9.375% Notes due 2015 | US$250.0 million | June 2015 | Limitations on liens, related party transactions and mergers | |||||||||
9.75% Perpetual Bonds | US$150.0 million | — | Limitations on liens, related party transactions and mergers | |||||||||
9.00% Perpetual Bonds | US$200.0 million | — | Limitations on liens, related party transactions and mergers | |||||||||
8.00% Notes due 2017 | US$275.0 million | January 2017 | Limitations on liens, related party transactions and mergers | |||||||||
Bank Credit Facilities: | ||||||||||||
Acquisition Credit Agreement: | Limitations on liens, related party transactions and mergers | |||||||||||
1st tranche | US$333.9 million | April 2009 | ||||||||||
2nd tranche | US$163.4 million | October 2009 | ||||||||||
3rd tranche | US$311.2 million | October 2009 | ||||||||||
4th tranche | US$50.5 million | October 2009 | ||||||||||
5th tranche | US$101.0 million | October 2009 | ||||||||||
Secured Credit Agreement (construction financing) | R$ | June 2016 |
| |||||||||
Syndicated Credit Agreement | US$ | March 2012 | Financial ratios, limitations on liens, related party transactions, mergers and asset sales | |||||||||
Syndicated Credit Agreement | US$ | June 2012 | Financial ratios, limitations on liens, related party transactions, mergers and asset sales |
|
|
|
| |||||||||
| ||||||||||||
| ||||||||||||
Export | Limitations on liens, related party transactions and mergers | |||||||||||
| US$ | October 2009 |
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Outstanding Principal | ||||||
Amount at | ||||||
Instrument | December 31, 2007 | Final Maturity | Principal Covenants | |||
2nd tranche | US$205.0 million | October 2009 | ||||
Export Credit Facility | US$48.3 million | May 2010 | ||||
Export Prepayment Agreement | US$95.0 million | June | Limitations on liens, related party transactions and mergers | |||
Export Prepayment Agreement | US$150.0 million | November 2013 | Limitations on liens | |||
Export Prepayment Agreement | US$150.0 million | April 2014 | Limitations on liens | |||
Export Prepayment Agreement | US$75.0 million | July 2014 | Limitations on liens | |||
Credit Export Note Facility | US$50.0 million | March 2018 | Limitations on liens | |||
Credit Export Note Facility | US$78.0 million | May 2018 | Financial ratios | |||
|
|
|
| |||
| US$ | |||||
|
ManySome of our debt instruments require that we comply with financial covenants, that we must maintain, the most restrictive of which are as follows:
We also are required to maintain a maximum ratio of short-term net debt to EBITDA for a particular fiscal quarter ifUnder our net debt to EBITDA ratio is greater than a specified level or our EBITDA to net financial expenses ratio is less than a specified level.
The definitions of EBITDA contained in these instruments vary. In the instruments containing the most restrictive financial ratios described above,debentures, EBITDA is calculated differently than under theour medium-term note program and is generally defined for purposes of the net debt to EBITDA ratio and the EBITDA to net financial expenses ratio, as operating income less financial expenses, taxes, depreciation and amortization, plus dividends and interest attributable to shareholders’ equity paid to us by our unconsolidated associated companies. In contrast to EBITDA as calculated under the medium-term note program covenant, the calculation of EBITDA under these instrumentsour debentures for purposes of these ratios does not eliminate the effect of proportional consolidation under Instruction 247. However, these instruments excludeFor more detailed information, see footnote 6 to the effect of proportional consolidation for purposes of calculating the short-term net debt to EBITDA ratio.table presented under “Item 3. Key Information–Selected Financial Information.”
For the fiscal year ended December 31, 2005,2007, we reported the following financial ratios to our creditors under the instruments containing our most restrictive debt covenants:creditors:
Accordingly, we were in compliance with these financial covenants at December 31, 2005,2007, and we believe that we will be able to comply with these financial covenants for the foreseeable future. In addition, we believe that our compliance with these financial covenants will not adversely affect our ability to implement our financing plans.
Many of these instruments also contain other covenants that restrict, among other things, the ability of our company and most of our subsidiaries to:
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In addition, the instruments governing a substantial portion of our indebtedness contain cross-default or cross-acceleration clauses, such that the occurrence of an event of default under one of these instruments could trigger an event of default under other indebtedness or enable the creditors under other indebtedness to accelerate that indebtedness.
At December 31, 2005,2007, R$566.2523.9 million of ourreal-denominated debt and R$183.977.9 million of our foreign currency-denominated debt (in each case, excluding related party debt) was secured. In order to secure this debt, we have pledged (1) some shares owned by our company in subsidiaries and affiliates, including shares of Copesul and Politeno, (2) certain of our property and equipment and (3) certain of our accounts receivable. The security arrangements for our secured debt vary depending on the transaction.
The following discussion briefly describes certain of our significant financing transactions. We have assumed the obligations of predecessor companies, including, among others, OPP Química (and its predecessor OPP Petroquímica) and Trikem, under these financing transactions as a result of the mergers of these companies with and into our company.
1314th Issue of Debentures. On September 1, 2006, we issued our 14th issue of unsecured non-convertible debentures in a single series of 50,000 debentures, each with a par value of R$10,000. The principal amount of these debentures is payable in full on September 1, 2011, and these debentures bear interest at a rate of 103.5% of the CDI rate per annum payable semi-annually in arrears in March and September of each year.
13th Issue of Debentures. On June 1, 2005, we issued our 13th13th issue of unsecured non-convertible debentures in a single series of 30,000 debentures, each with a par value of R$10,000. The principal amount of these debentures is payable in full on June 1, 2010, and these debentures bear interest at a rate of 104.1% of the CDI rate per annum payable semi-annually in arrears in June and December of each year.
12th Issue of Debentures. On June 1, 2004, we issued our 12th issue of secured non-convertible debentures in a single series of 3,000 debentures, each with a par value of R$100,000. These debentures are secured by a pledge of one of our long-term customer contracts and a related collection account, which pledge may be replaced or supplemented by a pledge of some of our current and future customer receivables, as well as by certain of our cash and cash equivalents if the value of the original pledge falls below a certain specified minimum level. The principal amount of these debentures is payable in full on June 1, 2009, and these debentures bear interest at the rate of 117% of the CDI rate per annum, payable semi-annually. We have the right to redeem these debentures at any time on or after June 1, 2007.
Subordinated Convertible Debentures. On May 31, 2002, OPP Produtos Petroquímicos S.A., or OPP Produtos, issued subordinated convertible debentures. As a result of our merger with OPP Produtos on August 16, 2002, these debentures became our obligations. The original principal amount of these debentures was R$591.9 million. At December 31, 2005, the outstanding amount of these debentures was R$999.3 million (including interest). Interest and monetary adjustment on these debentures accrues at the TJLP plus 5.0% per annum and will be accreted until their maturity on July 31, 2007. ODBPAR Investments, as the holder of these debentures, has the option to convert the debentures into shares of our share capital at any time. The initial conversion price of these debentures was R$12.19 per class A preferred share, plus accrued interest. The conversion price increases at a rate equal to the TJLP less 6.0% per annum from the date of the issuance of these debentures. At March 31, 2006, the conversion price of these debentures was R$14.23 per class A preferred
share. Upon conversion, we will issue class A preferred shares up to the legal limit for preferred shares of two-thirds of our total share capital. After this two-thirds limit is reached, we will issue any remaining shares to be converted in the following proportions: one-third in common shares; and two-thirds in class A preferred shares. If ODBPAR Investments had exercised its option to convert these debentures in full on May 31, 2006, ODBPAR Investments would have received 24,718,773 of our common shares and 49,437,545 of our class A preferred shares in exchange for these debentures.
Medium-Term Note Program.Program. On July 16, 2003, we established a medium-term note program permitting us to issue up to US$500.0 million aggregate principal amount of notes with maturities of up to five years from date of issuance. On December 16, 2003, we amended our medium-term note program to increase the maximum aggregate principal amount that we are permitted to issue to US$1.0 billion and to extend the maximum maturity of the notes issued under the program to ten10 years from the date of issuance. We have two series of outstanding notes under the program.
Between November 5, 2003 and November 26, 2003, we issued and sold US$275.0 million aggregate principal amount of our 12.50% Notes due 2008. Interest on these notes is payable semi-annually in arrears in May and November of each year and these notes mature on November 5, 2008. On October 2, 2006, we repurchased US$184.6 million aggregate principal amount of these notes that were tendered to us in a tender offer we made for these notes.
On January 22, 2004, we issued and sold US$250.0 million in aggregate principal amount of our 11.75% Notes due 2014 under the medium-term note program. Interest on these notes is payable semi-annually in arrears in January and July of each year and these notes mature on January 22, 2014.
Fixed Rate Notes.Notes. On June 25, 1997, we issued and sold US$150.0 million aggregate principal amount of our 9.0% Notes due 2007. Interest on these notes is payable semi-annually in arrears in June and December inof each year, andyear. In June 2007, we entered into a supplemental trust deed amending the trust deed governing our 9% notes due 2007 to permit us to redeem these notes maturein whole, but not in part, at any time prior to their maturity at a purchase price
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equal to 100% of their principal amount plus accrued and unpaid interest to the redemption date. In June 2007, we entered into a second supplemental trust deed amending the trust deed governing our 9% notes due 2007 that reduced the interest rate on these notes to 8.250% and extended their maturity date until June 25, 2007.2024.
On July 24, 1997, Trikem issued and sold US$250.0 million aggregate principal amount of its 10.625% Notes due 2007. We assumed the obligations of Trikem under these notes as a result of the merger of Trikem with and into our company on January 15, 2004. On July 24, 2005, we repurchased these notes and amended and restated their terms. As amended and restated, these notes bear interest at the rate of 9.375% per annum, payable semi-annually in arrears in June and December inof each year and mature on June 1, 2015. On August 24, 2005, we exchanged US$150.0 million aggregate principal amount of these notes for US$150.0 million aggregate principal amount of outstanding notes issued by one of subsidiaries on June 1, 2005 and guaranteed by our company.
On June 17, 2005, we issued and sold US$150.0 million aggregate principal amount of our 9.75% Perpetual Bonds. Interest on these bonds is payable quarterly in arrears in March, June, September and December inof each year. We may, at our option, redeem these bonds, in whole but not in part, at 100% of their principal amount plus accrued interest and additional amounts, if any, on any interest payment date on or after June 17, 2010.
On April 28, 2006, we issued and sold US$200.0 million aggregate principal amount of our 9.00% Perpetual Bonds. Interest on these bonds is payable quarterly in arrears in January, April, July and October of each year. We may, at our option, redeem these bonds, in whole or in part, at 100% of their principal amount plus accrued interest and additional amounts, if any, on any interest payment date on or after April 28, 2011, provided that, if we redeem these bonds in part, at least US$100 million aggregate principal amount of these bonds must remain outstanding following any partial redemption.
On September 26, 2006, we issued and sold US$275.0 million aggregate principal amount of our 8.00% Notes due 2017. Interest on these notes is payable semi-annually in arrears in January and July of each year and these notes mature on January 26, 2017.
Bank Credit Facilities.Facilities. In January 1998, severalApril 2007, we entered into the Acquisition Credit Agreement with three financial institutions granted a loan in the aggregate amount of US$30.01.2 billion to finance the Ipiranga Transaction. In April 2007, we received the first disbursement under the Acquisition Credit Agreement in the aggregate amount of US$330.0 million to Proppet to finance construction of its PET plant in Camaçari, Bahia. This loan has since been amended to, among other provisions, reflectfund the merger of Proppet with and into our company. ODBPAR Investments, Norquisa and Mitsubishi have guaranteed this loan. ODBPAR Investments and Norquisa have also agreed to reimburse Mitsubishi for any payments that it makes in respect of this guarantee if we default on ourfirst payment obligationsdue under the loan. To guarantee their reimbursement obligations, NorquisaIpiranga Investment Agreement. In October 2007, we received the second and ODBPAR Investments have caused our companythird disbursements under the Acquisition Credit Agreement in the aggregate amount of US$468.8 million to grant Mitsubishifund a second mortgage on its DMTportion of the purchase price under the Copesul Tender Offer. In October 2007, we received the fourth and PET plantsfifth disbursements under the Acquisition Credit Agreement in the aggregate amount of US$150.0 million to fund a portion of the purchase price paid by Ultrapar in tender offers for the common shares of RPI, DPPI or CBPI. In February 2008, we received the sixth and final disbursement under the Acquisition Credit Agreement in the aggregate amount of US$251.2 million to pledgefund the equipment related to its DMT and PET production. The loan amortizes in equal semi-annual installments until its final maturity in December 2007. The loanpayment due as part of the Ipiranga Transaction. Each disbursement under the Acquisition Credit Agreement bears interest at the rate of LIBOR plus 3.875%0.35% per annum until the first anniversary of such disbursement and thereafter at the rate of LIBOR plus 0.55% per annum, payable semi-annually in arrears in June and Decemberarrears. The principal amount of each year. Ninety-five percentdisbursement under the Acquisition Credit Agreement is payable on or prior to the second anniversary of the principal and interest of this loan is supported by insurance from Nippon Export and Investment Insurance, and we pay annual premiums in yen for this insurance.such disbursement. The Acquisition Credit Agreement includes limitations on our ability to incur liens, enter into related party transactions or merge with certain other entities. At December 31, 2005,2007, the outstanding principal amount ofunder this loancredit agreement was US$7.5960.0 million.
On June 30, 2004, we entered into a secured credit agreement in the aggregate amount of R$152.7 million to finance capital expenditures in certain of our plants located in the Northeastern Complex and in Alagoas that we made in 2004 and 2005. The loans under this credit agreement are secured by a first mortgage on our PVC plant located in São Paulo and our chloro-soda plant located in the Northeastern Complex, as well as by a purchase-money security interest in machinery and equipment that we have and will purchase with the proceeds of this loan. Under this credit agreement, we arewere required to invest up to R$65.4 million of our own funds in accordance with an investment schedule as a condition precedent to disbursements of the loans. As of December 31, 2005, we have invested R$41.0 million on capital expenditures included on this investment schedule, including loans to our company in the aggregate principal amount of R$28.7 million disbursed by the lender. The loans under this credit agreement bear interest at the rate of 14.0%9.78% per annum, payable quarterly in arrears through June 30, 2008 and thereafter monthly in arrears through June 30, 2016. The lender under this credit agreement may modify the interest rate annually based on fluctuations in the TJLP during the preceding year and upon written notice to our company. The principal amount of these loans is payable in 96 equal monthly installments, commencing on July 30, 2008. At December 31, 2005,2007, the outstanding principal amount under this credit agreement was R$60.3152.7 million.
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On March 24, 2005, we borrowed the Japanese yen equivalent of US$5050.0 million under a syndicated credit agreement dated March 8, 2005. The proceeds of this loan were required to be used for capital expenditures related to our Braskem+ program. This loan bears interest at the rate of six-month Tokyo Inter-Bank Offered Rate plus 0.95% per annum, payable semi-annually in arrears. Principal on this loan is payable in 11 equal installments beginning in March 2007 with a final maturity date in March 2012. In connection with this loan, we entered into a swap contract in the total amount of this debt, which effectively modifies the interest rate to 101.59% of CDI.the CDI rate. The maturities, currency, rates and amounts of the swap contract correspond to the terms of the loan. Ninety-five percent of the commercial risk of this loan and 97.5% of the political risk of this loan are supported by insurance from Nippon Export and Investment Insurance, for which we paid a lump-sum premium in yen. At December 31, 2005,2007, the outstanding principal amount under this credit agreement was US$44.554.5 million.
On September 20, 2005, we borrowed the Japanese yen equivalent of US$6060.0 million under a syndicated credit agreement dated June 30, 2005. The proceeds of this loan were required to be used for capital expenditures related to the Braskem+ program. This loan bears interest at the rate of six-month Tokyo Inter-Bank Offered Rate plus 0.95% per annum, payable semi-annually in arrears. Principal on this loan is payable in 11 equal installments beginning in June 2007 with a final maturity date in June 2012. In connection with this loan, we entered into a swap contract in the total amount of this debt, which effectively modifies the interest rate to 104.4% of CDI.the CDI rate. The maturities, currency, rates and amounts of the swap contract correspond to the terms of the loan. Ninety-five percent of the commercial risk of this loan and 97.5% of the political risk of this loan are supported by insurance from Nippon Export and Investment Insurance, for which we paid a lump-sum premium in yen. At December 31, 2005,2007, the outstanding principal amount under this credit agreement was US$56.257.3 million.
Acquisition Financing.Export Prepayment Facilities. In September 2001, BNDESPAR Participações S.A.—BNDESPAR2007, EDSP58 entered into an export prepayment credit facility with PIFCo under which EDSP58 is permitted to borrow an aggregate principal amount of up to US$323.0 million. As a result of the merger of EDSP58 with and into Copesul in December 2007, the PIFCo export prepayment credit facility became a direct obligation of Copesul. The loans under this facility may be disbursed in up to 10 disbursements. Each disbursement under this facility bears interest, payable in arrears, at the rate of LIBOR plus 0.35% per annum until the first anniversary of such disbursement and thereafter at the rate of LIBOR plus 0.55% per annum. The principal amount of each disbursement under the PIFCo export prepayment facility is payable on or BNDESPAR, sold 1,000,000,000 class B preferred sharesprior to the second anniversary of Nova Camaçari forsuch disbursement. In October 2007, EDSP58 borrowed an aggregate of US$312.5 million under this facility to fund a portion of the purchase price of R$163.9 million and, asthe shares tendered in the Copesul Tender Offer that was part of this transaction, BNDESPAR extended a loan to Nova Camaçari in a principal amount equal to the purchase price. We acquired Nova Camaçari on July 25, 2001 and merged with Nova Camaçari in September 2001. This loan bears interest at the TJLP plus 4.0% per annum, payable annually each August 15, and matures on August 15, 2006.Ipiranga Transaction. At December 31, 2005,2007, the outstanding principal amount ofunder this loanexport prepayment credit facility was R$167.7US$312.5 million.
Subject to the preemptive rights of existing shareholders, BNDESPAR has the option to convert the principal amount of and accrued interest on this loan into our class A preferred shares at any time prior to the maturity of this loan. If this loan is converted in connection with a public offering, the conversion price will be the offering price. If this loan is converted other than in connection with a public offering, the conversion price will be the weighted average of the average daily prices for our class A preferred shares on the São Paulo Stock Exchange
during the 60 days prior to the conversion, or, if greater, the offering price in our last public offering occurring within the nine months prior to the conversion, if any, monetarily restated by the IGP-M. AtIn May 31, 2006, the conversion price would have been R$15.62 per share. If BNDESPAR had exercised its option to convert this loan in full on May 31, 2006, BNDESPAR would have been entitled to receive 11,864,558 of our class A preferred shares in exchange for this loan. Our bylaws require that no more than two-thirds of our total share capital be represented by preferred shares. In the event that at the time that BNDESPAR exercises its option we are unable to issue the number of shares of class A preferred shares to which BNDESPAR is then entitled, we expect that we and BNDESPAR will mutually agree on an alternative that will satisfy the provisions of our bylaws.
Upon conversion, we will issue class A preferred shares up to the legal limit for preferred shares of two-thirds of our total share capital. After this two-thirds limit is reached, we will issue any remaining shares to be converted in the following proportions: one-third in common shares; and two-thirds in class A preferred shares.
Export Prepayment Facilities. In December 2002, OPP Quí2005, Ipiranga Petroquímica entered into a prepayment advance for products to be exported to a foreign customeran export credit facility in the amount of US$97.2 million.60.0 million with a Brazilian financial institution. As a result of the consolidation of the results of Ipiranga Petroquímica in our financial statements as from April 1, 2007, this indebtedness is included in our consolidated indebtedness. This prepayment advance borefacility bears interest at thea rate of six-month LIBOR plus 3.75%1.65% per annum, until December 9, 2004. On December 9, 2004,payable in arrears. The principal amount of this prepayment advance was amended to reduce the interest rate on this prepayment advance to the rate of six-month LIBOR plus 1.25% per annum. This prepayment advance will be paidfacility is payable in monthly payments commencing in June 2007 through partial semi-annual shipments from December 2003 to June 2006. Our obligation to deliver export products is guaranteed by a surety bond.maturity in May 2010. At December 31, 2005,2007, the outstanding principal amount ofunder this prepayment advanceexport credit facility was US$15.948.3 million.
On June 7, 2004, Overseas III Export Ltd., a special purpose company created by QSPV Limited,In July 2006, Ipiranga Petroquímica entered into a US$200.0 million syndicated credit agreement. During June 2004, US$70.0 million was disbursed to Overseas III Export Ltd. and lent by Overseas III Export Ltd. to our company on identical terms and conditions as those containedan export prepayment agreement in the syndicated credit agreement. During August 2004,amount of US$95.0 million with a Brazilian financial institution. As a result of the remaining US$130.0 million was disbursed to Overseas III Export Ltd. and lent by Overseas III Export Ltd. toconsolidation of the results of Ipiranga Petroquímica in our company on the identical terms and conditionsfinancial statements as those containedfrom April 1, 2007, this indebtedness is included in the syndicated credit agreement. The loan to Overseas III Export Ltd. has been guaranteed by our company andconsolidated indebtedness. This facility is secured by certain of our exports.export receivables of Ipiranga Petroquímica and certain shares of Coepsul, and bears interest at a rate of LIBOR plus 1.00% per annum, payable in arrears. The first tranche of this loan in the principal amount of US$145.0 million bore interest at the rate of six-month LIBOR plus 3.5% per annum,this facility is payable semi-annually in arrears, untilmonthly payments commencing in August 2009 through maturity in June 30, 2005. The second tranche of this loan in the principal amount of US$55.0 million bore interest at the rate of six-month LIBOR plus 4.5% per annum, payable semi-annually in arrears, until June 30, 2005. On June 30, 2005, the syndicated credit agreement was amended to combine the two tranches into one and to reduce the interest rate on2013. At December 31, 2007, the outstanding principal amount under this export prepayment agreement was US$95.0 million.
In November 2007, Ipiranga Petroquímica entered into an export prepayment agreement in the amount of US$150.0 million with a Brazilian financial institution. This facility bears interest at a rate of LIBOR plus 1.40% per annum, payable in arrears. The principal amount of this loan to the rate of six-month LIBOR plus 1.45% per annum. Principal on this loanfacility is payable in eight semi-annual installments beginningmonthly payments commencing in December 2005.2011 through maturity in November 2013. At December 31, 2005,2007, the outstanding principal amount ofunder this loanexport prepayment agreement was US$175.0150.0 million.
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On July 21, 2004, In April 2007, we entered into an export prepayment agreement in the amount of US$150.0 million with a Brazilian financial institution. The loan under this agreement bears interest at a rate of LIBOR plus 0.77% per annum, payable semiannually in arrears commencing in October 2007. The principal amount of this loan is payable in three semiannual payments commencing in April 2013. At December 31, 2007, the outstanding principal amount under this export prepayment agreement was US$150.0 million.
In July 2006, Ipiranga Petroquímica entered into an export prepayment agreement in the amount of US$75.0 million with a Brazilian financial institution. As a result of the consolidation of the results of Ipiranga Petroquímica in our financial statements as from April 1, 2007, this indebtedness is included in our consolidated indebtedness. This facility bears interest at a rate of LIBOR plus 0.78% per annum, payable in arrears. The principal amount of this facility is payable in monthly payments commencing in August 2009 through maturity in July 2014. At December 31, 2007, the outstanding principal amount under this export prepayment agreement was US$75.0 million.
Export Credit Note Facilities. In April 2007, we entered into a credit export note facility in an aggregatethe amount of US$50.0 million.million with a Brazilian financial institution. This facility bears interest at a rate of 7.87% per annum, payable semiannually in arrears commencing in October 2007. The loanprincipal amount of this facility matures in March 2018. At December 31, 2007, the outstanding principal amount under this credit export note facility was US$50.0 million.
In November 2006, we entered into an export credit note facility in the amount of US$78.0 million with a Brazilian financial institution. This facility is secured by certain of our export receivables and bears interest at a rate of three-month LIBOR plus 3.0%8.1% per annum, payable quarterlysemiannually in arrears commencing on January 21, 2005.May 10, 2007. The principal amount of this facility is payable in eight equal quarterly installments beginning in January 2005.matures on May 10, 2018. At December 31, 2005, the outstanding principal amount under this export prepayment facility was US$20.0 million. The outstanding principal amount of this facility was prepaid on January 21, 2006.
On January 19, 2005, we entered into a pre-export finance facility in an aggregate principal amount of US$45.0 million. The loans under this facility are secured by certain of our export receivables and bear interest at a rate of three-month LIBOR plus 1.00% per annum, payable quarterly in arrears commencing on April 30, 2005. The principal amount of this facility is payable in 11 equal quarterly installments beginning on July 31, 2005, with a final maturity date of January 31, 2008. At December 31, 2005,2007, the outstanding principal amount under this facility was US$36.878.0 million.
BNDES Development Loans. We maintainIn May 2007, we entered into a credit facilities that are granted directly or indirectly by BNDES,export note facility in the amount of US$75.0 million with a Brazilian federal government development bank, to fund general capital expenditures associated
principally with the expansion of our production capacity, environmental projects and the development of operation control centers, laboratories and waste treatment station, of which R$189.1 million principal amount was outstanding at December 31, 2005. Amounts borrowed from BNDES are secured by a pledge of certain equipment and machinery owned by us. The interest rate on most of the amounts we borrowed from BNDES is based on the TJLP plus a margin of 2% to 5% per annum. Other amounts borrowed from BNDES bearfinancial institution. This facility bears interest at a government reference rate (theTaxa Referencial), plus a margin of 6.5%, or at a rate based on the Monetary Unit of BNDES (Unidade Monetária do BNDES, or UM), a BNDES rate based on a basket of currencies (which rate reflects the daily exchange rate fluctuations7.85% per annum, payable semiannually in the currenciesarrears commencing in which BNDES borrows), plus a margin.November 2007. The principal and interest on theseamount of this facility matures in May 2019. At December 31, 2007, the outstanding principal amount under this credit facilities is payable monthly through July 2007.export note facility was US$75.0 million.
BNDES Development Loans. On June 24, 2005, we entered into two credit facilities with BNDES under which BNDES will disbursedisbursed loans in an aggregate principal amount of approximately R$336.2 million. The proceeds of the first credit facility arewere R$84.2 million, which we will useused to finance capital expenditures related to (1) the 50,000 ton increase in the annual production capacity of our Alagoas PVC plant, and (2) a project to use polypropylene in the disposable plastics market. The proceeds of the second credit facility arewere R$252.0 million, which we will useused to finance capital expenditures related to (1) the 100,000 ton increase in the annual production capacity of one of our polypropylene plants located in the Southern Complex, and (2) quality, productivity, environmental, health and safety projects at our plants.
On December 13, 2006, we entered into a third credit facility with BNDES under which BNDES disbursed loans in an aggregate principal amount of approximately R$48.4 million. The proceeds of the third credit facility were used to finance capital expenditures related to (1) the construction of a new salt well in Maceió, Alagoas to supply our Vinyls unit, and (2) the replacement of some equipment at our PVC plant in the Northeastern Complex.
These credit facilities are secured by a letter of credit. This letter of credit may be substituted by (1) a mortgage on one of our plants located in the Southern Complex (including the land on which this plant is located, as well as certain of the equipment, machinery and improvements in this plant) and (2) a guarantee by Odebrecht.. Amounts under the first credit facility will bewere disbursed in two tranches, and amounts under the second and third credit facility will bewere disbursed in three tranches. The first tranchetranches of thesethe first and second credit facilities in an aggregate principal amount of R$12.6 million and R$37.8 million, respectively, bearsbear interest at athe UMBNDES rate, based on the UMwhich is set by BNDES for its loans in foreign currency, plus a margin of 4% per annum. The other tranches of these credit facilities bear interest at the TJLP rate plus a margin of 4% per annum. Interest is payable on the first credit facility quarterly from July 15, 2005 through July 15, 2007 and monthly thereafter through maturity. The outstanding principal amount of the first credit facility is payable in 48 equal, successive monthly installments beginning on August 15, 2007. Interest is payable on the first and second tranches of the second credit facility quarterly from July 15, 2005 through January 15, 2007 and monthly thereafter through maturity. The outstanding principal amount of the first and second tranches of the second credit facility is payable in 48 equal, successive monthly installments beginning on February 15, 2007. Interest is payable on the third tranche of the second credit facility quarterly from July 15, 2005 through July 15, 2008 and monthly thereafter through maturity. The outstanding principal amount of the third tranche of the second credit facility is payable in 42 equal, successive monthly installments beginning on August 15, 2008.
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At December 31, 2005,2007, the outstanding principal amount under the first of these credit facilities was R$23.274.1 million, and the outstanding principal amount under the second of these credit facilities was R$108.1210.1 million, and the outstanding principal amount under the third of these credit facilities was R$46.2 million.
FINEP Credit Facility.Facility. On March 8, 2005, we entered into a credit facility withFinanciadora de Estudos e Projetos,, or FINEP, a technology funding institution of the Ministry of Science and Technology of Brazil, in an aggregate principal amount of R$84.9 million, to bethat was disbursed in eight quarterly installments, beginning on March 15, 2005, with the final disbursement on March 15, 2007.expected in the end of April 2008. We arewere required to use the proceeds disbursed under this credit facility for capital expenditures at the Braskem Center for Innovation and Technology operated by our Polyolefins Unit, the research and development pilot plant of our Vinyls Unit, and the research center of our Vinyls Unit. Under this credit facility, we are required to invest at least R$9.4 million of our own funds in these projects. The loans bear interest at athe TJLP rate of TJLP plus 5% per annum, payable quarterly in arrears commencing on June 15, 2005. However, we may be required to pay interest at only the TJLP, depending on the financial condition and liquidity of the National Scientific and Technological Development Fund (Fundo Nacional de Desenvolvimento Científico e Tecnológico) at any given time. The principal amount under this credit facility will beis payable in 61 equal monthly installments beginning on March 15, 2007, with a final maturity date of March 15, 2012. At December 31, 2005,2007, the outstanding principal amount under this credit facility was R$22.164.1 million. Our obligation to make payments under this credit facility is guaranteed by a surety bond.
Quotas (shares) subject to mandatory redemption. We have retained an interest in subordinated quotas (shares) of two receivables securitization funds described below. The receivables securitization funds are consolidated under Brazilian GAAP to the extent that we retain the majority of the possible losses. We have entered into these arrangements in order to increase our liquidity, as it enables us to receive immediate payment for purchases of petrochemical products by clients to whom we provide short-term trade financing in the ordinary course of our business.Off-Balance Sheet Arrangements
Beginning on January 1, 2005, pursuant to CVM Instruction 408, we are required to consolidate special purpose entities in our financial statements if specific criteria are met. See “Introduction—Financial Statements.”
Chemical Credit Rights Investment Fund. On November 6, 2003, our company, Trikem and Polialden entered into a receivables purchase and sale agreement with a special purpose receivables investment fund under which our company, Trikem and Polialden agreed to sell to the fund from time to time, without recourse, certain trade receivables represented by negotiable invoices(duplicatas). As a result of the merger of Trikem into our company in January 2004, we assumed Trikem’s rights and obligations under this agreement. As a result of the merger of Polialden into our company on May 31, 2006, we assumed Polialden’s rights under this agreement. Under this agreement, this fund may purchase these receivables using (1) the net proceeds that it obtains from the sale of interests, or senior quotas, in the fund to certain qualified investors in Brazil and (2) past due receivables that our company has previously sold to the fund and, although not obligated to do so, agreed to repurchase. The fund also may invest a portion of such net proceeds in cash and certain cash equivalents. The aggregate amount of the quotas of all series outstanding at any time may not exceed R$500.0 million. Each series of quotas will have a maturity of not less than 12 months from the date of issuance and will amortize on June 15 and December 15 of each year. The amortization payments will include amounts in respect of interest calculated as a multiple of the CDI rate.
The fund may cause the early amortization of quotas to the extent necessary to meet specified coverage ratios or to ensure that receivables constitute at least a specified percentage of the fund’s net worth. We also agreed to purchase subordinated quotas from the fund to the extent necessary to enable the fund to meet specified coverage ratios, whether measured on periodic calculation dates or measured on a pro forma basis before the issuance of quotas to investors. In addition, we are required to maintain an insurance policy covering an aggregate amount of 20% of the value of any series of quotas issued by the fund, and the fund may demand payment under the insurance policy in the amount of the receivables under any negotiable invoice for which documents necessary to pursue a collection action against the applicable obligor are unavailable.
On December 15, 2003, the fund issued R$100.0 million in aggregate amount of quotas, and on January 9, 2004, the fund issued another R$100.0 million in aggregate amount of quotas. These quotas will mature on December 15, 2006. The first series of quotas consists of 8,000 quotas, each with a unit value of R$25,000. The quotas began amortizing on June 15, 2004, and the amortization payments include a targeted (but not guaranteed) amount of interest at a rate of 113.5% of the CDI rate based on market conditions. At December 31, 2005, we held R$26.4 million of subordinated quotas.
Chemical Credit Rights Investment Fund II. On November 30, 2005, our company and Polialden entered into a receivables purchase and sale agreement with a special purpose receivables investment fund under which our company and Polialden agreed to sell to the fund from time to time, without recourse, certain trade receivables represented by negotiable invoices(duplicatas). As a result of the merger of Polialden into our company on May 31, 2006, we assumed Polialden’s rights under this agreement. Under this agreement, this fund may purchase the receivables using (1) the net proceeds that it obtains from the sale of interests, or senior quotas, in the fund to certain qualified investors in Brazil and (2) past due receivables that our company has previously sold to the fund and, although not obligated to do so, agreed to repurchase. The fund also may invest a portion of such net proceeds in cash and certain cash equivalents. The aggregate principal amount of the quotas of all series outstanding at any time may not exceed R$800.0 million. Each series of quotas will have a maturity of not less
than 12 months from the date of issuance and will amortize on June 15 and December 15 of each year. The amortization payments will include amounts in respect of interest calculated as a multiple of the CDI rate.
The fund may cause the early amortization of quotas to the extent necessary to meet specified coverage ratios or to ensure that receivables constitute at least a specified percentage of the fund’s net worth. We also agreed to purchase subordinated quotas from the fund to the extent necessary to enable the fund to meet specified coverage ratios, whether measured on periodic calculation dates or measured on a pro forma basis before the issuance of quotas to investors.
On December 9, 2005, the fund issued R$400.0 million in aggregate amount of quotas, and on January 9, 2004, the fund issued another R$100.0 million in aggregate amount of quotas. These quotas will mature on December 15, 2008. The first series of quotas consists of 16,000 quotas, each with a unit value of R$25,000. The quotas began amortizing on June 15, 2006, and the amortization payments include a targeted (but not guaranteed) amount of interest at a rate of 103.75% of the CDI rate based on market conditions. At December 31, 2005, we held R$40.4 million of subordinated quotas.
Off-balance sheet arrangements
We do not currently have any transactions involving off-balance sheet arrangements.
Contractual Commitments
Contractual Commitments
The following table summarizes significant contractual obligations and commitments at December 31, 20052007 that have an impact on our liquidity:
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Payments due by period | ||||||||||||||||
(In millions ofreais) | Less than one year | One to three years | Three to five years | More than five years | Total | |||||||||||
Loans and financings | R$ | 895.0 | (1) | R$ | 1,228.5 | R$ | 243.5 | R$ | 1,385.5 | R$ | 3,752.5 | |||||
Debentures | 9.3 | (1) | 999.3 | 600.0 | — | 1,608.6 | ||||||||||
Interest on loans, financings and debentures(2) | 355.2 | 745.8 | 339.6 | 669.2 | 2,109.8 | |||||||||||
Quotas (shares) subject to mandatory redemption | 225.4 | 404.1 | — | — | 629.5 | |||||||||||
Interest on quotas subject to mandatory redemption(3) | 111.6 | 118.7 | — | — | 230.3 | |||||||||||
Purchase obligations(4) | 6,247.8 | 8,616.5 | 1,177.1 | 1,569.4 | 17,610.8 | |||||||||||
Pension plan contributions(5) | — | 55.3 | — | — | 55.3 | |||||||||||
Other long-term liabilities | — | 128.5 | — | — | 128.5 | |||||||||||
Total contractual obligations | 7,844.3 | 12,296.7 | 2,360.2 | 3,624.1 | 26,125.3 | |||||||||||
Exclusion of proportional consolidation: | ||||||||||||||||
Loans and financings | 284.1 | (1) | 53.6 | 17.5 | 2.1 | 357.3 | ||||||||||
Interest on loans and financings(2) | 28.4 | 5.4 | 1.8 | 0.2 | 35.8 | |||||||||||
Other long-term liabilities | — | 36.4 | — | — | 36.4 | |||||||||||
Total contractual obligations, excluding the effects of proportional consolidation | R$ | 7,531.8 | R$ | 12,201.3 | R$ | 2,340.9 | R$ | 3,621.8 | R$ | 25,695.8 |
Payments Due by Period | ||||||||||
One to | ||||||||||
Less than | Three | Three to | More than | |||||||
One Year | Years | Five Years | Five Years | Total | ||||||
(in millions of reais) | ||||||||||
Loans and financings | R$1,068.4(1) | R$2,972.4 | R$633.7 | R$2,795.8 | R$7,470.3 | |||||
Debentures | 111.6(1) | 300.0 | 500.0 | — | 911.6 | |||||
Interest on loans, financings and debentures (2) | 481.6 | 538.7 | 273.9 | 292.5 | 1,586.7 | |||||
Purchase obligations (3) | 5,910.8 | 9,526.3 | 9,122.5 | 9,122.5 | 33,682.1 | |||||
Ipiranga Investment Agreement | 633.5 | — | — | — | 633.5 | |||||
Pension plan contributions (4) | — | 35.7 | — | — | 35.7 | |||||
Other long-term liabilities | — | 139.1 | — | — | 139.1 | |||||
Total contractual obligations | 8,205.9 | 13,512.2 | 10,530.1 | 12,210.8 | 44,459.0 | |||||
Exclusion of proportional consolidation: | ||||||||||
Loans, financings and debentures | 3.9(1) | 83.3 | 193.7 | — | 280.9 | |||||
Interest on loans, financings and | ||||||||||
debentures(2) | 2.0 | 3.7 | 2.5 | 1.1 | 9.3 | |||||
Total contractual obligations, excluding the effects of proportional consolidation | R$8,200.0 | R$13,425.2 | R$10,333.9 | R$12,209.7 | R$44,168.8 | |||||
(1) | Includes interest accrued at December 31, |
(2) | Consists of estimated future payments of interest on our loans, financings and debentures, calculated based on interest rates and foreign exchange rates applicable at December 31, |
(3) |
Consists of purchase commitments for raw material and electric power pursuant to binding obligations which include all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Based upon the applicable purchase prices at December 31, |
Consists of a final disbursement by our company to two defined benefit pension plans in an amount that we estimate will be assessed by theSecretaria da Previdencia Complementar |
We are also subject to contingencies with respect to tax, labor, distributors and other claims and have made provisions for accrued liability for legal proceedings related to certain tax claims of R$1,370.41,039.7 million at December 31, 2005.2007. The tax contingencies relate primarily to COFINS, PIS, IPI, federal income tax and the Social Contribution on Net Income.CSLL. See “Item 8. Financial Information—Legal Proceedings” and notes 9, 16, 17 and 1821 to our consolidated financial statements.
U.S. GAAP Reconciliation
Our net income in accordance with Brazilian GAAP was R$547.6 million in 2007, R$101.3 million in 2006, and R$625.8 million in 2005, R$687.1 million in 2004 and R$215.1 million in 2003.2005. Under U.S. GAAP, we would have reported net income of R$737.11,089.1 million in 2005,2007, R$887.8161.6 million in 20042006 and R$378.1741.2 million in 2003.2005.
Our shareholders’ equity in accordance with Brazilian GAAP was R$5,757.0 million at December 31, 2007, R$4,311.9 million at December 31, 2006 and R$4,535.8 million at December 31, 2005 and R$4,183.7 million at December 31, 2004.2005. Under U.S. GAAP, we would have reported shareholders’ equity of R$3,063.65,031.9 million at December 31, 2005 and2007, R$2,588.92,966.8 million at December 31, 2004.2006 and R$2,918.4 million at December 31, 2005.
The principal differences between Brazilian GAAP and U.S. GAAP that affected our net income in 2005, 20042007, 2006 and 2003,2005, as well as shareholders’ equity at December 31, 20052007 and 2004,2006, are described in note 31 to our audited consolidated financial statements included elsewhere in this annual report. The major differences relate to the accounting treatment of the following items:
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For a discussion of the principal differences between Brazilian GAAP and U.S. GAAP as they relate to our financial statements and a reconciliation of net income and shareholders’ equity, see note 31 to our audited consolidated financial statements included elsewhere in this annual report.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
Our board of directors (conselho de administração) and our board of executive officers (diretoria) are responsible for operating our business.
Board of Directors of Braskem
Our by-laws provide for a board of directors of eleven members and eleven alternate members. During periods of absence or temporary unavailability of a regular member of our board of directors, the corresponding alternate member substitutes for the absent or unavailable regular member. Our board of directors is a decision-making body responsible for, among other things, determining policies and guidelines for our business and our wholly-owned subsidiaries and controlled companies. Our board of directors also supervises our board of executive officers and monitors its implementation of the policies and guidelines that are established from time to time by the board of directors. Under the Brazilian Corporation Law, our board of directors is also responsible for hiring an external independent registered public accounting firm.accountants.
The members of our board of directors are elected at general meetings of shareholders for two-year terms and are eligible for reelection. The terms of all current members expire at our annual shareholders’ meeting in 2008.2010. Members of our board of directors are subject to removal at any time with or without cause at a general meeting of shareholders. Although our by-laws do not contain any citizenship or residency requirements for members of our board of directors, the members of our board of directors must be shareholders of our company. Our board of directors is presided over by the president of the board of directors, and, in his absence, the vice president of the board of directors. The president and the vice president of our board of directors are elected at a general meeting of shareholders from among the members of our board of directors, serve for one-year terms and are eligible for reelection.
Our board of directors ordinarily meets four times a year and extraordinarily when a meeting is called by the president, the vice president or any two other members of our board of directors. Decisions of our board of directors require a quorum of a majority of the directors and are taken by majority vote, subject to the veto rights of Petrobras and Petroquisa over resolutions of our board of directors relating to certain matters under the Petroquisa memorandum of understanding.Petrobras Shareholders’ Agreement. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders—Shareholders Agreements.”
The following table sets forth certain information with respect to the current members of our board of directors and their alternates:
Name | Member Since | Position Held | Age | |||
Pedro Augusto Ribeiro Novis | August 15, 2001 | President of the Board | 61 | |||
Ruy Lemos Sampaio | July 20, 2006 | Alternate | 58 | |||
Alvaro Fernandes da Cunha Filho | November 6, 1997 | Vice President of the Board | 59 | |||
Marcos Luiz Abreu de Lima | March 31, 2005 | Alternate | 68 | |||
José de Freitas Mascarenhas | August 15, 2001 | Board Member | 66 | |||
Guilherme Simões de Abreu | March 4, 2002 | Alternate | 56 | |||
Arão Dias Tisser | March 26, 2008 | Board Member | 32 | |||
Paulo Pinheiro de Castelo Branco | May 30, 2008 | Alternate | 60 | |||
Newton Sergio de Souza | August 15, 2001 | Board Member | 55 | |||
Cláudio Melo Filho | October 3, 2005 | Alternate | 40 | |||
Alvaro Pereira Novis | August 15, 2001 | Board Member | 64 | |||
Marcos Wilson Spyer Rezende | September 29, 2002 | Alternate | 60 | |||
Francisco Teixeira de Sá | May 24, 2001 | Board Member | 59 | |||
Lúcio José Santos Júnior | August 15, 2001 | Alternate | 42 | |||
Francisco Pais | May 30, 2008 | Board Member | 52 | |||
Rogério Gonçalves Mattos | September 29, 2002 | Alternate | 52 |
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Edmundo José Correia Aires | Board Member | 50 | ||||
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Antonio Britto Filho | July 20, 2006 | Board Member | 58 | |||
Rubio Fernal Ferreira e Sousa | April 7, 2006 | Alternate | ||||
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The following is a summary of the business experience, areas of expertise and principal outside business interests of our current directors and their alternates. Except as otherwise set forth below, the business address of (1) each of our current directors is Avenida das Nações Unidas, 4777, São Paulo, SP—CEP 05477-000, Brazil and (2) each of our alternate directors is the same as the business address of the director for which he or she is an alternate.
Directors
Pedro Augusto Ribeiro Novis. Mr. Novis was elected to our board of directors as a nominee of Odebrecht. He has been a member of our board of directors since August 2001 and was elected president of our board of directors in March 2002. He has served as a member of the board of directorsofdirectors of Odebrecht since October 1997 and as the chief executive officer of Odebrecht since January 2002. In addition, Mr. Novis serves in various capacities with other companies in the Odebrecht Group. He has been with the Odebrecht Group since 1968. He holds a law degree from the Universidade Federal da Bahia. Mr. Novis is a cousin of Mr. Alvaro Pereira Novis.
Alvaro Fernandes da Cunha Filho. Mr. Cunha Filho was elected to our board of directors as a nominee of Odebrecht and has been a member of our board of directors since 1997. He is currently the vice president of our board of directors and the president of Valora Participações Ltda. Mr. Cunha Filho served as vice president of the board of directors of Norquisa from 1997 through 1999, and from 2001 through 2003 as a member of the board of directors of Norquisa. He has also occupied several executive positions in subsidiaries and affiliates of Odebrecht. Mr. Cunha Filho holds a bachelor’s degree in civil engineering and a master’s degree in economics from the Universidade Federal da Bahia.
José de Freitas Mascarenhas. Mr. Mascarenhas has been a member of our board of directors as a nominee of Odebrecht since 2001. He has been an executive officer of Odebrecht since September 2001 and serves in
various capacities with other companies in the Odebrecht Group. He also has served as vice president of CNI—Confederação Nacional das Indústrias since October 1985, andas president of the Brazilian Association of Chemical Industry and Derivative Products since May 1993.1993, and as president of Federação das Indústrias do Estado da Bahia—FIEB from 1992 until 2002. He is also a member of the Board of the MBC—Movimento Brasil Competitivo (Brazilian Competitiveness Council). Mr. Mascarenhas holds a bachelor’s degree in civil engineering from Universidade Federal da Bahia. Mr. Mascarenhas’ business address is Avenida Luiz Viana Filho, 2841, Salvador, BA—CEP 41730-900, Brazil.
Luiz Fernando Cirne LimaArão Dias Tisser. Mr. Lima has been aTisser was elected as alternate member of our board of directors on March 26, 2008 as a nominee of OdebrechtPetroquisa, and became a member of our our board of directors on May 30, 2008 after the resignation of Mr. Luis Fernando Cirne Lima. He has been the management coordinator of holdings in petrochemical centers for Petrobras since 2001.2004, and has worked in commercial management of naphtha and industrial raw materials for Petrobras from February 2001 to October 2004. He is currently the superintendent executive officer of Copesul and aan alternate member of the board of directors of Banco Icatu S.A., a Brazilian bank.Triunfo. Mr. Lima has also served as the Brazilian Minister of Agriculture from 1969 through 1973. Mr. LimaTisser holds a bachelor’sbachelors degree in agronomical engineeringCivil Engineering from the Universidade Federal do Rio Grande do Sul.de Janeiro—UFRJ and has a master degree in engineering from COPPE/UFRJ. Mr. Lima’sTisser’s business address is Rua Dolores Alcaraz Caldas, 90, Porto Alegre, RS—Av. República do Chile, 65, Rio de Janeiro, RJ, CEP 90110-180,20031-912, Brazil.
Newton Sergio de Souza. Mr. Souza has been a member of our board of directors as a nominee of Odebrecht since 2001. He has been the general counsel and an executive officer of Odebrecht since May 1997 and the vice president of the board of directors and an executive officer of Norquisa since April 2003. He also serves in several executive positions in subsidiaries and affiliates of Odebrecht. Mr. Souza served as the president of the board of directors of Companhia de Concessões Rodoviárias—CCR. He was also a visiting lawyer at the law firm Dechert, Price & Rhoads (Philadelphia), a senior lawyer at the law firm Pinheiro Neto Advogados from 1976 through 1982 and a senior counsel of Latin America and Caribbean Division of the World Bank (Washington D.C.) from 1982 through 1987. Mr. Souza holds a law degree from Pontifícia Universidade Católica do Rio de Janeiro and an LL.M. from the University of Pennsylvania.
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Alvaro Pereira Novis. Mr. Novis has been a member of our board of directors as a nominee of Odebrecht since 2001. He has been the administrator of the board of directors of Odebrecht since December 2003, the chief financial officer and an executive officer of Odebrecht since July 1998 and a board member of AMCHAM Brasil since 2003. He also serves in various capacities with other companies in the Odebrecht Group. In 1980, he was elected managing director of Banco Iochpe de Investimentos, where he became president in 1995 upon its association with Bankers Trust Company. Mr. Novis holds a bachelor’s degree in economics from the Universidade do Rio de Janeiro and a master’s degree in Public Administration from Fundação Getúlio Vargas. Mr. Novis is a cousin of Pedro Augusto Ribeiro Novis.
Francisco Teixeira de Sá. Mr. Sá has been a member of our board of directors as a nominee of the Mariani Group since 2001. He served as a member of the board of directors of Norquisa from April 2001 through April 2005 and served as president of the board of directors of Norquisa from April 2001 through April 2003. He is also president of Pronor Petroquímica S.A., or Pronor. Mr. Sá served as engineering and production manager of Dow Química S.A. from 1973 through 1984. He holds a bachelor’s degree in chemical engineering from the Universidade Federal da Bahia. Mr. Sá’s business address is Quadra 3 do SESFI, Cia Sul, Simões Filho, BA—CEP 43780-000, Brazil.
Maria das Graças Silva FosterFrancisco Pais. Mrs. FosterMr. Pais was elected as a member of our board of directors on May 30, 2008 as a nominee of Petroquisa. From 1981 to 1986 he managed a hydroelectric structure recovery project in the Geotechnical area at Light S.A., and since 1987, he has served in a variety of capcities, including as assistant to the executive services officer, at Petrobras. From 1998 to 2002, he served as member of the fiscal council of the Ricardo Franco Foundation at the Military Engineering Institute, or IME. Currenlty. he is a member of the board of directors of Procurement Negócios Eletrônicos, and since 2006, he has served as chairman of the board of directors of Copenor S.A., both of which are affiliates of Petrobras. Mr. Pais holds a bachelor’s degree in civil engineering from the IME and an MBA degree specializing in economic and corporate law from the Fundação Getúlio Vargas.
Edmundo Jose Correia Aires. Mr. Aires has been an alternate member of our board of directors as a nominee of Petroquisa since August 15, 2001. He has been the partnership manager of Petroquisa since 2001. Previously, Mr. Aires occupied several executive positions with Petroquisa and Petrobras beginning in 1980. Mr. Aires holds a bachelor’s degree in chemical engineering from the Universidade Federal do Rio de Janeiro.
Antonio Britto Filho.Mr. Britto Filho has been a member of our board of directors since October 3, 2005. Mrs. Foster has beenJuly 2006. He was the CEOchief executive officer of Petroquisa since September 2005. Mrs. Foster has served as Executive Manager of the supply area for Petrobras since September 2005 and has been responsible for investor relations at Petroquisa since September 2005. Prior to assuming these duties, Mrs. Foster served as Secretary of Oil, Natural Gas and Renewable Fuels under the Ministry of EnergyCalçados Azaléia S.A. from 2003 through 2005. Mrs. Fosterto 2006. He also served as natural gasgovernor of the State of Rio Grande do Sul from 1995 to 1998, Minister of Social Security from 1992 to 1993 and energy technology manageras a congressman of Petrobras and coordinatorthe State of RedeGasEnergia—Excellence Natural Gas and Energy Distribution NetworkRio Grande do Sul from 20001987 to 2002. Mrs. Foster holds1995. Mr. Britto Filho has a bachelor’s degree in chemical engineering from Universidade Federal Fluminense, a master´s degree in mechanical and nuclear engineering from Universidade Federal do Rio de Janeiro, and an MBA in economics from Fundação Getúlio Vargas.
Patrick Horbach Fairon. Mr. Fairon was elected to our board of directors as a nominee of Petroquisa and has been a member of our board of directors since November 30, 2004. Mr. Fairon has been the chief financial officer of Downstream Participações S.A. since October 2000. Mr. Fairon also served as general manager of
business development for Petrobras. Mr. Fairon holds a bachelor’s degree in electrical engineeringjournalism from the Universidade Federal do Rio de Janeiro—UFRJGrande do Sul and an MBAa bachelor’s degree in Law from the Universidade CatólicaLuterana do Rio de Janeiro.Brasil. Mr. Fairon’sBritto Filho’s business address is Av. República do Chile, 500, 20 andar, Rio de Janeiro, RJ—isRua Florida 1970 – Brooklin, São Paulo – SP, CEP 20031-170,04565-907, Brazil.
Ruy Lemos SampaioJosé Mauro Mettrau Carneiro da Cunha. Mr. SampaioCunha has been a member of our board of directors as a nominee of OdebrechtBNDES Participações S.A.—BNDESPAR, or BNDESPAR, since April 7, 2006,July 31, 2007. Mr. Cunha is currently the president of the board of directors of Tele Norte Leste (Telemar) and priormember of the boards of directors of Lupatech and Log-In. Mr. Cunha served as vice president executive officer of strategic planning of Braskem from 2003 to that date,2005. Mr. Cunha has held a variety of positions at BNDES, having served as vice president and responsible for industrial operations, legal department and fiscal subjects from 1998 to 2002. Mr. Cunha holds a bachelor’s degree in mechanical engineering from the Faculdade de Engenharia da Universidade Católica de Petrópolis and a master’s degree in Industrial Projects and Transportation from the COPPE/UFRJ—Universidade Federal do Rio de Janeiro. Mr. Cunha’s business address is General Garzon, 22/508, Jardim Botânico – Rio de Janeiro, RJ – CEP 22470-010, Brazil.
Alternate Directors
Ruy Lemos Sampaio. Mr. Sampaio served ashas been an alternate member of our board of directors since September 27, 2002.July 20, 2006. He has been the investment officer of Odebrecht since August 2002. Previously, Mr. Sampaio occupied several executive positions within the Odebrecht Group beginning in 1985. Mr. Sampaio holds a bachelor’s degree of business administration from the Universidade Federal da Bahia and an MBA degree from Michigan State University.
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Masatoshi Furuhashi. Mr. Furuhashi has been a member of our board of directors since April 7, 2006. He has been managing director of Sojitz Corporation of America and president of Sojitz do Brasil S.A. since April 2004. From April 2001 to April 2004, he was senior vice president and managing director for the Mercosur region for Nissho Iwai American Corporation. From December 2000 to April 2001, he was general manager for southern South America and President of Nissho Iwai do Brasil S.A. From September 1995 to December 2000, he was director general and president of Nissho Iwai Mexicana S.A. Mr. Furuhashi holds a bachelor’s degree in Spanish from Tokyo University of Foreign Studies. Mr. Furuhashi’s business address is Avenida Paulista 1842 Torre Norte 21o andar, CEP: 01310-200 São Paulo-SP.
Alternate Directors
Eliani Maria Borazo Rubira. Ms . Rubira has been an alternate member of our board of directors as a nominee of Odebrecht since April 7, 2006. She has served as legal counsel for Odebrecht since 1999. Ms . Rubira holds a bachelor’s degree in law from Faculdades Integradas de Guarulhos and completed post-graduate studies in corporate law at the Universidade Presbiteriana Mackenzie.
Ruy Lemos Sampaio. Mr. Sampaio has been an alternate member of our board of directors as a nominee of Odebrecht since September 27, 2002. He has been the investment officer of Odebrecht since August 2002. Previously, Mr. Sampaio occupied several executive positions within the Odebrecht Group beginning in 1985. Mr. Sampaio holds a bachelor’s degree of business administration from the Universidade Federal da Bahia and a MBA degree from Michigan State University.
Marcos Luiz Abreu de Lima. Mr. Lima has been an alternate member of our board of directors as a nominee of Odebrecht since March 31, 2005. Mr. Lima has been an executive officer of Construtora Norberto OdebrechtCNO since 1999, chief executive officer of Odebrecht Administradora e Corretora de Seguros Ltda. since 1980 and is a member of the fiscal council of Fundação Odebrecht. Mr. Lima holds bachelor’s degrees in accounting, management and economics from the Universidade Católica de Belo Horizonte and a post-graduate degree in auditing and organization development, in addition to insurance and surety bonds. Mr. Lima’s business address is Av. Luiz Viana Pinto, 2841, 1º andar—1st Floor—Salvador, Bahia, Brazil.
Guilherme Simões de Abreu. Mr. Abreu has been an alternate member of our board of directors as a nominee of Odebrecht since March 4, 2002. He has been the assistant to the president of Odebrecht since 2002 and an officer of Odeprev—Odebrecht Previdência since 1998. Previously, Mr. Abreu occupied several executive positions with Odebrecht beginning in 1986. Mr. Abreu holds a bachelor’s degree in business administration from the Universidade Federal da Bahia.
Hilberto Mascarenhas Alves da Silva FilhoPaulo Pinheiro de Castelo Branco. Mr. Silva has beenCastelo Branco was elected as an alternate member of our board of directors on May 30, 2008 as a nominee of Odebrecht since April 29, 2003.Petroquisa. He has been theis a senior equipment engineer from Petrobras’ supply business area and currently serves as assistant to the chief financialexecutive supply officer of Odebrecht since 1998. Previously, Mr. Silva occupiedat Petrobras. Since 1972, he has served in several executive positions with the Odebrecht Group beginning in 1978.at Petrobras. He is also an officer of the Commercial Association of Bahia (Associação Comercial da
Bahia) and a member of the Financial Committee of the Brazilian Infrastructure and Basic Industry Association (ABDIB—Associação Brasileira de Infra-Estrutura e Indústria de Base). Mr. Silva holds a bachelor’s degree in business administrationmechanical engineering and an MBA degree in marketing from the Universidade Federal da BahiaUniversity of Rio de Janeiro (UFJR), and attended a senior executive program at Columbia Business School and a financial planning and management course at Fundaçãan MBA in controllership from the University of São Getúlio Vargas.Paulo (USP).
Cláudio Melo Filho. Mr. Melo has been an alternate member of our board of directors as a nominee of Odebrecht since October 3, 2005. He has been the new business, development and representation director of Odebrecht since 2004. Mr. Melo served as financial manager and contract manager in several projects in Brazil and Angola for Construtora Norberto OdebrechtCNO from 1990 to 2004. Mr. Melo holds a bachelorbachelor’s degree in business administration from the Universidade de Brasilia and a post-graduate degree in financial administration from Fundação Getúlio Vargas.
Marcos Wilson Spyer Rezende. Mr. Rezende has been an alternate member of our board of directors as a nominee of Odebrecht since September 29, 2002. He has been the vice president of institutional relations of the Odebrecht Group since 2002. Mr. Rezende served as a journalist in various capacities for newspapers and television stations from 1972 through 2002. Mr. Rezende holds a bachelor’s degree in sociology and politics from the Universidade Federal de Minas Gerais and in social communication from the Faculdade Casper Líbero/PUC São Paulo.
Lúcio José Santos Júnior. Mr. Santos has been an alternate member of our board of directors as a nominee of the Mariani Group since August 15, 2001. He has been the chief financial officer of Engepack Embalagens S.A., or Engepack, since 2002. He has been superintendent officer of Pronor since 2001 and a member of the board of directors of Pronor since 2002. Mr. Santos served as chief financial officer of Nitrocarbono from 1996 through 2002. Mr. Santos holds a bachelor’s degree in economics from the Pontifícia Universidade Católica do Rio de Janeiro and a post graduate degree in finance from Ibemec—Instituto Brasileiro de Mercado de Capitais.
Edmundo Jose Correia Aires. Mr. Aires has been an alternate member of our board of directors as a nominee of Petroquisa since August 15, 2001. He has been the partnership manager of Petroquisa since 2001. Previously, Mr. Aires occupied several executive positions with Petroquisa and Petrobras beginning in 1980. Mr. Aires holds a bachelor’s degree in chemical engineering from the Universidade Federal do Rio de Janeiro.
Rogério Gonçalves Mattos. Mr. Mattos has been an alternate member of our board of directors as a nominee of Petroquisa since September 29, 2002. Mr. Mattos has occupied several executive positions with Petrobras since 1979. He has been the manager of business development forof Petrobras since 1998 and a member of the fiscal council of the pension fund of Petrobras (PETROS—Fundacã(Fundação Petrobras de Seguridade Social)Social Petros), or PETROS,Petros, since 2003. He holds a bachelor’s degree in chemical engineering from the Universidade Federal do Rio de Janeiro and a bachelor’s degree in economics from the Universidade Estadual do Rio de Janeiro. Mr. Mattos also attended a senior executive program at the Harvard Business School.
Márcio Domingues de Andrade. Mr. Andrade was elected as an alternate member of our board of directors on May 30, 2008 as a nominee of Petroquisa. Since 2006, he has served on Petrobras’ management team and from 2001 to 2006 was manager of the planning area and forest fund of Brascan’s Group. From 2000 to 2001, he was an associate at Santander Private Equity F.I.A, and from 1998 to 1999, he served as assistant to the vice-president of controllership at Banco Bozano. He was an associate at Fundo Bozano, Simonsen-Advent from 1996 through 1998 and served as a production manager at Banco Real from 1990 through 1994. Since 2003, he has served as member of the board of directors of Tafisa Brasil S.A., and from 1996 to 1998, he sat on the board of directors of several companies of Fundo Bozano, Simonsen-Advent’s portfolio. Mr. Andrade holds a bachelor’s degree in economics and an MBA from the Federal University of Rio de Janeiro (UFJR).
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Rubio Fernal Ferreira e Sousa. Mr. Ferreira e Sousa has been an alternate member of our board of directors as a nominee of Odebrecht since April 7, 2006. He has been a business development manager of Odebrecht since 1989. Mr. Ferreira e Sousa holds a bachelor’s degree of engineering from Universidade Federal de Minas Gerais.
Yukihiro Funamoto. Mr. Funamoto has been an alternate member of our board of directors since April 7, 2006. He has been an executive officer of Sojitz do Brasil S.A. since June 2004. From September 2000 until June 2004, he worked in the energy and chemical project department of the investment group of Nissho Iwai Corporation. Mr. Funamoto began working for Nissho Iwai Corporation in April 1997. Mr. Funamoto holds a bachelor’s degree of social sciences from Rikkyo University, Tokyo. Mr. Funamoto’s business address is Avenida Paulista 1842 Torre Norte 21o andar, CEP: 01310-200 São Paulo-SP.
Board of Executive Officers of Braskem
Our board of executive officers is our executive management body. Our executive officers are our legal representatives and are responsible for our internal organization and day-to-day operations and the implementation of the general policies and guidelines established from time to time by our board of directors.
Our by-laws require that the board of executive officers consist of a chief executive officer and between three and nine additional members, each responsible for business areas that our board of directors assigns to them. The members of our board of executive officers, other than our chief executive officer, have no formal titles (other than the title of executive officer or ““director”Diretor”)but have the informal titles set forth in the table below.
The members of our board of executive officers are elected by our board of directors for two-year terms, corresponding to the terms of the members of our board of directors, and are eligible for reelection. The current term of all of our executive officers ends at our annual shareholders’ meeting in 2008.2010. Our board of directors may remove any executive officer from office at any time with or without cause. According to the Brazilian Corporation Law, executive officers must be residents of Brazil but need not be shareholders of our company. Our board of executive officers holds meetings when called by our chief executive officer.
The following table lists the current members of our board of executive officers:
Year of | ||||||
Name | Appointment | Position Held | Age | |||
José Carlos Grubisich Filho | 2002 | Chief Executive Officer | 51 | |||
Carlos José Fadigas de Souza Filho | 2007 | Vice President Executive Officer, | 38 | |||
Chief Financial Officer and | ||||||
Director of Investor Relations | ||||||
Luiz de Mendonça | 2002 | Vice President Executive Officer | 45 | |||
Mauricio Roberto de Carvalho Ferro | 2002 | Vice President Executive Officer | 42 | |||
and General Counsel | ||||||
Roberto Prisco Paraíso Ramos | 2002 | Vice President Executive Officer | 61 | |||
Luis Fernando Sartini Felli | 2006 | Vice President Executive Officer | 42 |
Name | Year of appointment | Position held | Age | |||
José Carlos Grubisich Filho | 2002 | Chief Executive Officer | 49 | |||
Paul Elie Altit | 2002 | Vice President Executive Officer, Chief Financial Officer and Director of Investor Relations | 48 | |||
Bernardo Afonso de Almeida Gradin | 2002 | Vice President Executive Officer | 41 | |||
Luiz de Mendonça | 2002 | Vice President Executive Officer | 43 | |||
Mauricio Roberto de Carvalho Ferro | 2002 | Vice President Executive Officer and General Counsel | 40 | |||
Roberto Prisco Paraíso Ramos | 2002 | Vice President Executive Officer | 59 | |||
Roberto Lopes Pontes Simões | 2004 | Vice President Executive Officer | 49 |
Summarized below is information regarding the business experience, areas of expertise and principal outside business interests of our current executive officers. The business address of each of our current executive officers is Avenida das Nações Unidas, 4777, São Paulo, SP—CEP 05477-000, Brazil.
José Carlos Grubisich Filho.Mr. Grubisich is currently our chief executive officer. He is also currently the president of the board of directors of Copesul. He was the chief executive officer of OPP Química and the president of the board of directors of OPP Química. From 2000 to 2001, Mr. Grubisich served as vice president of Rhodia Fine Organics worldwide and was a member of the executive committee of the Rhône Poulenc Group. Prior to 2000, he served as vice president of Rhodia S.A. (currently known as Rhodia Brasil Ltda., a member of the Rhône Poulenc Group) for Brazil and Latin America. Mr. Grubisich holds a bachelor’s degree in chemical engineering from Escola Superior de Química Oswaldo Cruz and completed an Advanced Management Program at INSEAD—France.
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Paul Elie Altit.Carlos José Fadigas de Souza Filho.Mr. AltitFadigas is currently one of our vice president executive officers, our chief financial officer and director of investor relations. He is also a member of the board of directors of Copesul, Ipiranga Química and Ipiranga Petroquímica. He was also a member of the board of directors of Politeno prior to its merger into Braskem and a member of the board of directors of Politeno, andCompanhia Petroquímica Paulista—CPP prior to its merger into Paulínia. Prior to joining our company, Mr. Fadigas was a member of the board of directors of Polialden and the investor
relations officer of Polialden until our merger with Polialden on May 31, 2006. Mr. Altit has also served in several executive positions at Construtora Norberto Odebrecht S.A., most recently as the chief financial officer of CNO since 2002. Mr. Fadigas held a variety of positions at OPP and investor relations officer of Construtora Norberto Odebrecht S.A.Trikem from 1993 through 2002. He also served as assistant vice presidentto 2002, and held a variety of Odebrecht S.A.positions at Citibank from 19891990 to 1992. Mr. AltitFadigas holds a bachelor’s degree in engineeringbusiness administration from the Universidade Federal do Rio de Janeiro and a post-graduate degree in finance from the Pontifícia Universidade Católica do Rio de Janeiro.
Bernardo Afonso de Almeida Gradin. Mr. Gradin is currently one of our vice president executive officers and head of our Basic Petrochemicals Unit. He is also a member of the board of directors of Cetrel. Mr. Gradin was a member of the board of directors of OPP Química and Trikem and an executive officer of Trikem. Mr. Gradin holds a bachelor’s degree in civil engineering from the Universidade Federal da Bahia, a master’s degree in international politics from the University of PennsylvaniaSalvador—UNIFACS and an MBA degree from The Wharton School of Business.the Institute for Management Development in Switzerland.
Luiz de Mendonça.Mr. Mendonça is currently one of our vice president executive officers and head of our Polyolefins Unit. He wasis also an executive officer (Superintendent) of Polialden, a member of the board of directors of PolialdenCopesul, Ipiranga Química and an alternatePaulínia. He was also a member of the board of directors of Politeno prior to its merger into Braskem and a member of the board of directors of Companhia Petroquímica Paulista—CPP prior to its merger into Paulínia. Mr. Mendonça was an executive officer (Superintendent) of Polialden, and a member of the board of directors of Polialden until our merger with Polialden on May 31, 2006. Mr. Mendonça also worked for 15 years at Rhodia S.A., where he served as general manager of production, supply, and finance and marketing, as an officer in the chemical division (Latin America) and as vice president of Rhodia U.S.A. Mr. Mendonça holds a bachelor’s degree in production engineering from Escola Politécnica da Universidade de São Paulo and an MBA degree from INSEAD—France.
Mauricio Roberto de Carvalho Ferro.Mr. Ferro is currently our vice president executive officer and general counsel and a member of the board of directors of Ipiranga Petroquímica and Copesul. He was also the vice president of the board of directors of Politeno andprior to our merger with Politeno, an alternate member of the board of directors of Petroflex. He was alsoPetroflex until the sale of our interest in Petroflex in April 2008, and a member of the board of directors of Polialden until our merger with Polialden on May 31, 2006.Polialden. He served as a lawyer at the law firm of Carlos Eduardo Paladini Cardoso in 1989 and as a lawyer at the law firm of Bulhões Pedreira, Bulhões Carvalho e Advogados Associados from 1991 until 1995. Mr. Ferro holds a law degree from the Pontifícia Universidade Católica do Rio de Janeiro and an LL. M. degree from the University of London and from the London School of Economics.
Roberto Prisco Paraíso Ramos.Mr. Ramos is currently one of our vice president executive officers and head of business competitiveness. He is also a member of the board of directors of Cetrel and Companhia Alagoas Industrial-Cinal, and the vice presidentPaulínia. He was a member of the board of directors of Petroflex.Politeno prior to our merger with Politeno and a member of the board of directors of Petroflex until the sale of our interest in Petroflex in April 2008. Mr. Ramos was a member of the board of directors of Trikem and served on the board of directors of several companies in the Odebrecht Group. Mr. Ramos holds a bachelor’s degree in mechanical engineering from the Universidade Federal do Rio de Janeiro, a post-graduate degree in the Program for Management Development from Harvard Business School and a master’s degree in finance from the University of Leicester, England.
Roberto Lopes Pontes Simões.Luis Fernando Sartini Felli.Mr. SimõesFelli is currently one of our vice president executive officers and head of ourthe Vinyls Unit.Unit and a member of the board of directors of Cetrel. He was an alternate member of the presidentboard of IG—Internet Groupdirectors of Petroflex until the sale of our interest in Petroflex. In April 2008 he served as commercial director of the Polyolefins Unit from 2002 to 2004, where he had served as the chief operational officer since 2000. He also was the president of Opportrans Concessão Metroviária—Metrô Rio from 1999 to 2000 and an executive officer of Odebrecht Engenharia e Construções from 1994 to 1999.2006. Mr. SimõesFelli holds a bachelor’sgraduate degree in mechanicalagronomy engineering from the Universidade Federal da Bahiade São Paulo – ESALQ and an MBA from Columbia University in maintenance engineering from CEMANT (a program developed by the Universidade Federal da Bahia and Petrobras/Petroquisa).New York.
Fiscal Council
Fiscal Council
The Brazilian Corporation Law requires us to establish a permanent or non-permanent fiscal council(conselho fiscal).Our by-laws provide for a permanent fiscal council composed of five members and their respective alternate members. The fiscal council is a separate corporate body independent of our management and our external independent registered public accounting firm.accountants. The primary responsibility of the fiscal council is to review our management’s activities and our financial statements and to report their findings to our shareholders.
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The members of our fiscal council are elected by our shareholders at the annual general shareholders’ meeting for one-year terms and are eligible for reelection. The terms of the members of our fiscal council expire at the next annual general shareholders’ meeting. Under the Brazilian Corporation Law, the fiscal council may not contain members who are members of our board of directors or our board of executive officers or are employees or spouses or relatives of any member ofmemberof our management. To be eligible to serve on our fiscal council, a person must be a resident of Brazil and either be a university graduate or have been a company officer or fiscal council member of another Brazilian company for at least three years prior to election to our fiscal council.
Holders of preferred shares without voting rights and non-controlling common shareholders that together hold at least 10.0% of our voting share capital are each entitled to elect one member and his or her respective alternate to the fiscal council.
The following table lists the current members of our fiscal council and their alternates:
| First
Year | |
of | ||
Name | Appointment | |
Ismael Campos de Abreu | 2003 | |
| ||
Manoel Mota Fonseca | 2002 | |
Maria Cláudia Freitas Sampaio (alternate) | 2002 | |
| ||
| ||
| ||
| ||
Marcos Antonio Silva Menezes | 2005 | |
Sergio José de Barros (alternate) | 2005 |
The following is a summary of the business experience, areas of expertise and principal outside business interests of the current members of our fiscal council and their alternates.
Members of Fiscal Council
Ismael Campos de Abreu.Mr. Abreu has been a member of our fiscal council as a nominee of Norquisa Odebrecht and ODBPAR Investments since 2003.2003 and has served as president of our fiscal council since 2006. Mr. Abreu has been the controller of Odebrecht since 1995, and previously served as manager of the tax consulting division of PricewaterhouseCoopers Auditores Independentes from 1978 to 1985, controller of Corrêa Ribeiro S.A. Comércio e Indústria from 1986 to 1988, manager of the consulting area of Arthur Andersen from 1989 to 1991, and a partner of Performance Auditoria e Consultoria from 1992 to 1995. He is currentlywas a member of the fiscal council of Petroflex until the sale of our interest in Petroflex in April 2008 and was a member of the fiscal council of Polialden until our merger with Polialden on May 31, 2006.Polialden. Mr. Abreu holds a bachelor’s degree in accounting from Fundação Visconde de Cairú, and a post-graduate degree in economic engineering from Centro Interamericano de Desenvolvimento. Mr. Abreu’s business address is Av. Luis Viana Filho, 2841, Salvador, BA—CEP 41730-900, Brazil.
Manoel Mota Fonseca.Mr. Fonseca has been a member of our fiscal council as a nominee of Norquisa Odebrecht and ODBPAR Investments since 2002 and has served as president of our fiscal council since 2003.in 2003 and 2004. Mr. Fonseca has been a partner of the law firm Mota Fonseca e Advogados since 1990 and previously served as legal and tax counsel of Coopers & Lybrand, KPMG and PricewaterhouseCoopers Auditores Independentes. Mr. Fonseca holds a law degree from the Universidade de São Paulo, and a post-graduate degree in tax law from Fundação Getúlio Vargas. Mr. Fonseca’s business address is Rua Frederico Simões, 85—Edifício Empresarial Simonsen, Sala 304—3° andar,3rd Floor, Salvador, BA—CEP 41820-020, Brazil.
Jorge José Nahas Neto. Mr. Neto was elected as a member of our fiscal council on May 30, 2008 as a nominee of Petroquisa. Mr. Neto currently serves as executive manager of financial planning and risk management at Petrobras, and since 1993, he has served as financial manager at companies in the Petrobras Group. Previously, he served as control planning manager at Montreal Engenharia S.A. from 1987 to 1993, as treasury assistant at Thomas De La Rue from 1985 to 1987, as consultant at Instituto do Açúcar e Álcool (IAA) from 1982 to 1984 and as administrative supervisor at Companhia Industrial Farmacêutica (COTY) from 1981 to 1982. Mr. Neto holds a bachelor’s degree in economic sciences and a graduate degree in economic engineering from Candido Mendes University (UCAM).
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Walter Murilo Melo de Andrade. Jayme Gomes da Fonseca Junior.Mr. AndradeFonseca has been a member of our fiscal council since 2008 as a nominee of Norquisa Odebrecht and ODBPAR, since 2002. Mr. Andrade has been a legal counsel of Engepack Embalagens S.A. , or Engepack, since 2002. Previously, heand served as legal counsel of Nitrocarbono, Pronor and Proppet from 1998 to 2002. Mr. Andrade holds a law degree from the Universidade Católica de Salvador, with a specialization in civil law from Fundação Faculdade de Direito da Bahia and in corporate law from Escola de Magistratura do Estado do Rio de Janeiro. Mr. Andrade’s business address is Quadra 03 do Sesfi, Cia. Sul, Simões Filho, BA—CEP 42780-000, Brazil.
Janildo Dantas de Souza. Mr. Souza has been aan alternate member of our fiscal council in 2007. Mr. Fonseca is currently an executive officer of Ipiranga Química and Ipiranga Petroquímica. He was our controller from 2004 to 2007 and previously served as a nomineefiscal manager of PETROS,Caixa de Previdência dos Funcionários do Banco do Brasil—PREVI, or PREVI,OPP Química from 1999 to 2004, fiscal manager of Odebrecht S.A. from 1996 to 1999, fiscal manager of CNO from 1993 to 1996, supervisor of Performance Auditoria e Consultoria S/C from 1991 to 1993 and Petroquisa since April 7, 2006.an assistant of Arthur Andersen S/C from 1989 to 1991. Mr. Souza has been a partner with Souza Mafra Consultoria since March 2001, president of the Union of Retail Optical Materials in the State of Rio Grande do Norte since October 2003 and president of the Assistance, Consulting and Support to Corporate Management Cooperative in the State of Rio Grande do Norte since April 1999. He is also director of the Commercial Federation of the State of Rio Grande do Norte and of the Retail Commerce Union of Rio Grande do Norte and serves as a member of the fiscal council of COSERN—Companhia Energetica do Rio Grande do Norte. Mr. SouzaFonseca holds a bachelor’s degree in accountingbusiness administration from the UNIFACS—Universidade Federalde Salvador, an IAG Master in finances from PUC—Pontifícia Universidade Católica do Rio Grande do Norte.de Janeiro, and a MSc in Accounting and Finance from UMIST—University of Manchester Institute of Science. Mr. Souza’sFonseca’s business address is Av. Senador Salgado Filho, 2190, Sala 130, Lagoa Nova, Natal, Rio Grande do Norte, 59075-000.das Nações Unidas, 4777, 6th Floor, São Paulo, SP, CEP 05477-000, Brazil.
Marcos Antonio Silva Menezes. Mr. Menezes was elected a member of our fiscal council in 2005, as a nominee of Petroquisa. Mr. Menezes has been the director of Petrobras International Finance Company—PIFCo since 2003 and chief accountant officer of Petrobras since 1998. He joined Petrobras in 1976 and served as Deputy Superintendent of the former Financial Services—SEFIN from 1995 through 1998. He served as a member of the fiscal council of Companhia de Gás de Minas Gerais—GASMIGfrom 2003 through 2005, as president of the fiscal council of PETROS and as a member of the fiscal councilGASMIG, of Companhia de Gás da Bahia—BAHIAGAS.BAHIAGAS and as chairman of the fiscal council of Petros. Mr. Menezes has been the chairman of the fiscal council of Instituto Brasileiro de Petróleo e Gás—IBPs since 1998, and a member of the fiscal council of Organização Nacional das Indústras de Petróleo—ONIP since 1999. He is also a director of the American Chamber of Commerce—AMCHAM/RJ since 2004 and a member of Associação Nacional dos Executivos de Finanças, Administração e Contabilidade—Contabilidade – ANEFAC and Associação Brasileira das Companhias Abertas—ABRASCA and its Auditing and Accounting Rules Commission—CANC.Mr.CANC. Mr. Menezes holds bachelor’s degrees in accounting and in business management from Faculdade Moraes Júniorinnior in Rio de Janeiro, a post-graduate degree in financial management from Fundação Getúlio Vargas, and completed an advanced management program—PGA at Fundação Dom Cabral/INSEAD—França. Mr. Menezes’ business address is Av. República do Chile, 65, Rio de Janeiro, RJ, Brazil.
Alternate Members of Fiscal Council
Anna Cecília de M.C. Dutra da Silva.José Renato Andrade Mendonça. Ms. Silva has been an alternate member of our fiscal council as Mr. Mendonça nominee of Norquisa, Odebrecht and ODBPAR since 2003. Ms. Silva has been an associate at the law firm of Barbosa, Müssnich & Aragão Advogados since 2001 and anwas elected as alternate member of the fiscal council in 2008 as a nominee of PronorOdebrecht. Mr. Mendonça has been the managing partner of Performance Auditoria e Consultoria Empresarial S/S since 20021992, and of Cimento Tupi S.A. since 2003. She was also worked for 17 years at Arthur Andersen S/C. Mr. Mendonça memberis the Director of the fiscal councilAmerican Chamber of Polialden from 2003 until our merger with Polialden on May 31, 2006. SheCommerce Brazil and Director of the Bahia Section of IBRACON. Mr. Mendonça holds a lawbachelor’s degree in business management from the Pontifícia Universidade Católica do RioFederal da Bahia, in accounting sciences from Fundação Visconde de Janeiro. Mr. Silva’sCairú and has a specialization degree in Controllership from UNIFACS—Salvador. His business address is Av. Pres. Juscelino Kubitschek, 50—4th Floor, São Paulo, SP—Tancredo Neves, 1632, salas 1301 to 1309, Salvador, Bahia, CEP 04543-000,41520-020, Brazil.
Maria Cláudia Freitas Sampaio. Ms.Mrs. Sampaio has been an alternate member of our fiscal council as a nominee of Norquisa Odebrecht and ODBPAR since 2002. Mrs. Sampaio has been a lawyer at the law firm Mota Fonseca e Advogados since 2001 and2001. Mrs. Sampaio served as a member of the fiscal council of Norquisa since 1991.from 2003 to 2005. Previously, she served as an auditor of PricewaterhouseCoopers Auditores Independentes from 19861990 to 1991. Ms.1993 and she served as fiscal manager in Performance Consultoria Tributária e Empresarial Ltda. from 1994 to 1998. Mrs. Sampaio holds a law degree and a bachelor’s degree in business administration from the Universidade Católica de Salvador. Ms.Mrs. Sampaio’s business address is Rua Frederico Simões, 85 -Edifício Empresarial, Simonsen Sala 304—30 andar,30th Floor, Salvador, BA—CEP 41820-020, Brazil.
Marcelo André Lajchter.Marcílio José Ribeiro Júnior.Mr. LajchterJúnior was elected as an alternate member of our fiscal council on May 30, 2008 as a nominee of Petroquisa. Since 2006, he has beenworked in Petrobras’ financial management on the executive team of the financial analysis area of FINCORP. Previously, he served as as accountant at Terminal Garagem Menezes Côrtes S.A. from 1998 through 2001, as accounting manager at ALTM S.A. Tecnologia e Serviços de Manutenção from 2001 to 2002, as accountant at Gás e Participações Ltda. (GASPART) from 2002 to 2004, as accounting manager at Starfish Oil and Gas S.A. from 2004 to 2005 and as controller at Queiroz, Galvão, Óleo e Gás S.A. from 2005 to 2006.
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Sergio Garrido de Barros.Mr. Barros was elected an alternate member of our fiscal council as a nominee of Norquisa Odebrecht and ODBPAR since 2002.in 2007. Mr. LajchterBarros has been a partneran accounting and fiscal manager of the law firm Barbosa, Müssnich & Aragão AdvogadosCNO since 2000 and a professor at Fundação Getúlio Vargas since 2003.2005. Previously, he served as a lawyer in the tax litigation areasenior auditor manager of PricewaterhouseCoopers Auditores Independentes from 1993 to 1995.2004. Mr. Lajchter holds a law degree from the Universidade do Estado do Rio de Janeiro. Mr. Lajchter’s business address is Av. Pres. Juscelino Kubitschek, 50—4th Floor, 04543-000, São Paulo, SP—CEP 04543-000, Brazil.
José Easton Matos Neto. Mr. Neto has been an alternate member of our fiscal council as a nominee of PETROS, PREVI and Petroquisa since April 7, 2006. Mr. Neto worked for Banco do Brasil S.A. for 28 years, retiring in November 2004 as a bank manager. Mr. NetoBarros holds a bachelor’s degree in accounting from FaculdadeUniversidade Católica de Tecnologia e Ciências de Feira de Santana and an MBA from the Universidade Federal da Bahia—UFBA.Salvador. Mr. Neto’sBarros’s business address is Rua Almirante Carlos Paraguaçu de Sá, 1, Sala 5A7, Pituba, Salvador, Bahia, 41810-660.Av. das Nações Unidas, 4777, 6th Floor, São Paulo, SP—CEP 05477-000, Brazil.
Sergio José de Barros. Mr. Barros has been an alternate member of our fiscal council as a nominee of Petroquisa since 2005. Mr. Barros has been the accounting manager of international businesses of PetrobrásPetrobras since 2005, and served as the financial businesses manager of PetrobrásPetrobras from 2002 through 2005. Prior to 2002, he served in various capacities in the finance and accounting areas of Petrobras since 1993. He has been a member of the fiscal council of Petrobras Gás S.A.—GASPETRO. He also served as member of the Fiscal Council of Companhia de Gás do Ceará—CEGÁS in 2003 and 2004, Gás de Alagoas—ALGÁS in 2005, and Sergipe Gás—SERGÁS in 2005. He also served as a supervisor at KPMG—Peat Marwick—Auditores Independentes and at Boucinhas, Campos e Claro Auditores Independentes. Mr. Barros holds bachelor’s degrees in accounting and law, a post-graduate degree in business management from the Universidade Federal do Rio de Janeiro (UFRJ), and an MBA from IBMEC. Mr. Barros’s business address is Av. República do Chile, 65, Rio de Janeiro, RJ, Brazil.
Compensation
Compensation
According to our by-laws, our shareholders are responsible for establishing the aggregate compensation we pay to the members of our board of directors, our board of executive officers and our fiscal council. Our shareholders determine this aggregate compensation at the general shareholders’ meeting each year. Once the aggregate compensation is established, the members of the board of directors are responsible for distributing such aggregate compensation individually to the members of our board of directors and our board of executive officers and our fiscal council in compliance with our bylaws. Our
Compensation Committee
The Compensation Committee is composed of three members of our board of directors: Mr. Newton Sergio de Souza, Mr. Guilherme Simões de Abreu, and Mr. Lucio José Santos Junior. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to members of our board of directors doesand our board of executive officers. Our chief executive officer may not have abe present at any committee meeting during which his compensation committee.is deliberated. The compensation committee is responsible for, among other things:
Compensation and Benefits
The aggregate compensation paid by us to all members of our board of directors, board of executive officers and our fiscal council for services in all capacities was R$12.816.8 million in 2005.2007. On April 7, 2006,March 26, 2008, our shareholders (acting in the annual general meeting) established the following compensation for the year 2006:2008:
We compensate our alternate directors for each meeting of our board of directors that they attend. We compensate alternate members of our fiscal council for each meeting of our fiscal council that they attend.
Our executive officers receive the same benefits generally provided to our employees, such as medical (including dental) assistance, private pension plan and meal vouchers. Like our employees, our executive officers
also receive a yearly bonus equal to one-month’s salary (known as(knownas the “thirteenth” (monthly) salary in Brazil), an additional one-third of one-month’s salary for vacation, and contributions of 8.0% of their salary into a defined contribution pension fund known as the Guarantee Fund for Time of Service(Fundo de Garantia por Tempo de Serviço).Members of our board of directors and fiscal council are not entitled to these benefits. We made contributions into the Guarantee Fund for Time of Service for our executive officers in an aggregate amount of R$0.60.4 million during the year ended December 31, 2005.2007.
Members of our board of directors, board of executive officers and fiscal council are not parties to contracts providing for benefits upon the termination of employment other than, in the case of executive officers, the benefits described above.
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Long-Term Incentive Plan
On September 26, 2005, we adopted a long-term incentive plan. Under the terms of this plan, we may issue investment units, each of which has an economic value equivalent to the economic value of one class A preferred share of our company, to our executive officers, senior management and other employees involved in our strategic programs, which the plan refers to as our business partners. These investment units do not carry any voting rights and may not be transferred. Each year, our Chief Executive Officer will submit an annual program to our board of directors stating:
Upon the purchase by a business partner of his allocation of investment units, the business partner will receive additional investment units as an incentive for the purchase of the purchased investment units. We refer to the purchased investment units as alpha units and the additional investment units as beta units. Each beta unit will automatically convert into an alpha unit ten10 years after the date of issue of the beta unit. Upon the payment by our company of dividends or interest attributable to shareholders’ equity to holders of our class A preferred shares, we will issue additional units, which we refer to as gamma units, with an aggregate value equivalent to the value of the dividends or interest attributable to shareholders’ equity attributed and paid to the holders of a class A preferred share.
Each year we will determine the unit value of the investment units applicable from April 1 of that year until March 31 of the following year calculated as the average closing price inreaisof our class A preferred shares on the São Paulo Stock Exchange from October 1 of the preceding year through March 31 of the year in which the unit price is established. Following the fifth anniversary of the date on which any business partner first acquires investment units, we will redeem up to 20% of the investment units held by that business partner at the then-established unit price upon the request of that business partner made within 120 days following the delivery of an annual statement from us with respect to the investment units held by that business partner. After the first redemption, we will redeem up to 10% per year of the investment units heldunitsheld by that business partner at the then-established unit price upon the request of that business partner made in subsequent years. We will redeem any gamma unit at the then-established unit price upon the request of the holder made within 60 days following the issuance of that gamma unit. Any gamma unit not so redeemed will automatically convert into an alpha unit.
In the event that a business partner is dismissed without just cause or retires, we will redeem all of the investment units held by that business partner at the then-established unit price upon the request of that business partner. In the event that a business partner is dismissed for just cause or resigns, all of the beta units held by that
business partner will be immediately extinguished, and we will redeem all of the alpha units held by that business partner at the then-established unit price upon the request of that business partner. Upon the death of a business partner, we will automatically redeem all of the investment units held by that business partner (for the benefit of the business partner’s estate) at the then-established unit price.
Our board of directors has adopted an annual program for the 20052006 fiscal year. Under this annual plan, certain executive officers arewere entitled to purchase up to an aggregate of 135,500 investment units and to receive up to an additional 135,500 investment units. Our board of directors adopted an annual program for the 2007 fiscal year. Under this annual plan, certain executive officers were entitled to purchase up to an aggregate of 430,180 investment units and to receive up to an additional 430,180 investment units. Our board of directors also adopted an annual program for the 2008 fiscal year. Under this annual plan, certain executive officers are entitled to purchase up to an aggregate of 360,384 investment units and to receive up to an additional 360,384 investment units.
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Corporate Governance Practices
The significant differences between our corporate governance practices and the New York Stock Exchange standards can be found on our website,www.braskem.com.br. The information found at this website is not incorporated by reference into this annual report.
Employees
Employees
The following table sets forth the number of our employees by main category of activity and location.
At December 31, | ||||||
Main category of activity | 2005(1) | 2004(2) | 2003(3) | |||
Coordinators and operators | 1,589 | 1,563 | 1,494 | |||
Engineers and other professionals | 695 | 521 | 491 | |||
Administrative and support | 254 | 272 | 273 | |||
Technicians | 283 | 226 | 223 | |||
Maintenance | 243 | 224 | 206 | |||
Managers and directors | 198 | 190 | 181 | |||
Total | 3,262 | 2,996 | 2,868 | |||
At December 31, | ||||||
Main Category of Activity | 2007(1) | 2006(2) | 2005(3) | |||
Coordinators and operators | 1,970 | 1,653 | 1,589 | |||
Engineers and other professionals | 947 | 768 | 695 | |||
Administrative and support | 488 | 281 | 254 | |||
Technicians | 610 | 289 | 283 | |||
Maintenance | 556 | 284 | 243 | |||
Managers and directors | 212 | 219 | 198 | |||
Total | 4,783 | 3,494 | 3,262 | |||
(1) | At December 31, 2007, 2,007 employees worked in the State of Bahia, 1,803 employees worked in the State of Rio Grande do Sul, 484 employees worked in the State of São Paulo, 472 employees worked in the State of Alagoas and 17 employees worked in other states in Brazil. |
(2) | At December 31, 2006, 2,171 employees worked in the State of Bahia, 430 employees worked in the State of Rio Grande do Sul, 455 employees worked in the State of São Paulo, 423 employees worked in the State of Alagoas and 15 employees worked in other states in Brazil. |
(3) | At December 31, 2005, 1,982 employees worked in the State of Bahia, |
We do not employ a material number of temporary employees.
In Brazil, both employees and employers have the right to organize unions. Employees belonging to a specific “professional category” and employers constituting a specific “economic category” may each be represented by a single union in a particular geographic area. Individual unions generallyunionsgenerally belong to state-wide union federations, which in turn belong to nationwide union confederations. We are a member of the Petrochemicals and Synthetic Resins Industries Union of the States of Bahia, Alagoas and Rio Grande do Sul, and our employees belong to the Petrochemicals Industries Workers’ Unions in each of these states.
Approximately 33%1,492 of our non-management employees were union members at December 31, 2005.2007. We believe that we have good ongoing relations with our employees and their unions. We have not experienced a strike since OPP Química was privatized in 1992 and Trikem was privatized in 1995. Copesul has not experienced a strike since 1991. The current collective
bargaining agreements with our unions have one-year to two year terms and are subject to annual renegotiation. We have traditionally applied the terms of bargaining agreements entered into with the unions equally to unionized and non-unionized employees.
Since coming under the control of the Odebrecht Group, we have adopted and applied the personnel management philosophy of the Odebrecht Group, which emphasizes a performance-relatedperformance related pay structure and a decentralized management structure. Employees in each of our business units participate in setting and achieving their business unit’s annual objectives. As a result, employees in those business units that meet or exceed their goals share in our financial performance through performance-based employee compensation plans. During 2005,2007, we recorded an expense of R$91.1116.1 million related to this program with respect to 2,971 employees. We paid an additional R$8.4 million to3,274 employees, including our executive officers under this program during 2005.officers. The members of our board of directors do not participate in this program.
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We seek to recruit top graduates from Brazilian technical schools and universities to work at each of our plants and offer career development training to employees to develop skills necessary to operate an internationally competitive, vertically integrated petrochemical company. We have invested in a series of training courses for our operating, laboratory and maintenance personnel through agreements with technical training organizations. During 2005,2007, our total investment in education and training amounted to R$8.714.6 million for 317,730approximately 397,700 hours of training, representing an average of 10083.1 hours per employee.
We tailor career development programs to each employee’s individual needs and abilities. We established this program with our own resources and technology, and it has become a Brazilian benchmark in human resources practices. In 2005, 51.3%2007, 42.8% of our employees received salary increases as a result of their participation in our career development programs.
Our employees and their dependents receive medical and dental assistance through a network of accredited doctors. We pay most of the costs for these services, with a small portion being paid by our employees. A small monthly fee is also charged to our employees to pay for more costly medical services. In 2005,2007, we spent R$15.624.6 million on this assistance.
The majority of our employees participate in the Odebrecht Pension Plan(ODEPREV—Odebrecht Previdência). We pay part of the monthly payments made by our employees to threethe Odebrecht Pension Plan. This pension fund is a defined contribution plan that pays supplementary pension and retirement amounts in amount to those paid by the Brazilian government’s pension system and is intended to provide its members with income on retirement. In 2007, we paid R$5.9 million into this fund.
Copesul makes contributions to Petros under retirement and defined benefit pension plans that was closed to new participants on January 1, 1995. In 2006, the rate of the contribution was 12.93% of the total pay of employees who participate in the plan. In 2007, Copesul made contributions of R$5.7 million to these plans.
In May 2003, Copesul approved and implemented a supplementary private pension plan named COPESULPREV. COPESULPREV is a closed defined-contribution plan intended to cover those employees not included in the Petros plan. COPESULPREV is independently managed by Petros, with no links to any other pension plan managed by Petros, pursuant to the provisions of Complementary Law 109/2001. In 2007, Copesul made contributions of R$1.4 million to COPESULPREV.
Ipiranga Petroquímica and Ipiranga Química sponsors Fundação Francisco Martins Bastos (FFMB) Pension Plan, a defined benefit closed supplementary private pension entity, designed to manage and execute pension benefit plans for the benefit of the employees of Ipiranga Petroquímica and Ipiranga Química. In 2007, Ipiranga Petroquímica and Ipiranga Química made contributions of R$2.3 million to this fund.
Prior to July 2005, we paid part of the monthly payments made by our employees to two additional private pension funds: Odebrecht Pension Plan(ODEPREV—Odebrecht Previdência); PETROSPetros and Previnor Pension Plan(PREVINOR—Associação de Previdência Privada). The majority of our employees participate in these pension funds. These pension funds pay supplementary pensionPetros plan was a defined benefit plan and retirement amounts similar in amount to those paid by the Brazilian government’s pension system and arePrevinor Pension Plan was a defined contribution plan. In June 2005, we announced that we intended to provide their members with income on retirement. In 2005, we paid R$12.0 million into these funds. The Odebrechtwithdraw as a sponsor of the Previnor Pension Plan and the Previnor Pension Plan are defined contribution plans. The PETROSPetros plan is a defined benefit plan.effective June 30, 2005. The present value of our obligations under the PETROSPetros plan exceeded the value of the assets of that fund by R$58.619.6 million at December 31, 2005.2007. See note 28 to our consolidated financial statements. In June 2005, we announcedThe calculation of mathematical reserves of participants in the Petros plan was completed in November 2006 and submitted in that we intendmonth to withdraw asthe Secretariat for Complementary Pensions, a sponsorSocial Security Ministry department in charge of regulating and inspecting private pension plans. The reserve computations with respect to the Previnor Pension Plan have been completed and the PETROS plan.entity has a surplus; as a result, no contributions by our company are required. The sponsorship withdrawal was approved by the Secretariat for Complementary Pensions and the commitments to the plan participants was settled in 2007.
Prior to January 2007, Politeno was the sponsor of a defined contribution plan managed by PREVINOR. In December 2006, Politeno advised PREVINOR of its intention to withdraw from the plan effective at the end of December 2006. The calculation of mathematical reserves of participants to be refunded to plan was completed and submitted to the Supplementary Pension Plan Secretary for approval in February 2008. This plan is fully funded and no additional disbursements by Braskem will be required.
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Share Ownership of Directors and Officers
The total number of shares owned by members of Braskem’s Boardboard of Directorsdirectors and Executive Officersexecutive officers as of June 22, 200627, 2008 represents less than 1%0.1% of Braskem’s capital stock.share capital. Under our by-laws, each of our directors must also be a shareholder of our company. Accordingly, if a person is appointed to our board of directors and is not one of our shareholders at the time, the shareholder that designated such person to be one of our directors (in accordance with the terms of the relevant shareholders agreement) generally transfers one share to the newly appointed director at no cost. All other shares owned by our directors were purchased at market prices through the São Paulo Stock Exchange. As of the date hereof, none of our executive officers owns any of our shares.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
Major Shareholders
At June 22, 2006, we had 123,492,14227, 2008, our issued and outstanding capital consisted of 196,714,190 common shares, 246,107,138 outstanding325,368,337 class A preferred shares and 803,066 outstanding class B preferred shares.
We have registered one class of ADSs, with the United States Securities and Exchange Commission, or the Commission, pursuant to the Securities Act. Each ADS is evidenced by American Depositary Receipts, or ADRs, representing two of our class A preferred shares. At June 22, 2006,27, 2008, we had approximately 18,33319,213 shareholders, including onefour U.S. resident holderholders of our common shares, approximately 117108 U.S. resident holders of our class A preferred shares (including The Bank of New York, as depositary) and no U.S. resident holders of our class B preferred shares.
The following table sets forth information concerning the ownership of our common shares and class A preferred shares at June 22, 2006,27, 2008, by each person whom we know to be the owner of more than 5.0% of our common shares and our class A preferred shares, and by all of our directors and executive officers as a group. Our principal shareholders have the same voting rights with respect to each class of our shares that they own as other holders of shares of that class.
Common Shares | Class A Preferred Shares | Class B Preferred Shares(1) | Total | |||||||||||||
Number of Shares | % | Number of shares | % | Number of Shares | % | Number of shares | % | |||||||||
Odebrecht Group(2) | 92,153,272 | 74.6 | 53,763,411 | 21.8 | — | — | 145,916,683 | 39.4 | ||||||||
Petroquisa | 12,110,937 | 9.8 | 18,522,258 | 7.5 | — | — | 30,633,195 | 8.3 | ||||||||
BNDESPAR(3) | — | — | 13,649,731 | 5.5 | — | — | 13,649,731 | 3.7 | ||||||||
Alliance Capital Management L.P. (4) | — | — | 12,191,991 | 5.0 | — | — | 12,191,991 | 3.3 | ||||||||
Marcos Juliano Lucas Carvalho | 80 | * | 5,086 | * | 260,368 | 32.4 | 265,534 | * | ||||||||
Liane Maria Wolf | — | — | 15,900 | * | 54,400 | 6.8 | 70,300 | * | ||||||||
Beatriz Maria Wolf | — | — | — | — | 54,400 | 6.8 | 54,400 | * | ||||||||
Vera Maria Wolf | — | — | — | — | 50,700 | 6.8 | 50,700 | * | ||||||||
All directors, fiscal council members, their alternates and executive officers as a group (39 persons) | 7 | * | 74,998 | * | — | — | 74,998 | * |
Class A Preferred | ||||||||||||
Common Shares | Shares | Total | ||||||||||
Number of | Number of | Number of | ||||||||||
Shares | % | shares | % | shares | % | |||||||
Odebrecht (1) | 118,691,669 | 60.3 | 80,697,919 | 24.8 | 199,389,588 | 38.1 | ||||||
Petroquisa | 59,014,256 | 30.0 | 61,666,920 | 19.0 | 120,681,176 | 23.1 | ||||||
BNDESPAR | - | - | 28,319,525 | 8.7 | 28,319,525 | 5.0 | ||||||
All directors, fiscal council members, | ||||||||||||
their alternates and executive officers as | ||||||||||||
a group (38 persons) | 7 | * | 75,058 | * | 75,065 | * |
* | less than 1% |
(1) |
Represents |
We currently have no management or employee option plans or management or employee options outstanding. See “Item 6. Directors, Senior Management, and Employees—Compensation—Long-Term Incentive Plan.”
Changes in Ownership
On January 31, 2007, Norquisa transferred 1,235,000 common shares of Braskem to ODBPAR Investments.
At January 1, 2005:146
During 2005, some of the shareholders of our class B preferred shares exercised their rights to convert their class B preferred shares into class A preferred shares. As a result of these conversions,In April 2007, we issued 4,938,742 class A preferred shares in exchange for 9,877,484 class B preferred shares.
On March 22, 2005, Odebrecht transferred 2,784,799 class A preferred shares to BNDESPAR in exchange for non-voting shares of Norquisa representing 10.06% of the total share capital of Norquisa.
On April 28, 2005, Odebrecht transferred 2,044,990 class A preferred shares to EDN—Distribuidora do Nordeste S.A. in exchange for shares of Norquisa representing 11.1% of the total share capital, including 12.5% of the voting share capital, of Norquisa.
On April 3, 2006, Odebrecht transferred 2,164,975 class A preferred shares to Politeno and 2,129,324 class A preferred shares to another shareholder of Norquisa in exchange for shares of Norquisa representing an aggregate of 22.0% of the total share capital, including 21.4% of the voting share capital, of Norquisa.
On May 31, 2006, we issued 7,878,8251,533,670 of our class A preferred shares to the shareholders of Polialden,Politeno, other than our company, in exchange for their share capital of Polialden.Politeno. In addition, at an extraordinary general shareholders’ meeting held on May 31, 2006,in April 2007, Odebrecht and Norquisa converted 2,518,822464,685 and 113,22121,845 of their class A preferred shares, respectively, into the same number of common shares.
As a result of these transactions, at June 22, 2006.this transaction, the class A preferred shares owned by Politeno became treasury shares.
In July 2007, Odebrecht transferred our subordinated convertible debentures to its subsidiary, CNO, and CNO assumed all of the obligations of Odebrecht under its non-convertible debentures of the second series.
In July 2007, CNO, as the holder of our subordinated convertible debentures, converted all of these debentures in the outstanding amount of R$1,113.5 million (including accrued and unpaid interest) into 25,832,198 of our common shares and 51,664,397 of our class A preferred shares, reflecting a conversion price of R$14.37 per share. On the same date, BNDESPAR exercised its option to exchange all of the non-convertible debentures of the second series of CNO held by BNDESPAR for 18,344,872 of our class A preferred shares.
In October 2007, CNO transferred 25,832,198 common shares and 31,994,603 class A preferred shares to its subsidiary Belgravia.
In October 2007, Belgravia transferred 25,832,198 common shares to Odebrecht in exchange for 25,832,198 class A preferred shares. On the same date, Odebrecht transferred 20,685,872 class A preferred shares to OII.
On May 30, 2008, we issued an aggregate of 46,903,320 common shares and 43,144,662 class A preferred shares to Petroquisa in the first phase of the Petrobras Transaction. As a result, the direct and indirect ownership of Odebrecht in our company was reduced to 60.3% of our common shares, 24.7% of our class A preferred shares and 38.1% of our total share capital, including 25.0%and the ownership of Petroquisa in our company increased to 30.0% of our common shares, 18.9% of our class A preferred shares and 23.1% of our total share capital.
On May 30, 2008, our subsidiary Braskem Participações S.A. authorized the transfer of the shares of Braskem’s share capital that it owns to Braskem. This transfer will become effective not more than 60 days after the transfer was authorized.
Shareholders Agreements
Petrobras Shareholders’ Agreement
On May 30, 2008, Petrobras, Petroquisa, Odebrecht and Norquisa, with Braskem as intervening party, entered into the Petrobras Shareholders’ Agreement, which has a term of 25 years. The Petrobras Shareholders’ Agreement superseded the Ipiranga Memorandum of Understanding and the Petroquisa Memorandum of Understanding.
Under the Petrobras Shareholders’ Agreement, Petrobras and Petroquisa:
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Table of our total share capital, including 9.8%Contents
Shareholders Agreements
Petroquisa Memorandum of Understanding
On July 3, 2001, Odebrecht, Odebrecht Química, Petroquisa and Petroquímica da Bahia S.A., or Petroquímica da Bahia entered into a Memorandum of Understanding regarding Shareholders Agreement, which was amended with respect to Odebrecht and Petroquisa, with Petroquímica da Bahia and Norquisa as consenting parties, on July 26, 2002. On April 29, 2005, Odebrecht, Petroquisa, ODBPAR and Norquisa entered into a further amendment to the Memorandum of Understanding regarding Shareholders Agreement, with Petrobras and our company as consenting parties, which revoked the initial amendment, and which,capital, together with the Memorandum of Understanding regarding Shareholders Agreement, we refer to as the Petroquisa memorandum of understanding. The Petroquisa memorandum of understanding grants Petroquisa (1) an option to purchase additional shares from our company and from Odebrecht, ODBPAR and Norquisa, (2)have the right to designate one member of our fiscal council and his or her alternate; and
Under the Petrobras Shareholders’ Agreement, Petrobras and Petroquisa together have the right to designate:
Under the Petroquisa memorandum of understanding, Odebrecht, ODBPAR and Norquisa granted to Petroquisa an option to purchase such number of our common shares as may be necessary for Petroquisa to own up to 30%more of our voting share capital, which we refer tocapital.
For so long as thePetrobras and Petroquisa option. Under the Petroquisa memorandum of understanding, Petroquisa hadtogether have the right to exercise the Petroquisa option in full on a single occasion ondesignate two or prior to December 31, 2005. On September 29, 2005, we agreed with the other parties to the Petroquisa memorandum of understanding to extend the expiration of the Petroquisa option until March 31, 2006. On March 31, 2006, the Petroquisa option expired without being exercised.
Under the Petroquisa memorandum of understanding, Petroquisa has veto rights over the following matters at any general meeting of our shareholders:
Under the Petroquisa memorandum of understanding, Petroquisa has veto rights over resolutionsthese designees will serve as vice president of our board of directors relating todirectors.
Under the following matters:
Although the Petroquisa memorandum of understanding does not provide a definition of EBITDA, we calculate EBITDA for purposes of this agreement on the same basis as set forth in the most restrictive financial covenants in our debt instruments. See “ Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness and Financing Strategy.” PetroquisaPetrobras Shareholders’ Agreement, Petrobras has the right to sellsell:
Mariani Group Shareholders Agreement
On July 27, 2001, Odebrecht Química and Petroquímica da Bahia entered into a shareholders agreement with respect to their shares of Norquisa and our company, which was amended on July 29, 2002 pursuant to the First Amendment to Shareholders Agreement among Odebrecht Química, Odebrecht, ODBPAR Investments and Petroquímica da Bahia. We refer to this agreement, as amended, as the Mariani Group Shareholders Agreement.
The Mariani Group Shareholders Agreement provides that:
Under the Mariani Group Shareholders Agreement, Odebrecht, ODBPAR Investments and Petroquímica da Bahia will vote their shares as a block in each general shareholders’ meeting of Norquisa. Odebrecht, ODBPAR Investments and Petroquímica da Bahia will meet prior to each meeting to determine how to vote these shares with respect to matters to be submitted to the meeting. These determinations will be made by majority vote among these shareholders based on the number of Norquisa shares held by each of them. As a result, the Odebrecht Group may effectively determine the vote for all of these shareholders.
Under the Mariani Group Shareholders Agreement, Odebrecht and ODBPAR Investments, on the one hand, and Petroquímica da Bahia, on the other hand, granted to the other a right of first refusal in respect of sales
transfers or encumbrances of common shares of Norquisa owned directly or indirectly by either of them. If the Odebrecht Group intends to sell any of its shares of Norquisa, Petroquímica da Bahia has the right to sell apro rataportion of its shares of Norquisa on the terms and conditions under which the Odebrecht Group intends to sell its shares. If the Odebrecht Group intends to sell a sufficient number of its shares of Norquisa to result in a change of joint control of Norquisa, Petroquímica da Bahia has the right to sell all of its shares of Norquisa on the same terms and conditions under which the Odebrecht Group intends to sell its shares. If the Odebrecht Group sells or transfers direct or indirect control of our company to a third party, Petroquímica da Bahia also has the right to sell all of its shares of our company on the same terms offered by the third party acquiring control of our company from the Odebrecht Group.
On September 9, 2003, Odebrecht granted to Pronor, a company in the Mariani Group, an option to exchange all its shares of Norquisa, representing 13.8% of Norquisa’s total share capital, including 16.1% of its voting share capital, for 1,454,424 of our class A preferred shares, representing 0.4% of our total share capital, owned directly or indirectly by Odebrecht. On December 26, 2003, Pronor exercised its option and is required to complete the exchange of shares between January 30, 2005 and January 30, 2009. As of June 22, 2006, Pronor owned 1.7% of our total share capital, including 2.8% of our voting share capital.
Pension Funds Memorandum of Understanding
On July 20, 2001, Odebrecht Química, Petroquímica da Bahia PETROSS.A., Petros andCaixa de Previdência dos Funcionários do Banco do Brazil—PREVI, or PREVI, entered into a Memorandum of Understanding Regarding Shareholders Agreement, which we refer to as the Pension Funds memorandumMemorandum of understanding.Understanding. The Pension Funds memorandumMemorandum of understandingUnderstanding grants certain preemptive and share transfer rights to PETROSPetros and PREVI.the pension fund of Banco do Brasil (Caixa de Previdência dos Funcionários do Banco do Brasil), or Previ. The Pension Funds memorandumMemorandum of understandingUnderstanding has a term of 20 years, unless a shareholders agreement containing the terms set out below is entered into prior to that date. Under the Pension Funds memorandumMemorandum of understanding, the parties agreed to adopt the following basic principles for our management:
TheUnder the Pension Funds memorandumMemorandum of understanding contains the following liquidity provisions with respect to our shares owned by PETROSUnderstanding, Petros and PREVI:
control.
The Pension Funds memorandum of understanding granted certain voting rights to PETROS and PREVI, including veto rights to PETROS and PREVI over certain actions by our shareholders and our board of directors. These vero rights of PETROS and PREVI were valid so long as on a combined basis they owned, together with other private pension funds, at least 15.0% on August 16, 2002 as a result of our mergers with OPP Produtos and 52114 Participações S.A. The Pension Funds memorandum of understanding provided that these veto rights would remain in effect for three years after the date on which the percentage of voting capital owned by these
pension funds fell below 15.0%, during which PETROS and PREVI could purchase more of our shares in order to maintain their veto rights beyond such three-year period. As of August 16, 2005, the percentage of voting capital owned by these pension funds did not equal or exceed 15.0% and, consequently, these veto rights expired.
BNDESPAR Shareholders Agreement
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We, Odebrecht and BNDESPAR have entered into a shareholders agreement. This shareholders agreement provides that if BNDESPAR’s ownership of our total share capital exceeds 5.0% on or prior to July 31, 2007, BNDESPAR will havehas the right to appoint one member of our board of directors. Until the earlier of the date on which BNDESPAR appoints a member of our board of directors and July 31, 2007, a representative of BNDESPAR may attend meetings of our board of directors, but is not allowed to participate or to vote in such meetings. If BNDESPAR’s ownership of our total share capital exceeds 5.0% on or prior to July 31, 2007, thisThis shareholders agreement will expire on the earlier of anythe first date thereafter on which BNDESPAR ceases to own more than 5.0% of our total share capital and August 24, 2011. This shareholders agreement also provides that BNDESPAR has the right to (1) require our company and Odebrecht to purchase the shares that it owns in our company if we do not comply with the terms of thethis shareholders agreement and do not cure any such non- compliancenon-compliance within a specified period, and (2) sell its shares in the event that Odebrecht sells its voting control of our company to a third party.
Related Party Transactions
The following summarizes the material transactions that we have engaged in with our principal shareholders and their affiliates since January 1, 2005.2007.
We and our subsidiaries have engaged in extensive transactions with our principal shareholders and their affiliates and expect to do so in the future. We also have commercial relationships with some of our affiliates and, as a result, record trade accounts receivable and current and long-term liabilities mainly from purchases and sales of goods and services at prices and on terms equivalent to the average terms and prices of transactions that we enter into with third parties. In addition, we have entered into financial and other transactions with our principal shareholders and their affiliates, including, among others, as obligor on R$999.3 million, at December 31, 2005, of convertible subordinated debentures held by the Odebrecht Group and as a party to fourthree shareholder’s agreements or memoranda of understandings with shareholders of our company. See “—Principal Shareholders—Shareholders Agreements.”
In connection with the Ipiranga Transaction, we entered into the Purchase Agreement, the Ipiranga Investment Agreement, the Interim Shareholders Agreement, the Ipiranga Memorandum of Understanding and the RPI Shareholders Agreement with Petrobras and the other parties thereto. The Ipiranga Memorandum of Understanding has been superseded by the Petrobras Shareholders’ Agreement. See “Item 4. Information on the Company—Ipiranga Transaction.”
In connection with the Petrobras Transaction, we have entered into the Petrobras Investment Agreement with Odebrecht, Petrobras, Petroquisa and Norquisa. See “Item 4. Information on the Company—Petrobras Transaction.”
Under the Brazilian Corporation Law, each of our directors, their alternates and our executive officers cannot vote on any matter in which they have a conflict of interest and such transactions can only be approved on reasonable and fair terms and conditions that are no more favorable than the terms and conditions prevailing in the market or offered by third parties. However, if one of our directors is absent from a meeting of our board of directors, that director’s alternate may vote even if that director has a conflict of interest, unless the alternate director shares that conflict of interest or has another conflict of interest.
The Odebrecht Group
OnIn May 31, 2002, OPP Produtos Petroquímicos S.A., or OPP Produtos, issued subordinated convertible debentures to Odebrecht.Odebrecht S.A. These debentures became our obligations as a result of the merger of OPP Produtos into our company onin August 16, 2002. In July 2007, Odebrecht hastransferred our subordinated convertible debentures to its subsidiary, CNO, and CNO assumed all of the option to convertobligations of Odebrecht under its non-convertible debentures of the second series. In July 2007, CNO, as the holder of our subordinated convertible debentures, converted all of these debentures in the outstanding amount of R$1,113.5 million (including accrued and unpaid interest) into shares25,832,198 of our share capital at any time. See “Item 5. Operatingcommon shares and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness and Financing Strategy.”51,664,397 of our class A preferred shares, reflecting a conversion price of R$14.37 per share.
OnIn December 4, 2004, we entered into an Alliance Agreement with CNO under which we have appointed CNO as a non-exclusive preferred provider with respect to maintenance services and efficiency enhancement projects at each of our plants. This agreement was unanimously approved by our board of directors. Under this agreement, we are required to request bids from CNO for these services and projects. If CNO is retained for any
specific service or project, we will pay CNO its costs related to the service or project plus 15%. In addition, weWe are also required to pay any applicable taxes with respect to such fees. This agreement expires in December 2008. We purchased services under this agreement from CNO of R$109.5120.3 million in 2005.2007. We had accounts payable to CNO of R$12.317.5 million at December 31, 2005.2007.
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Petrobras
Financial Transactions with Petrobras
Petrobras is the controlling shareholder of Petroquisa, which owns 8.3% of our total share capital, including 9.8% of our voting share capital. We purchase naphtha from Petrobras, and we sell automotive gasoline and LPG to Petrobras Distribuidora S.A.,In September 2007, EDSP58 entered into an export prepayment credit facility with PIFCo, a wholly-owned subsidiary of Petrobras.
On June 22, 1978, we entered into a 10-year renewable contract with Petrobras, under which EDSP58 is permitted to borrow an aggregate principal amount of up to US$323.0 million. In October 2007, EDSP58 borrowed an aggregate of US$312.5 million under this facility to fund a portion of the prices paid by us to Petrobras for naphtha are established based onpurchase price of the Amsterdam-Rotterdam-Antwerp market price and are linked to fluctuationsshares tendered in thereal/U.S. dollar exchange rate. This contract was amended Copesul Tender Offer. These loans bear interest at the rate of LIBOR plus 0.35% per annum until the first anniversary of their disbursement and renewed in February 1993 and in February 2003.thereafter at the rate of LIBOR plus 0.55% per annum. The principal amount of these loans is payable on or prior to the second anniversary of each disbursement.
We maintain a rotating naphtha supply line of credit with Petrobras that permits us to finance purchases of naphtha from Petrobras. We are permitted to maintain balances up to an aggregate of R$570.0 million under this line of credit. We pay interest on the outstanding balance under this line of credit at the monthly rate of 1.78%.
Commercial Transactions with Petrobras
We purchase naphtha from Petrobras, and we sell automotive gasoline and LPG to Petrobras Distribuidora S.A., a wholly-owned subsidiary of Petrobras.
In June 1978, we entered into a 10-year renewable contract with Petrobras under which the prices paid by us to Petrobras for naphtha are established based on the Amsterdam-Rotterdam-Antwerp market price and are linked to fluctuations in thereal/U.S. dollar exchange rate. This contract was amended and renewed in February 1993 and in February 2003.
In February 1996, Copesul and Petrobras entered into a 16-year renewable contract with Petrobras under which the prices paid by Copesul to Petrobras for petroleum condensate are established based on the Amsterdam-Rotterdam-Antwerp market price and are linked to fluctuations in thereal/U.S. dollar exchange rate.
In April 2007, we entered into a three-year caustic soda supply contract with Petrobras under which we will supply approximately 61,300 tons of caustic soda annually for use by Petrobras’ Brazilian refineries. Petrobras uses caustic soda for the treatment of effluents in its refineries.
We purchased raw materials and utilities from Petrobras and Petrobras Distribuidora S.A. of R$5,311.45,713.1 million in 2005.2007 and sold products to Petrobras of R$286.1 million during this period. We had accounts payable to Petrobras and Petrobras Distribuidora S.A.in an aggregate amount of R$103.1579.2 million and accounts receivable from Petrobras in an aggregate amount of R$96.8 million at December 31, 2005.2007.
In March 2007, we entered into a five-year propylene supply contract with Refap, a subsidiary of Petrobras, under which we will purchase an initial annual supply of 70,000 tons of propylene, representing 70% of Refap’s current annual propylene production capacity of 100,000 tons. In addition, we sell condensate and purchase naphtha from Refap. We purchased raw materials from Refap of R$1,654.2 million and had sales to Refap of R$543.2 million in 2007. We had accounts receivable from Refap in an aggregate amount of R$26.2 million at December 31, 2007.
On February 21, 2005, we purchased (1) 15,390,139 common shares, 379,955 class B preferred sharesOur Subsidiaries, Jointly Controlled Companies and 7,695,071 class C preferred shares, representing 13.74% of the total share capital of Companhia Alagoas Industrial-Cinal, including 16.6% of its voting share capital, and (2) 1,669,518,451 quotas, representing 25% of the total capital of Alclor—Química de Alagoas Ltda., from Petroquisa for R$7.7 million.Associated Companies
Paulínia
Petrobras’ subsidiary, Petroquisa, isIn December 2006, Paulínia entered into a partycredit agreement with BNDES in the aggregate amount of R$566.2 million to the Petroquisa memorandum of understanding with Odebrecht and Petroquímica da Bahia. This agreement grants certain voting and other rights in respect of our company to Petroquisa. See “—Major shareholders—Shareholders Agreements—Petroquisa Memorandum of Understanding.”
On September 16, 2005, we and Petroquisa incorporated Paulínia, a joint venture forfinance the construction and operation of a polypropylene plant to be located in Paulínia, in the State of São Paulo. We own 60.0% of the total and voting share capital of Paulínia and Petroquisa owns the remaining 40.0%. On September 16, 2005, (1)In December 2006, we entered into a shareholdersan agreement with PetroquisaPetrobras and BNDES under which we and Petrobras severally guarantee the obligations of Paulínia with respect to our proportionate shares of the management ofobligations that Paulínia incurs under this credit agreement. The first tranche under this credit agreement in the principal amount of R$56.0 million bears interest at a rate of 9.5% per annum. The second tranche under this credit agreement in the aggregate principal amount of R$424.6 million bear interest at the TJLP rate plus 3.4% per annum. The third tranche under this credit agreement in the aggregate principal amount of R$76.9 million bears interest at the TJLP rate plus 2.9% per annum. The fourth tranche under this credit agreement in the aggregate principal amount of R$8.1 million bear interest at the TJLP rate plus 2.4% per annum. The first tranche under this credit agreement matures in January 2015 and the transferother three tranches mature in December 2014.
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Cetrel
Our Subsidiaries, Jointly Controlled Companies and Associated Companies
Copesul
Our Polyolefins Unit purchases ethylene and propylene from Copesul, in which we have a 29.5% interest. We have a long-term supply contract with Copesul that is described in “Item 4. Information on the Company—Polyolefins Unit—Raw Materials of Our Polyolefins Unit.” Our Polyolefins Unit also buys nitrogen on market terms from Copesul. We recorded purchases from Copesul of R$1,814.3 million in 2005. We had accounts payable to Copesul of R$353.2 million at December 31, 2005.
COPESUL—International Trading Inc.
COPESUL—International Trading Inc. is a subsidiary of Copesul, in which we have a 29.5% interest. At December 31, 2004, one of our subsidiaries, Lantana Trading Company Inc., had four outstanding loans from COPESUL—International Trading Inc. of R$145.8 million (R$102.9 million giving effect to proportional consolidation) at interest rates equivalent to the market rates. These loans were paid in full during the year ended December 31, 2005.
Politeno
At December 31, 2005, we owned 34.0% of the total share capital of Politeno, including 35.0% of its voting share capital. Our Basic Petrochemicals Unit supplies ethylene to Politeno. We recorded net sales to Politeno of R$696.0 million in 2005. We had accounts receivable from Politeno of R$18.5 million at December 31, 2005. As a result of the Politeno acquisition, we now own 96.2% of the total share capital of Politeno, including 100% of its voting share capital, and will fully consolidate Politeno in our consolidated financial statements at dates and for periods following this acquisition.
Cetrel
We own, directly and indirectly, 53.0%52% of the voting and total share capital of Cetrel. We purchase treatment services on market terms from Cetrel for the wastewater and organic residues generated by us in the Northeastern Complex. We recorded purchases from Cetrel of R$13.610.0 million in 2005.2007. We had accounts payable to Cetrel of R$0.90.1 million at December 31, 2005.2007.
Petroflex
Petroflex
We own 20.1%Prior to April 1, 2008, we owned 33.5% of the voting and total share capital of Petroflex.Petroflex, including 33.6% of its voting share capital. We sell butadiene-l to Petroflex on market terms under a long-term contract that is renewable automatically for ten-year10-year periods. We recorded net sales to Petroflex of R$353.2336.3 million in 2005.2007. We had accounts receivable from Petroflex of R$41.4457.1 million at December 31, 2005.2007.
OnIn June 11, 2004, Petroflex entered into a R$34.3 million secured credit agreement with BNDES to finance capital expenditures. In accordance with the terms of a shareholders agreement among our company and the other controlling shareholders of Petroflex that terminated upon our sale of our interest in Petroflex, we have guaranteed severally, but not jointly, 40% of this loan, or approximately R$13.7 million of its aggregate principal amount. The first tranche of this loan in the principal amount of R$10.3 million bears interest at a rate based on the UMUMBNDES rate plus a margin of 5.125% per annum. The second and third tranches of this loan in the aggregate principal amount of R$24.0 million bear interest at the TJLP plus 5.125% per annum. As set forth in thethis shareholders agreement, we charge Petroflex a fee of 1.25% of the outstanding principal amount of this loan that we guarantee. Under the terms of the agreement under which we sold our interest in Petroflex, this guarantee is required to be replaced and we are to be released from this guarantee prior to or on June 29, 2008.
Borealis Brasil S.A.
We sell polypropylene and polyethylene to Borealis Brasil S.A., or Borealis, in which we have a 20.0% interest. We recorded net sales to Borealis of R$128.5143.0 million in 2005.2007. We had accounts receivable from Borealis of R$8.710.7 million at December 31, 2005.2007.
Other
Engepack
Engepack
We sell PET from time to time to Engepack, a packaging manufacturer. Francisco Teixeira de Sá, the chairman of the board of directors of Engepack, is a member of our board of directors. In addition, one of the alternate members of our board of directors, LucioLúcio José Santos Junior,Júnior, is an executive officer of Engepack, and one of the members of our fiscal council, Walter Murilo Melo de Andrade, is the internal counsel of Engepack. We recorded net sales to Engepack of R$25.549.3 million in 2005.2007. Engepack purchases PET from a variety of second generation producers, including our company.
Sojitz
We sell PVC and EDC to, and we purchase raw materials, principally naphtha, from Sojitz, a chemical trader. Masatoshi Furuhashi, the managing director of Sojitz Corporation of America and president of Sojitz do Brasil S.A., both subsidiaries of Sojitz, is a member of our board of directors. In addition, Yukihiro Funamoto, an executive officer of Sojitz do Brasil S.A., a subsidiary of Sojitz, is an alternate member of our board of directors. At December 31, 2005,2007, Sojitz owned 1.2%1.0% of our total share capital, including 3.6%2.9% of our voting share capital.
We have an ongoing obligation to export PVC and EDC under a supply agreement with Sojitz. Under this supply agreement, we have agreed to supply, and Sojitz has agreed to purchase, minimum annual volumes of 6,000 tons of PVC, and minimum annual volumes of EDC, which decline over time from 100,000 to 80,000 tons. We recorded net sales to Sojitz of R$93.517.0 million in 2005.2007. In addition, we recorded purchases from Sojitz of R$827.6742.1 million in 2005.2007.
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Consolidated Statements and Other Financial Information
Reference is made to Item 19 for a list of all financial statements filed as part of this annual report.
Legal Proceedings
Tax Proceedings
We are engaged in several legal proceedings with Brazilian tax authorities for which we have established provisions in an aggregate amount of R$1,370.41,145.8 million at December 31, 2005.2007. In addition, there are currently certain legal proceedings pending in which we are involved for which we have not established provisions. If any of these legal proceedings is decided adversely to us, our results of operations or financial condition could be materially and adversely affected.
IPI
IPI Credits on Raw Materials Purchases.We pay IPI tax on industrial products that we manufacture. The regulations governing the IPI tax assess this tax on a non-cumulative basis, meaning that companies may offset their IPI tax obligations with the amount of IPI taxes paid by suppliers earlier in the production chain. The Brazilian federal tax authorities have asserted that the purchase of raw materials that are tax-exempt, non-taxable or taxed at a zero percent rate does not generate IPI tax credits, on the basis that there is no law or regulation that expressly authorizes these credits. We believe that this interpretation is contrary to Article 153, paragraph 3 of the Brazilian Constitution, which sets forth the principle of non-cumulative taxation and does not exclude purchases of raw materials that are tax-exempt, non-taxable or taxed at a zero percent rate.
In July 2000, OPP Química (which has merged into our company) filed suit in the State of Rio Grande do Sul requesting the acknowledgement of IPI tax credits for its purchases of raw materials from our company and Copesul. The amount of credits claimed by OPP Química comprised the book value of those raw materials plus monetary adjustments. In December 2002, the Brazilian Federal Supreme Court held that OPP Química was entitled to IPI tax credits in an aggregate amount of R$1,030.1 million, including R$367.9 million attributable to monetary adjustments, for the ten-year10-year period ended in 2002, calculated based on the price of the raw materials purchased during the ten-year10-year period preceding the filing of the suit, plus monetary adjustments based on official indices.
The Brazilian government appealed the decision of the Brazilian Federal Supreme Court. AsIn this special appeal, the appeal does not challengeBrazilian federal tax authorities are no longer challenging the validity of IPI tax credits, but only the method of calculating monetary adjustments on those credits and the time period for appealing the decision of the Brazilian Federal Supreme Court has expired, we believe that (1) the decision acknowledging the validity of the IPI tax credits is no longer subject to appeal, and
(2) it is reasonably possible that we could lose the appeal regardingare alleging some inaccuracies in the method of calculating monetary adjustments on those credits. IfAccording to the opinion of our legal advisors, these issues have already been resolved by decisions of the Brazilian Government prevailsFederal Supreme Court and the Regional Federal Court favorable to OPP Química. However, there may be a risk of changes in this appeal, we could lose all or partthe previous decision as a result of the IPI tax credits attributable to monetary adjustments.special appeal, because, among other factors, the Brazilian Federal Supreme Court has revisited this matter on the merits in a similar lawsuit lodged by another taxpayer. We recognized IPI tax credits in an aggregate amount of R$1,030.1 million in December 2002. At December 31, 2005,2007, we have used the full amount of the R$1,030.1 million IPI tax credit to offset our IPI and other federal tax obligations.
On September 28, 2006, the Brazilian federal tax authorities issued four tax deficiency notices to us, claiming that we owe approximately R$1,100.0 million in taxes that we offset with OPP Química’s IPI tax credits. We are contesting the government’s claims in administrative tax proceedings. We believe that the government issued two of the deficiency notices, in an aggregate amount of R$308.6 million solely to avoid forfeiting their claims due to the expiration of the statute of limitations. However, we believe that we will prevail in these administrative tax proceedings, as our decision to offset IPI tax credits against our IPI and other federal tax obligations is supported by a final decision of the Brazilian Federal Supreme Court. The other two tax deficiency notices, in an aggregate amount of R$791.4 million, allege that we are not allowed to recognize IPI tax credits from future raw material purchases. Nevertheless, the existing court decisions have given our company full and ongoing entitlement to offsetting rights. We believe that we will prevail in these administrative proceedings.
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During 2007, the Federal Revenue Office rejected approximately 200 applications for offsetting of these credits with federal taxes payable by our company. We disputed these rejections at administrative and judicial levels. We believe that we will prevail in all these administrative and judicial tax proceedings.
The tax credits used up by us (as adjusted by applying the SELIC rate through December 2007) amount to R$2,506.9 million. The various collection proceedings referred to above have claimed R$2,263.5 million as of December 31, 2007, plus fines in the aggregate amount of R$731.0 million. We believe that such fines are not payable because we relied upon a judicial decision in the recognition of the tax credits.
In a procedural decision on December 11, 2007 that has not yet been published, the Brazilian Federal Supreme Court held that a new judgment should be rendered and, in view of the importance of the matters raised by our lawsuit, the parties were granted an opportunity to make new oral arguments concerning the procedural matter.
Upon publication of this decision, we intend to determine whether to appeal this decision. However, despite the possibility of the Brazilian Federal Supreme Court’s review of the merits of its former decision and its ruling against us, we and our counsel believe that the December 2002 decision should nonetheless be givenres judicata(i.e., final and binding) effect.
We have three othera similar suitssuit pending on behalf of OPP Química (which has merged into our company) in federal court in the State of São Paulo, and two similar suits on behalf of Trikem (which havehas merged into our company) in federal courts in the States of Bahia, São Paulo and Alagoas. In two of these cases, we obtained preliminary injunctions that allowed these companies to use these credits to offset other IPI tax obligations. In the third case, we obtained a favorable decision in federal trial court that recognized our right to these credits for the ten-year period preceding the filing of this suit, which decision the Brazilian government appealed to the Superior Court of Justice and the Brazilian Federal Supreme Court in 2002. All three of theseThese suits remain pending. Based on (1) these favorable lower court decisions, (2) the favorable decision of the Brazilian Federal Supreme Court relating to the validity of the IPI tax credits in OPP Química’s suit in Rio Grande do Sul described above and (3) our assessment of the arguments made in a similar case involving a third party that is currently pending before the Brazilian Federal Supreme Court, we believe that it is reasonably possible that we will prevail in these suits. Accordingly, weWe have used R$203.7120.5 million at December 31, 20052007 of Trikem’s and OPP Químicas’ IPI tax credits to offset our IPI and other federal tax obligations and have recorded a provision in the amount of R$308.7227.4 million at December 31, 2005.2007. We have not recognized any assets or gains in relation to these claims.
We note that the Brazilian Federal Supreme Court issued an unfavorable ruling in another case in February 2007 involving a taxpayer unrelated to our company, holding by a six-to-five vote that IPI tax credits arising from the purchase of raw materials that are taxed at a zero percent rate may not be used to offset IPI and other federal taxes. In June 2007, the full bench of the Brazilian Federal Supreme Court contemplated whether this decision would have retroactive or prospective effect and, by majority opinion, ruled that a decision of the Brazilian Federal Supreme Court that reversed an earlier determination made by the full bench of the Brazilian Federal Supreme Court in favor of a taxpayer would apply retroactively.
In a third suit on behalf of OPP Química and Trikem in the federal court in the State of Bahia, we obtained a favorable decision in federal trial court that recognized our right to these credits for the 10-year period preceding the filing of this suit. The Brazilian government appealed this ruling to the Superior Court of Justice in the First Circuit. In August 2007, the Superior Court of Justice in the First Circuit overturned the ruling of the federal trial court. As a result, we paid R$127.3 million to the tax authorities in accordance with this judgment. We had established a provision with respect to this action in excess of the amount of this judgment.
We also have a similar suit pending in federal court in the State of Bahia that was commenced by PoliadenPolialden prior to our merger with Polialden. Polialden won this suit in federal trial court, which ruled that Polialden was entitled to IPI tax credits for the ten-year10-year period preceding the filing of this suit. However, theThe Brazilian government appealed this decision to the Federal Superior Court of Justice which appeal remains pending. Based on (1) this favorable lower court decision, (2)in the favorable decisionFirst Circuit. In September 2007, the Superior Court of Justice in the First Circuit overturned the ruling of the Brazilian Federal Supreme Court relatingfederal trial court. As a result, we paid R$99.6 million to the validity of the IPI tax creditsauthorities in OPP Química’s suit in Rio Grande do Sul described above, and (3) our assessment of the arguments made in a similar case involving a third party that is currently pending before the Brazilian Federal Supreme Court, we believe that it is reasonably possible that we will prevail inaccordance with this suit. Accordingly, Polialden used R$98.0 million at December 31, 2005 in IPI tax credits to offset its IPI and other federal tax obligations and recordedjudgment. We had established a provision with respect to this action in excess of the amount of R$157.6 million at December 31, 2005. Polialden did not recognize any assets or gains in relation to these claims.this judgment.
For further information on our accounting treatment of these IPI credits, see note 17notes 9 and 16(ii) to our consolidated financial statements.
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IPI Export Credits.Brazilian Decree Law No. 491/69 provides a tax credit to exporters of manufactured products to compensate them for taxes paid in Brazil prior to exporting their products. The regulations governing the IPI tax permit exporters to offset IPI taxes with IPI export credits and/or to transfer their IPI export credits to third parties. However, the Brazilian tax authorities issued a series of administrative rules that reduced, restricted and ultimately suspended the use of these credits based on Decree Law No. 1,724/79, which expressly delegated these powers to the Brazilian Ministry of Finance. We believe that this delegation of powers to the Ministry of Finance violated the distribution of functions among the executive branch, and that secondary administrative rules may not restrict or suspend a benefit created by a constitutionally superior norm. Accordingly, we believe that the administrative rules promulgated under the authority of Decree Law No. 1,724/79 have no legal effect. On these grounds, we and some of our subsidiaries filed suits against the Brazilian government challenging Decree Law No. 1,742/79 and these administrative rules and seeking to offset and transfer IPI export credits as provided under Decree Law No. 491/96.
We and our subsidiaries believe that we are entitled to more than R$794.6 million in IPI export credits. In one of these suits, the Regional Federal Court ruled against OPP Química (which has merged into our company), holding that it does not have the right to IPI export credits. OPP Química’s appeals before the Superior Court of Justice and the Brazilian Federal
Supreme Court remain pending. Although our other suits also are pending, the Brazilian tax authorities have issued deficiency notices against us (1) attempting to collect amounts offset using these IPI export credits and (2) asserting their right to do so before the expiration of the applicable statute of limitations. We filed administrative appeals in respect of these deficiency notices, but we received unfavorable decisions in each of these appeals. We have appealed each of these unfavorable decisions to the taxpayers’ council (an administrative appeal board). However, based on recent Brazilian Federal Supreme Court and otherandother jurisprudence holding that the sub-delegation by the Ministry of Finance of the authority to regulate IPI export credits under Decree Law No. 1,742/79 was unconstitutional and recognizingthat recognized the right to offset IPI export credits as provided under Decree Law No. 491/96, we believe that it is reasonably possible that we will prevail in all of these judicial and administrative proceedings. We note thatDespite the Brazilian Federal Supreme Court rendered a decision in an unrelated proceeding involving a third party holding that this sub-delegation was constitutional. However,issuance of Resolution No. 71 by the Federal Senate issued Resolution No. 71 on December 27, 2005, confirmingwhich confirmed the unconstitutionality of this sub-delegation and ratifyingratified the validity of IPI export credits. We are analyzingcredits, the potential consequencesSuperior Court of this Resolution.Justice, in an appeal made by another taxpayer seeking recognition of that taxpayers’ entitlement to use such tax benefit, upheld its rejection to such prospective use and affirmed that the tax benefit expired in 1990. When the Superior Court of Justice completes its judgment, the Brazilian Federal Supreme Court will revisit the right to use those tax credits after 1990, based on application of Temporary Constitutional Provisions Act (ADCT) 41. We have used a portion of these credits to offset IPI and other federal taxes in the amount of R$391.0381.8 million at December 31, 20052007 and recorded a provision in the amount of R$550.3687.8 million at December 31, 20052007 because these suits remain pending. For further information on our accounting treatment of these IPI credits, see note 1716(i) to our consolidated financial statements.
IPI Credits Arising from the Acquisition of Fixed Assets and Materials Not Used in ProductionProduction.. We are involved in four suits against the Brazilian government seeking the acknowledgment of IPI credits arising from the acquisition of fixed assets and materials not used by us in the production of our products. The regulations governing the IPI tax permit companies to offset against their IPI tax liability IPI credits arising from the acquisition of raw materials and other unfinished products only to the extent that they are used in production. We believe that this limitation imposed by the IPI regulations is unconstitutional. Article 153, paragraph 3 of the Brazilian Constitution sets forth a broad principle of non-cumulative taxation and does not limit the grant or use of IPI credits arising from the acquisition of fixed assets or in respect of materials not used in production.
We lost one of these suits in federal trial court and appealed this decision, which appeal remains pending. Although our three other suits also remain pending in federal court, the Brazilian tax authorities have issued deficiency notices against us attempting to collect amounts offset using these credits, asserting their right to do so before the expiration of the applicable statute of limitations. We appealed the issuance of these deficiency notices to the taxpayers’ council. We believe that it is reasonably possible for us to prevail in all of these judicial and administrative proceedings. We have used R$20.231.9 million at December 31, 20052007 of these credits to offset IPI taxes and recorded a provision in the amount of R$37.742.5 million at December 31, 20052007 because these suits remain pending. For further information on our accounting treatment of these IPI credits, see note 1716 to our consolidated financial statements.
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Social Contribution on Net Income
Law No. 7,689/88 created the Social Contribution on Net Income (CSLL),CSLL, a tax similar to the corporate income tax. Under Article 146, item III of the Brazilian Constitution, the Social Contribution on Net IncomeCSLL should have been enacted as a supplementary law and not as an ordinary law. Under Brazilian law, supplementary laws must be approved by at least a majority of the members of each house of the Brazilian Congress, while an ordinary law may be approved by a simple majority of the members of Congress present at the relevant voting session. In addition, we believe that Social Contribution on Net IncomeCSLL violates Article 154, item II of the Brazilian Constitution, which provides that new taxes may not be assessed and calculated on the same basis as existing taxes. We believe the Social Contribution on Net IncomeCSLL is assessed and calculated on the same basis as the corporate income tax.
On these grounds, we and some of our subsidiaries filed suit challenging the constitutionality of the Social Contribution on Net Income.CSLL. We received a final decision in our favor in 1992. However, in 1993, Brazilian tax authorities filed a rescission action (aç(ação rescisória)ria) against us in relation to all but one of these cases seeking to
overrule this decision on the basis of a ruling by the Brazilian Federal Supreme Court in an unrelated case that recognized the constitutionality of the Social Contribution on Net Income.CSLL. The Brazilian tax authorities prevailed in their rescission action both in the first instance and on appeal. We filed further appeals in respect of this decision with the Superior Court of Justice and the Brazilian Federal Supreme Court, which appeals remain pending. The Brazilian Superior Court of Justice (Superior Tribunal de Justiça) issued a ruling in a case of another unrelated taxpayer dismissing one of the arguments thas has been used by the Brazilian tax authorities in the rescission action. This decision should strenghen the arguments that we have used in our cases. In the remaining case, we believe that it is reasonably possible that the final decision in our favor will remain in effect.
Brazilian tax authorities issued several deficiency notices against us and our subsidiaries attempting to collect Social Contribution on Net Income.CSLL. We obtained suspensions of all deficiency notices that we have received to date based on a Brazilian civil procedure provision that states that a rescission action may take effect only after the court publishes a final decision.
We believe it is reasonably possible that we will lose our appeals. However, if we lose these suits, we believe that we would be required to pay Social Contribution on Net IncomeCSLL only from the date that a final decision is published. We note, however, that Brazilian law allows rescission actions to relate back to, and to take effect from, the date of the initial decision. Although this legislation does not involve tax proceedings and the Brazilian Federal Supreme Court has not ruled on this issue, the same line of reasoning has been adopted by the Brazilian tax authorities and may be adopted by the courts in our suit. Accordingly, we believe that it is reasonably possible that we will be required to pay these taxes retroactively.
If Social Contribution on Net IncomeCSLL is charged retroactively, then our total estimated exposure at December 31, 20052007 would be R$651.7809.0 million, including interest. This amount does not include approximately R$175.0242.4 million in penalties at December 31, 2005,2007, which we believe are not payable because we relied upon a judicial decision in not paying Social Contribution on Net Income.CSLL. We believe that there is a possibility that we will be required to pay related interest and a remote possibility that we will be required to pay fines as a result of this tax litigation.
As we believe that Social Contribution on Net IncomeCSLL may not be payable for periods before the date the final decision is published in the rescission action, we have not made any provision in our consolidated financial statements for these contingencies. For further information on our accounting treatment of CSLL, see note 18(c)17(c) to our consolidated financial statements.
PIS and COFINS
The PIS and COFINS taxes are Brazilian federal taxes created to fund the government’s unemployment payments, social security and other social programs. Prior to February 1999, PIS and COFINS were assessed on “gross billings,” that is, billings or invoices for sales of goods and services. Effective February 1999, Law No. 9,718/98 introduced significant changes in the assessment of PIS and COFINS, which changes have materially increased the tax burden of our company on a consolidated basis. Law No. 9,718/98 substantially broadened the concept of “gross billings” to include revenue generated from sources other than sales of goods and services, increasing the tax base upon which PIS and COFINS are assessed. At the same time, the rate of COFINS increased from 2% to 3%.
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We believe that these changes were unconstitutional. The provisions of Law No. 9,718/98 that broadened the concept of “gross billings” in our view violated the original terms of Article 195 of the Brazilian Constitution, as well as Article 110 of the Brazilian tax code, which prohibits tax laws from changing the definition, content and reach of private law doctrines and concepts. In addition, although the Brazilian Congress enacted Constitutional Amendment No. 20 on December 15, 1998 to modify Article 195 of the Brazilian Constitution in order to validate the expanded calculation basis of PIS and COFINS as set forth in Law No. 9,718/98, we believe that this law cannot be validated by constitutional amendment for periods before the effectiveness of the constitutional amendment. On these grounds, we and our subsidiaries have filed suit against the Brazilian government seeking to pay PIS and COFINS in accordance with the rules prevailing prior to February 1999.
We and some of our subsidiaries lost our suits challenging the change in the definition of “gross billings” and have appealed these decisions to the Brazilian Federal Supreme Court. On November 9, 2005, the full bench of the Brazilian Federal Supreme Court ruled that the increase in PIS and COFINS tax basis under Law No. 9,718/98 was unconstitutional. Following this decision, the previous unfavorable decisions against us and these subsidiaries were vacated, and we and these subsidiaries won most of our suits challenging the change in the definition of “gross billings.”
We and some of our subsidiaries lost suits challenging the increase in the COFINS tax rate and have appealed these decisions to the Brazilian Federal Supreme Court. Based on recent Brazilian Federal Supreme Court and Superior Court of Justice jurisprudence, we believe that our chances of success in these suits are remote. Two of our subsidiaries have voluntarily settled their COFINS liabilities under a special program created by Law No. 10,684/03, for which we have recorded a long-term liability in an aggregate amount of R$43.236.6 million at December 31, 2005.2007. As of February 2004, we and our subsidiaries have been paying COFINS in accordance with Law 10,833/03, which introduced new criteria for calculating COFINS.
We recorded a provision in accordance with Law No. 9,718/98 in respect of the proceedings that were not settled in an aggregate amount of R$316.150.6 million at December 31, 2005 and have deposited R$39.1 million of this amount in court.2007. For further information on our accounting treatment of these contingencies, see notes 10 and 17(iii)note 16(iii) to our consolidated financial statements.
Tax on Net Profits
Law No. 7713/88 imposed an 8.0% income tax on equity holders, the tax on net profits, which was calculated on net profits recorded by companies in which such holders own equity and was assessed even when the net profits have not been distributed to those equity holders. We believe that Law No. 7713/88 violates Article 43 of the Brazilian tax code, which provides that income tax may be assessed only at the moment when the equity holder effectively receives or is entitled to receive income.
On these grounds, we filed a lawsuit in 1997 against the Brazilian government seeking a refund of, or the right to offset other taxes with, the tax on net profits that we overpaid with respect to the 1990 and 1991 tax years, which at December 31, 2005 totaled approximately R$73.2 million. We deposited a portion of this amount with the court and have used this amount to offset our PIS and COFINS liabilities. In March 2002, the Regional Federal Court recognized our right to use these overpaid amounts to offset other taxes, as adjusted for inflation and including interest accrued on these amounts at the SELIC rate. The Brazilian government filed a special appeal before the Superior Court of Justice, which decided the case in favor of our company. Based on the decision of the Superior Court of Justice, we have petitioned the Regional Federal Court, requesting the refund of our judicial deposits and the nullification of the deficiency notices issued by the tax authorities with respect to these amounts.
We brought suit for recovery of unduly paid tax on net profits in the 1989 and 1990 tax years. The Regional Federal Court issued a non-appealable order in our favor, and we requested that the Federal Revenue Office acknowledge that a tax credit be recognized and be available to offset against subsequent tax obligations. In November 2005, the Federal Revenue Office acknowledged our entitlement to a R$45.4 million tax credit, which we used to offset PIS and COFINS liabilities in 2005.
Offset of Tax Credits
From May through October 2000, OPP Química and Trikem offset their own federal tax obligations with IPI tax credits assigned by a third-party export trading company. In June 1999, the export trading company filed a motion for a writ of mandamus requiring the federal tax authority of the State of São Paulo to recognize these offsets, and in October 1999, the federal tax authority of the State of São Paulo issued offset support certificates in response to an injunction obtained by the export trading company. In September 1999, the export trading
company filed a motion for a writ of mandamus requiring the federal tax authority of the State of Rio de Janeiro to recognize the recovery of IPI tax credits by the export trading company and the validity of their use in offsetting third-party tax obligations. In March 2001, the motion for a writ of mandamus filed by the export trading company in the State of São Paulo was dismissed without prejudice, confirming the administrative and jurisdictional authority of the State of Rio de Janeiro to rule on the export trading company’s tax credits.
In June 2005, the federal tax authority of the State of São Paulo issued regulations canceling the offset support certificates. Based on these regulations, the Federal Revenue Office unit in Camaçari, Bahia sent collection letters to our company in June 2005. We presented notices of dispute against these collection letters, but the administrative authorities declined to process these notices.
On October 3, 2005, the Federal Supreme Court granted a non-appealable writ of mandamus to the export trading company, confirming the export trading company’s right to use its IPI tax credits from all its exports and the availability of these IPI tax credits for offsetting third-party obligations. As a result, we believe that our use of the export trading company’s IPI credits to offset our federal taxes has been confirmed and that the assessment made by the Federal Revenue Office unit in Camaçari, Bahia is not due. In addition and notwithstanding the writ of mandamus granted to the export trading company, we believe that the statue of limitations has expired with respect to the federal taxes offset against the IPI tax credits of the export trading company and can no longer be claimed by the tax authorities.
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In December 2005, the Federal Revenue Office unit in Camaçari, Bahia assessed past-due federal tax liabilities of R$276.6 million against our company related to our alleged undue offset of federal taxes. In January 2006, we were ordered to post bond in aid of execution of the tax claim made by the Federal Revenue Office unit in Camaçari, Bahia, and we posted this bond in the form of an insurance policy.
We and the export trading company subsequently commenced judicial and administrative proceedings to defend the lawfulness and validity of those offsetting procedures. We believe that it is probable that we will prevail in these judicial and administrative proceedings in light of our view of the validity and liquidity of those credits as confirmed in a special audit conducted by the federal tax authority of the State of Rio de Janeiro. In the event that we are unsuccessful in all of these judicial and administrative proceedings, pursuant to the agreement under which the export trading company assigned the IPI tax credits to OPP Química and Trikem, we will be entitled to full recourse against the export trading company concerning all amounts we are required to pay to the National Treasury.
Other Tax Proceedings
We our subsidiaries and our affiliates are involved in several other judicial and administrative proceedings regarding withholding taxes, corporate income taxes(Imposto de Renda da PessoaJurídica),the ICMS, the tax on financial transactions (Imposto Sobre Operações Financeiras), monetary adjustments, the Social Investment FundIntegration Program (FundoPrograma de InvestimentoIntegração Social), compulsory loans to Eletrobrás and other issues related to tax matters. Some of these disputes involve substantial amounts.
Labor Proceedings
Clause Four—“Cláusula Quarta”
Our company and other companies in the Northeastern Complex enter into annual collective bargaining agreements with the petrochemical workers’ union. The collective bargaining agreement that was valid between September 1989 and August 1990 required employers to pay workers monthly cost of living adjustments equal to 84.3% of the consumer price index (Índice de Preços ao Consumidor), or IPC, and prohibited the substitution of the IPC by another index with lower values.
In March 1990, the Brazilian government introduced an economic plan known as the “Collor Plan,” named after the then-President of Brazil. The Collor Plan provided that cost of living adjustments in wages could be based on other indices but not on the IPC. Based on judicial precedent, we interpreted the Collor Plan as prohibiting wage increases based on the IPC, which interpretation was contrary to the terms of the collective bargaining agreements in effect at the time. The petrochemical employers’ union filed a lawsuit against the petrochemical workers’ union, seeking to confirm that the cost of living adjustment indices provided in the Collor Plan preempted the conflicting provisions in the collective bargaining agreements. The Regional Labor Court ruled in favor of the workers’ union, and the decision was later modified in part on appeal to the Superior Labor Court. In 1998, the employers’ union filed an extraordinary appeal to the Brazilian Federal Supreme Court.
The Brazilian Federal Supreme Court initially held in favor of the workers’ union, but reversed its decision in December 2002 and held that a private collective bargaining agreement cannot preempt federal law, particularly a law that related to Brazilian public policy. In 2003, the workers’ union requested reconsideration of this decision. The Brazilian Federal Supreme Court accepted the workers’ union’s request for reconsideration, but on May 31, 2005, the Brazilian Federal Supreme Court unanimously reaffirmed its December 2002 decision and dismissed the workers’ union’s appeal.
On October 24, 2005, the workers’ union filed a divergence appeal to the Brazilian Federal Supreme Court, requesting the resolution of conflict between the decisions given by the Brazilian Federal Supreme Court under this proceeding and prior decisions given by the another panel of the Brazilian Federal Supreme Court. The Brazilian Federal Supreme Court has agreed to consider this appeal, but has not yet issued a decision. However, the Brazilian attorney general has filed a brief in this matter in November 2006 supporting the position of the employers’ union.
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Other
WeEmployment and our subsidiaries are involved in approximately 1,100 labor lawsuits that involve claims totaling R$223.4 million at December 31, 2005. We have deposited R$22.5 million of this amount in court and have established a provision for labor contingencies in an aggregate amount of R$12.3 million at December 31, 2005.
Occupational Health and Safety Proceedings
At December 31, 2005,2007, we were party to 169involved in approximately 1,400 employment and occupational health and safety proceedings as to which the total amount claimed was approximately R$147.4344.8 million. As we believe that the riskWe have deposited R$4.3 million of losing these proceedings is possiblethis amount in court and not probable, we have not established a provision for these claims in respectan aggregate amount of these proceedings andR$25.0 million at December 31, 2007. We do not believe that these proceedings will have a material adverse effect on our business, financial condition or operations.
Other Proceedings
At December 31, 2005,2007, we were a defendant in threetwo civil suits filed by a former caustic soda distributor, its controlling shareholder and a former transporter for breach of a caustic soda distribution agreement. The damages claimed in these suits totaled R$132.627.5 million at December 31, 20052007 (monetarily adjusted). We prevailed in one of theseThese suits in trial court, which the plaintiff appealed. This appeal remains pending. On January 19, 2006, a lower court issued a non-appealable judgment in our favor in one or these suits in which the damages claimed were R$106.5 million. The remaining suit isare pending. We believe that we will possibly prevail in this suit and in the appeal.these suits.
We have also filed a claim in the amount of R$1.9 million against this distributor in its pending bankruptcy proceeding. The bankruptcy court has initially accepted our claim.
We are parties to certain proceedings brought by some preferred shareholders of our companyBraskem, Polialden and PolialdenPoliteno which we do not believe will have a material adverse effect on our business, financial condition or results of operations.
Dividends And Dividend Policy
Payment of Dividends
Our dividend distribution policy has historically included the distribution of periodic dividends, based on annual balance sheets approved by our board of directors. When we pay dividends on an annual basis, they are declared at our annual shareholders’ meeting, which we are required by the Brazilian Corporation Law and our by-laws to hold by April 30 of each year. When we declare dividends, we are generally required to pay them within 60 days of declaring them unless the shareholders’ resolution establishes another payment date. In any event, if we declare dividends, we must pay them by the end of the fiscal year for which they are declared. Under Article 9 of Law 9,249/95 and our bylaws, we also may pay interest attributable to shareholders’ equity as an alternative form of dividends upon approval of our board of directors. For a more detailed description of interest attributable to shareholders’ equity, see “—Payment of Dividends and Interest Attributable to Shareholders’ Equity—Interest Attributable to Shareholders’ Equity.”
The following table sets forth the dividends and/or interest attributable to shareholders’ equity paid to holders of our common shares, class A preferred shares and class B preferred shares since 2001 inreaisand in U.S. dollars translated fromreaisat the commercial market selling rate in effect as of the payment date.
Nominal Brazilian Currency per | US$ equivalent per | |||||||||||||||||||
Year | Payment Date | Common shares | Class A Preferred Shares | Class B Preferred Shares | Common shares | Class A Preferred Shares | Class B Preferred Shares | |||||||||||||
2001 | February 20, 2001 | R$ | 0.21 | R$ | 0.21 | R$ | — | US$ | 0.11 | US$ | 0.11 | US$ | — | |||||||
May 20, 2001 | 0.14 | 0.14 | 0.14 | 0.06 | 0.06 | 0.06 | ||||||||||||||
August 20, 2001 | 0.14 | 0.14 | 0.14 | 0.06 | 0.06 | 0.06 | ||||||||||||||
November 20, 2001 | 0.14 | 0.14 | 0.14 | 0.06 | 0.06 | 0.06 | ||||||||||||||
2002 | February 25, 2002 | — | 0.08 | 0.08 | — | 0.04 | 0.04 | |||||||||||||
May 20, 2002 | — | 0.13 | 0.13 | — | 0.05 | 0.05 | ||||||||||||||
2005 | April 12, 2005(1) | 0.56 | 0.56 | 0.56 | 0.22 | 0.22 | 0.22 | |||||||||||||
2006 | April 18, 2006 | 0.90 | 0.90 | 0.56 | 0.42 | 0.42 | 0.26 |
Nominal Brazilian Currency per | US$ equivalent per | |||||||||||||
Class A | Class B | Class A | Class B | |||||||||||
Common | Preferred | Preferred | Common | Preferred | Preferred | |||||||||
Year | Payment Date | shares | Shares | Shares | shares | Shares | Shares | |||||||
2005 | April 12, 2005(1) | R$0.56 | R$0.56 | R$0.56 | US$0.22 | US$0.22 | US$0.22 | |||||||
2006 | April 18, 2006(2) | 0.90 | 0.90 | 0.56 | 0.42 | 0.42 | 0.26 | |||||||
2007 | April 9, 2007(3) | — | 0.16 | 0.16 | — | 0.07 | 0.07 | |||||||
2008 | April 7, 2008(4) | 0.64 | 0.64 | 0.64 | 0.38 | 0.38 | 0.38 |
(1) | Represents interest attributable to shareholders’ equity of R$0.28 (US$0.11) per common share, R$0.56 (US$0.22) per class A preferred share and R$0.56 (US$0.22) per class B preferred share, plus dividends of R$0.28 (US$0.11) per common share. |
(2) | Represents interest attributable to shareholders’ equity of R$0.75 (US$0.35) per common share, R$0.75 (US$0.35) per class A preferred share and R$0.56 (US$0.26) per class B preferred share, plus dividends of R$0.15 (US$0.07) per common share and R$0.15 (US$0.07) per class A preferred share. |
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(3) | Represents dividends of R$0.16 (US$0.07) per class A preferred share and R$0.16 (US$0.07) per class B preferred share. |
(4) | Represents dividends of R$0.64 (US$0.38) per common share, R$0.64 (US$0.38) per class A preferred share and R$0.64 (US$0.38) per class B preferred share. |
Amounts Available for Distribution
The following discussion summarizes the principal provisions of the Brazilian Corporation Law and our by-lawsbylaws relating to the distribution of dividends, including interest attributable to shareholders’ equity.
Calculation of Adjusted Net Profits
At each annual shareholders’ meeting, our board of directors is required to recommend how to allocate our net profits for the preceding fiscal year, which recommendation our board of executive officers initially submits to our board of directors for approval. This allocation is subject to approval by our common shareholders. The Brazilian Corporation Law defines “net profits” for any fiscal year as our net income after income taxes for that fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to employees’ participation in our net profits in that fiscal year. Under the Brazilian Corporation Law, our adjusted net profits available for distribution are equal to our net profits in any fiscal year, reduced by amounts allocated to our legal reserve and other applicable reserves, and increased by any reversals of reserves that we constituted in prior years.
Our calculation of net profits and allocations to reserves for any fiscal year are determined on the basis of financial statements prepared in accordance with Brazilian GAAP.
Reserve Accounts
Under the Brazilian Corporation Law and our by-laws, we are required to maintain a legal reserve. In addition, we are permitted by the Brazilian Corporation Law to establish the following discretionary reserves:
Allocations to each of these reserves (other than the legal reserve) are subject to approval by our common shareholders voting at our annual shareholders’ meeting.
The Brazilian Corporation Law provides that the legal reserve and the tax incentive investment reserve may be credited to shareholders’ equity or used to absorb losses, but these reserves are unavailable for the payment of distributions in subsequent years. The amounts allocated to the other reserves may be credited to shareholders’ equity and used for the payment of distributions in subsequent years.
Legal Reserve Account
Under the Brazilian Corporation Law and our by-laws, we must allocate 5% of our net profits for each fiscal year to our legal reserve until the aggregate amount of our legal reserve equals 20% of our paid-in capital. However, we are not required to make any allocations to our legal reserve in a fiscal year in which our legal reserve, when added to our other reserves, exceeds 30% of our shareholders’ equity. At December 31, 2005,2007, we had a balance of R$68.9100.0 million in our legal reserve account.
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Capital Reserve Accounts
Under the Brazilian Corporation Law, we are also permitted to record a capital reserve that may be used only (1) to absorb losses which exceed retained earning and profit reserves as defined in the Brazilian Corporation Law, and (2) to redeem or repurchase share capital and/or participation certificates, (3) to increase our capital, or (4) if specified in our by-laws (which currently do not so specify), to pay preferred share dividends. Amounts allocated to our capital reserves are unavailable for the payment of distributions and are not taken into consideration for purposes of determining the mandatory distributable amount. At December 31, 2005,2007, we had a balance of R$396.8458.1 million in our capital reserve accounts.
Mandatory Distributions
As permitted by the Brazilian Corporation Law, our by-laws specify that 25% of our adjusted net profits for each fiscal year must be distributed to shareholders as dividends or interest attributable to shareholders’ equity. We refer to this amount as the mandatory distributable amount.
Under the Brazilian Corporation Law, the amount by which the mandatory distributable amount exceeds the “realized” portion of net income for any particular year may be allocated to the unrealized income reserve, and the mandatory distribution may be limited to the “realized” portion of net income. The “realized” portion of net income is the amount by which our net income exceeds the sum of (1) our net positive results, if any, from the equity method of accounting for earnings and losses of our subsidiaries and certain associated companies, and (2) the profits, gains or income obtained on transactions maturing after the end of the following fiscal year. As amounts allocated to the unrealized income reserve are realized in subsequent years, such amounts must be added to the dividend payment relating to the year of realization.
In addition to the mandatory distributable amount, our board of directors may recommend that holders of our common shares approve the payment of additional distributions from other funds legally available for distribution.distributions. Distributions made to holders of our class A preferred shares and our class B preferred shares are computed in determining whether we have paid the required mandatory distribution. We net any payment of interim distributions against the required mandatory distribution for that fiscal year.
As described under “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders—Shareholders Agreements,” we have entered into an agreement with two of our shareholders that establishes as our dividend policy the distribution of at least 50% of our adjusted net profits during any relevant period, provided that we have established and maintained all necessary reserves for the efficient operation and development of our business.
Under our 10.625%12.50% Notes due 20072008 and our 11.75% Notes due 2014, we may not pay dividends in excess of two times the minimum dividends or interest attributable to shareholders’ equity payable under our by-laws or under applicable Brazilian law.
The Brazilian Corporation Law permits us to suspend the mandatory distribution if our board of directors reports to our annual shareholders’ meeting that the distribution would be incompatible with our financial condition at that time. Our fiscal council must approve any suspension of the mandatory distribution. In addition, our management must report the reasons of any suspension of the mandatory distribution to the Brazilian Securities Commission. We must allocate net profits not distributed by our company as a result of a suspension to a special reserve and, if not absorbed by subsequent losses, we must distribute these amounts as soon as our financial condition permits. In case our profits reserves, as defined in the Brazilian Corporation Law, exceed our share capital, the excess must be credited to shareholders’ equity or used for the payment of distributions.
Payment of Dividends and Interest Attributable to Shareholders’ Equity
We may pay the mandatory distributable amount as dividends or as interest attributable to shareholders’ equity, which is similar to a dividend but is deductible in calculating our income tax obligations. There are no restrictions on our ability to distribute dividends that have been lawfully declared under Brazilian law. However, as with other types of remittances from Brazil, the Brazilian government may impose temporary restrictions on remittances to foreign investors of the proceeds of their investments in Brazil, as it did for approximately six months in 1989 and early 1999, and on the conversion of Brazilian currency into foreign currencies, which could hinder or prevent the depositary from converting dividends into U.S. dollars and remitting these U.S. dollars abroad. See “Item 3. Key Information—Risk Factors—Risks Relating to Our Class A Preferred Shares and the ADSs.”
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Dividends
We are required by the Brazilian Corporation Law and by our by-laws to hold an annual shareholders’ meeting by April 30 of each year. At our annual shareholders’ meeting, our common shareholders may vote to declare an annual dividend. Our payment of annual dividends is based on our audited financial statements prepared for our preceding fiscal year.
Any holder of record of shares at the time that a dividend is declared is entitled to receive dividends. Under the Brazilian Corporation Law, we are generally required to pay dividends within 60 days after declaring them, unless the shareholders’ resolution establishes another payment date, which, in any case, must occur prior to the end of the fiscal year in which the dividend is declared.
Our board of directors may declare interim dividends based on the accrued profits recorded or the realized profits in our annual or semi-annual financial statements approved by our common shareholders. In addition, we may pay dividends from net income based on our unaudited quarterly financial statements. These quarterly interim dividends may not exceed the amounts included in our capital reserve accounts. We may set off any payment of interim dividends against the amount of the mandatory distributable amount for the year in which the interim dividends were paid.
Interest Attributable to Shareholders’ Equity
Brazilian companies, including our company, are permitted to pay interest attributable to shareholders’ equity as an alternative form of payment of dividends to our shareholders. These payments may be deducted when calculating Brazilian income tax and social contribution tax. The interest rate applied to these distributions generally cannot exceed the Long-Term Interest Rate for the applicable period. The amount of interest paid that we can deduct for tax purposes cannot exceed the greater of:
Any payment of interest attributable to shareholders’ equity to holders of common shares, preferred shares or ADSs, whether or not they are Brazilian residents, is subject to Brazilian withholding tax at the rate of 15%, except that a 25% withholding tax rate applies if the recipient is a resident of a tax haven jurisdiction. A tax haven jurisdiction is a country (1) that does not impose income tax or whose income tax rate is lower than 20% or (2) which does not permit disclosure of the identity of shareholders of entities organized under its jurisdiction. See “Item 10. Additional Information—Taxation—Brazilian Tax Considerations.” Under our by-laws, we may include the amount distributed as interest attributable to shareholders’ equity, net of any withholding tax, as part of the mandatory distributable amount.
Prescription of Payments
Our shareholders have three years to claim dividend distributions made with respect to their shares, as from the date that we distribute the dividends to our shareholders, after which any unclaimed dividend distributions legally revert to us. We are not required to adjust the amount of any distributions for inflation that occurs during the period from the date of declaration to the payment date.
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Dividend Preference of Preferred Shares
Under our by-laws, our preferred shareholders are entitled to a minimum annual non-cumulative preferential dividend equal to 6% of theirpro ratashare of our capital before dividends may be paid to our common shareholders. If we declare a dividend in an amount that exceeds the preferential dividends due to our preferred shareholders, our common shareholders are then entitled to receive distributions equivalent, on a per share basis, to the preferential dividend payable to our preferred shareholders. If any additional dividend amounts remain, our common shareholders and our class A preferred shareholders are entitled to receive the same amount per share. Our class B preferred shareholders, however, are not entitled to receive any additional dividend amounts after they have received the preferential dividend.
Significant Changes
Other than as otherwise disclosed in this annual report, no significant change has occurred since the date of the audited consolidated financial statements included in the annual report.
Markets for Our Equity Securities
The principal trading market for our common shares, class A preferred shares and class B preferred shares is the São Paulo Stock Exchange. Our common shares and class A preferred shares began trading on the São Paulo Stock Exchange on November 11, 1980, and our class B preferred shares began trading on the São Paulo Stock Exchange on August 19, 1983.
On December 21, 1998, ADSs representing our class A preferred shares began trading on The New York Stock Exchange. On December 31, 2005,2007, there were 15,115,6848,292,864 ADSs outstanding, representing 30,231,36816,585,728 class A preferred shares, or 12.6%9.08% of our outstanding class A preferred shares.
On October 8, 2003, we listed our class A preferred shares on the LATIBEX, a stock market for Latin American issuers that is quoted in euros on the Madrid Stock Exchange, under the symbol “XBRK.” Our class A preferred shares are traded on the LATIBEX in lots of one share.
At June 22, 2006,27, 2008, we had approximately 18,33319,213 shareholders, including onefour U.S. resident holderholders of our common shares, approximately 117108 U.S. resident holders of our class A preferred shares (including The Bank of New York, as depositary) and no U.S. resident holders of our class B preferred shares. At June 22, 2006,27, 2008, there were 72,000290,961 common shares, 50,729,75641,682,008 class A preferred shares (including class A preferred shares represented by ADSs), and no class B preferred shares held by U.S. resident holders.
Price History of Our Class A Preferred Shares and the ADSs
The tables below set forth the high and low closing sales prices for our class A preferred shares on the São Paulo Stock Exchange and the high and low closing sales prices for the ADSs on The New York Stock Exchange for the periods indicated.
São Paulo Stock Exchange | New York Stock Exchange | |||||||
Reaisper | ||||||||
Class A Preferred Share | U.S. dollars per ADS | |||||||
High | Low | High | Low | |||||
2003 | 15.63 | 1.85 | 11.70 | 1.10 | ||||
2004 | 31.68 | 9.36 | 25.48 | 6.18 | ||||
2005 | 31.84 | 16.16 | 25.82 | 14.57 | ||||
2006 | 18.95 | 9.97 | 18.24 | 9.15 | ||||
2007 | 18.19 | 12.34 | 19.27 | 11.56 |
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São Paulo Stock Exchange | New York Stock Exchange | |||||||
Reais per | ||||||||
Class A Preferred Share | U.S. dollars per ADS | |||||||
High | Low | High | Low | |||||
2006 | ||||||||
First Quarter | 18.95 | 15.84 | 18.24 | 14.37 | ||||
Second Quarter | 15.74 | 12.26 | 15.05 | 10.93 | ||||
Third Quarter | 14.94 | 9.97 | 13.63 | 9.15 | ||||
Fourth Quarter | 16.69 | 13.95 | 15.42 | 12.86 | ||||
2007 | ||||||||
First Quarter | 15.55 | 12.34 | 15.04 | 11.56 | ||||
Second Quarter | 17.22 | 14.44 | 17.59 | 14.14 | ||||
Third Quarter | 18.19 | 15.15 | 19.27 | 15.10 | ||||
Fourth Quarter | 17.24 | 13.42 | 19.11 | 14.55 | ||||
2008 | ||||||||
Most Recent Six Months | ||||||||
November 2007 | 18.19 | 13.42 | 19.27 | 14.55 | ||||
December 2007 | 18.19 | 13.42 | 19.27 | 14.55 | ||||
January 2008 | 18.19 | 12.01 | 19.27 | 13.77 | ||||
February 2008 | 17.24 | 11.76 | 19.11 | 13.47 | ||||
March 2008 | 17.24 | 11.76 | 19.11 | 13.47 | ||||
April 2008 | 15.48 | 11.76 | 17.72 | 13.47 | ||||
May 2008 | 15.48 | 11.76 | 18.03 | 13.47 | ||||
June 2008 (1) | 15.19 | 11.76 | 18.03 | 13.47 |
(1) Through June 27, 2008.
Source: Economática Ltda./ Bloomberg
São Paulo Stock Exchange | New York Stock Exchange | |||||||||||
Reais per | ||||||||||||
Class A Preferred Share | U.S. dollars per ADS | |||||||||||
High | Low | High | Low | |||||||||
2001 | R$ | 7.25 | R$ | 3.61 | US$ | 8.94 | US$ | 3.07 | ||||
2002 | 6.84 | 2.24 | 6.38 | 1.29 | ||||||||
2003 | 15.63 | 1.85 | 11.70 | 1.10 | ||||||||
2004 | 31.68 | 9.36 | 25.48 | 6.18 | ||||||||
2005 | 31.84 | 16.16 | 25.82 | 14.57 | ||||||||
São Paulo Stock Exchange | New York Stock Exchange | |||||||||||
Reais per | ||||||||||||
Class A Preferred Share | U.S. dollars per ADS | |||||||||||
High | Low | High | Low | |||||||||
2004 | ||||||||||||
First Quarter | R$ | 18.82 | R$ | 14.73 | US$ | 14.63 | US$ | 10.75 | ||||
Second Quarter | 16.95 | 9.36 | 12.77 | 6.32 | ||||||||
Third Quarter | 22.26 | 13.30 | 16.54 | 9.12 | ||||||||
Fourth Quarter | 31.68 | 21.58 | 25.48 | 15.89 | ||||||||
2005 | ||||||||||||
First Quarter | 31.84 | 25.04 | 25.82 | 19.42 | ||||||||
Second Quarter | 26.49 | 18.02 | 20.87 | 15.78 | ||||||||
Third Quarter | 24.45 | 16.16 | 22.45 | 14.57 | ||||||||
Fourth Quarter | 21.93 | 17.00 | 21.00 | 15.79 | ||||||||
2006 | ||||||||||||
First Quarter | 18.95 | 15.84 | 18.24 | 14.37 | ||||||||
Most Recent Six Months | ||||||||||||
December 2005 | 19.11 | 17.64 | 18.26 | 15.85 | ||||||||
January 2006 | 18.70 | 16.65 | 16.62 | 14.95 | ||||||||
February 2006 | 18.95 | 16.72 | 18.24 | 15.35 | ||||||||
March 2006 | 18.13 | 15.84 | 17.45 | 14.37 | ||||||||
April 2006 | 15.96 | 14.43 | 14.95 | 13.66 | ||||||||
May 2006 | 15.55 | 13.85 | 15.05 | 11.94 |
On June 22, 2006,27, 2008, the closing sales price of:
The following table sets forth the average daily trading volume for our class A preferred shares on the São Paulo Stock Exchange and for the ADSs on The New York Stock Exchange for the periods indicated.
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Average Daily Trading Volume | ||||
São Paulo Stock Exchange | New York Stock Exchange | |||
Class A Preferred Shares | ADSs | |||
2004 | ||||
First Quarter | 569,440 | 59,736 | ||
Second Quarter | 613,548 | 50,120 | ||
Third Quarter | 802,780 | 94,642 | ||
Fourth Quarter | 777,788 | 178,366 | ||
2005 | ||||
First Quarter | 983,247 | 224,456 | ||
Second Quarter | 1,023,416 | 207,602 | ||
Third Quarter | 1,353,811 | 255,289 | ||
Fourth Quarter | 1,277,477 | 222,679 | ||
2006 | ||||
First Quarter | 1,521,282 | 302,466 |
Average Daily Trading Volume | ||||
São Paulo Stock Exchange | New York Stock Exchange | |||
Class A Preferred Shares | ADSs | |||
2006 | ||||
First Quarter | 1,521,282 | 302,466 | ||
Second Quarter | 1,682,577 | 231,495 | ||
Third Quarter | 1,712,119 | 191,306 | ||
Fourth Quarter | 1,513,327 | 151,090 | ||
2007 | ||||
First Quarter | 1,739,291 | 228,726 | ||
Second Quarter | 1,706,671 | 257,047 | ||
Third Quarter | 1,465,457 | 241,476 | ||
Fourth Quarter | 1,499,592 | 200,838 | ||
2008 | ||||
First Quarter | 1,406,760 | 235,978 |
Trading on the São Paulo Stock Exchange
Settlement of transactions conducted on the São Paulo Stock Exchange is effected three business days after the trade date without any adjustment for inflation. Delivery of and payment for shares is made through the facilities of the the Brazilian Clearing System (Companhia Brasileira de Liquidação e Custódia). The seller is ordinarily required to deliver the shares to the exchange on the second business day following the trade date.
The São Paulo Stock Exchange is significantly less liquid than The New York Stock Exchange and many other of the world’s major stock exchanges. While all of the outstanding shares of a listed company may trade on the São Paulo Stock Exchange, in most cases fewer than half of the listed shares are actually available for trading by the public. The remaining shares are often held by a single or small group of controlling persons or by governmental entities.
Trading on the São Paulo Stock Exchange by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or a non-Brazilian holder, is subject to certain limitations under Brazilian foreign investment regulations. With limited exceptions, non-Brazilians holders may trade on the São Paulo Stock Exchange only in accordance with the requirements of Resolution No. 2,689 of January 26, 2000 of the National Monetary Council. Resolution No. 2,689 requires securities held by non-Brazilian holders to be maintained in the custody of, or in deposit accounts with, financial institutions that are authorized by the Central Bank and the Brazilian Securities Commission. In addition, Resolution No. 2,689 requires non-Brazilian holders to restrict their securities trading to transactions on the São Paulo Stock Exchange or organized over-the-counter markets. With limited exceptions, non-Brazilian holders may not transfer the ownership of investments made under Resolution No. 2,689 to other non-Brazilian holders through private transactions. See “Item 10. Additional Information—Regulation of Foreign Investment.”
Regulation of Brazilian Securities Markets
The Brazilian securities markets are regulated by the Brazilian Securities Commission, which has authority over stock exchanges and the securities markets generally, by the National Monetary Council and by the Central Bank, which has, among other powers, licensing authority over brokerage firms and which regulates foreign investment and foreign exchange transactions. The Brazilian securities market is governed by Brazilian Law No. 6,385/76, as amended, and by the Brazilian Corporation Law and other Brazilian Securities Commission rulings and regulations.
Under the Brazilian Corporation Law, a company may be either public (companhia aberta), as we are, or closely held (companhia fechada). All public companies are registered with the Brazilian Securities Commission and are subject to periodic reporting requirements. A company registered with the Brazilian Securities Commission may have its securities traded on the Brazilian stock exchanges or in the Brazilian over-the-counter market. The shares of a listed company, like those of our company, also may be traded privately subject to certain limitations.
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The Brazilian over-the-counter market consists of direct trades between persons in which a financial institution registered with the Brazilian Securities Commission serves as intermediary. No special application, other than registration with the Brazilian Securities Commission, is necessary for securities of a public company to be traded in this market. The Brazilian Securities Commission must receive notice of all trades carried out in the Brazilian over-the counter market by the respective intermediaries.
Trading of a company’s securities on the São Paulo Stock Exchange may be suspended in anticipation of a material announcement. A company must also suspend trading of its securities on international stock exchanges on which its securities are traded. Trading may also be suspended by a Brazilian stock exchange or the Brazilian Securities Commission, among other reasons, based on or due to a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to an inquiry by the Brazilian Securities Commission or the relevant stock exchange.
Brazilian Law No. 6,385/76, as amended, the Brazilian Corporation Law and regulations issued by the Brazilian Securities Commission provide for, among other things, disclosure obligations, restrictions on insider trading and price manipulation and protections for minority shareholders. However, the Brazilian securities markets are not as highly regulated and supervised as securities markets in the United States and some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States, which may put holders of our class A preferred shares and the ADSs at a disadvantage. Corporate disclosures also may be less complete than for public companies in the United States and certain other jurisdictions.
São Paulo Stock Exchange Corporate Governance Standards
On December 11, 2000, the São Paulo Stock Exchange launched three new listing segments:
These new listing segments have been designed for the trading of shares issued by companies that voluntarily undertake to abide by corporate governance practices and disclosure requirements in addition to those already required under the Brazilian Corporation Law. The inclusion of a company in any of the new segments requires adherence to a series of corporate governance rules. These rules are designed to increase shareholders’ rights and enhance the quality of information provided by Brazilian corporations.
On February 13, 2003, we agreed to comply with Level 1. In becoming a Level 1 company, we agreed to:
To become a Level 2 company, a company must agree to the following additional provisions:
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To be a company listed on the New Market, a company must have its share capital composed exclusively of common shares in addition to meeting the Level 1 and the Level 2 requirements. We have no current plans to propose to amend our share capital structure to provide solely for the issuance of common shares.
ITEM 10. ADDITIONAL INFORMATION
Description of Our Company’s Bylaws
The following is a summary of the material provisions of our by-laws and of the Brazilian Corporation Law. In Brazil, a company’s by-laws (estatuto social) is the principal governing document of a corporation (sociedade anônima).
General
General
Our registered name is Braskem S.A., and our registered office is located in the Municipality of Camaçari, State of Bahia, Brazil. Our registration number with the Brazilian Commercial Registry is No. 29300006939. We have been duly registered with the Brazilian Securities Commission under No. 4820 since December 18, 1978. Our principal place of business is in the Municipality of Camaçari, State of Bahia, Brazil. Our company has a perpetual existence.
At June 22, 2006,27, 2008, we havehad outstanding share capital of R$3,508,271,820.78,5,361,655,888.67, equal to 370,402,346522,885,593 total outstanding shares consisting of 123,492,142196,714,190 outstanding common shares, 246,107,138325,368,337 outstanding class A preferred shares and 803,066 outstanding class B preferred shares, including 4,470,9471,669,000 class A preferred shares held in treasury. All of our outstanding share capital is fully paid. All of our shares are without par value. Under the Brazilian Corporation Law, the aggregate number of our non-voting and limited voting class A and class B preferred shares may not exceed two-thirds of our total outstanding share capital.
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Corporate Purposes
Article 2 of our by-laws establishes our corporate purposes to include:
Board of Directors
Under the Brazilian Corporation Law, any matters subject to the approval of our board of directors can be approved by a simple majority of votes of the members present at a duly convened meeting, unless our by-laws otherwise specify. Under our by-laws, our board of directors may only deliberate if a majority of its members are present at a duly convened meeting. Any resolutions of our board of directors may be approved by the affirmative vote of a majority of the members present at the meeting, subject to veto rights of Petroquisa, PETROS and PREVI over resolutions of our board of directors relating to certain matters under the Petroquisa memorandum of understanding and the Pension Funds memorandum of understanding.Petrobras Shareholders’ Agreement. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders—Shareholders Agreements—Petroquisa Memorandum of Understanding” and “—Pension Funds Memorandum of Understanding.Petrobras Shareholders’ Agreement.”
Election of Directors
The majority of the members of our board of directors are elected by the Odebrecht Group. In addition, any director appointed by a shareholder pursuant to a shareholders agreement is bound by the terms of such agreement. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders— Shareholders Agreements.”
The members of our board of directors are elected at general meetings of shareholders for concurrent two-year terms.
Qualification of Directors
The Brazilian Corporation Law requires members of our board of directors to own shares of our company. However, there is no minimum share ownership or residency requirement to qualify for membership on our board of directors. Our by-laws do not require the members of our board of directors to be resident in Brazil. The Brazilian Corporation Law requires each of our executive officers to be residents of Brazil.
Fiduciary Duties and Conflicts of Interest
All members of our board of directors and their alternates owe fiduciary duties towards us and all of our shareholders.
Under the Brazilian Corporation Law, if one of our directors, their alternates or our executive officers has a conflict of interest with our company in connection with any proposed transaction, such director, alternate director or executive officer may not vote in any decision of our board of directors or of our board of executive officers, as the case may be, regarding such transaction and must disclose the nature and extent of his conflicting interest for inclusion in the minutes of the applicable meeting. However, if one of our directors is absent from a meeting of our board of directors, that director’s alternate may vote even if that director has a conflict of interest, unless the alternate director shares that conflict of interest or has another conflict of interest.
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Any transaction in which one of our directors (including the alternate members) or executive officers may have an interest, including any financings, can only be approved on reasonable and fair terms and conditions that are no more favorable than the terms and conditions prevailing in the market or offered by third parties. If any such transaction does not meet this requirement, then the Brazilian Corporation Law provides that the transaction may be nullified and the interested director or executive officer must return to us any benefits or other advantages that he obtained from, or as result of, such transaction. Under the Brazilian Corporation Law and upon the request of a shareholder who owns at least 5.0% of our total share capital, our directors and executive officers must reveal to our shareholders at an ordinary meeting of our shareholders certain transactions and circumstances that may give rise to a conflict of interest. In addition, our company or shareholders who own 5.0% or more of our share capital may bring an action for civil liability against directors and executive officers for any losses caused to us as a result of a conflict of interest.
Compensation
Under our by-laws, our common shareholders approve the aggregate compensation payable to our directors, executive officers and members of our fiscal council. Subject to this approval, our board of directors establishes the compensation of its members and of our executive officers. See “Item 6. Directors, Senior Management and Employees—Compensation.”
Mandatory Retirement
Neither the Brazilian Corporation Law nor our by-laws establish any mandatory retirement age for our directors or executive officers.
Share Capital
Under the Brazilian Corporation Law, the number of our issued and outstanding non-voting shares or shares with limited voting rights, such as our class A preferred shares and class B preferred shares, may not exceed two-thirds of our total outstanding share capital.
Each of our common shares entitles its holder to one vote at our annual and extraordinary shareholders’ meetings. Holders of our common shares are not entitled to any preference in respect of our dividends or other distributions or otherwise in case of our liquidation.
Our class A preferred shares and class B preferred shares are non-voting, except in limited circumstances, and have priority over our common shares in the case of our liquidation. See “—Voting Rights” for information regarding the voting rights of our preferred shares, “—Liquidation” for information regarding the liquidation preferences of our preferred shares, and “Item 8. Financial Information—Dividends and Dividend Policy—Amounts Available for Distribution”Calculation of Adjusted Net Profits” and “—Dividend Preference of Preferred Shares” for information regarding the distribution preferences of our preferred shares.
Shareholders’ Meetings
Under the Brazilian Corporation Law, we must hold an annual shareholders’ meeting by April 30 of each year in order to:
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In addition to the annual shareholders’ meetings, holders of our common shares have the power to determine any matters related to changes in our corporate purposes and to pass any resolutions they deem necessary to protect and enhance our development whenever our interests so require, by means of extraordinary shareholders’ meetings.
Under the Brazilian Corporation Law, the holders of our common shares have the power, among other powers, to vote at shareholders’ meetings to:
We convene our shareholders’ meetings, including our annual shareholders’ meeting, by publishing a notice in theDiário Oficial do Estado da Bahia,in at least one additional newspaper designated by our shareholders with general circulation in Bahia, where we maintain our registered office, and in at least one newspaper with general circulation in the City of São Paulo, where the São Paulo Stock Exchange, the principal securities market for our shares, is located. On the first call of any meeting, the notice must be published no fewer than three times, beginning at least 15 calendar days prior to the scheduled meeting date. The notice must contain the meeting’s place, date, time, agenda and, in the case of a proposed amendment to our by-laws, a description of the subject matter of the proposed amendment.
Our board of directors may convene a shareholders’ meeting. Under the Brazilian Corporation Law, shareholders’ meetings also may be convened by our shareholders as follows:
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Each shareholders’ meeting is presided over by a president and secretary elected by the shareholders present at the meeting. A shareholder may be represented at a shareholders’ meeting by an attorney-in-fact appointed by the shareholder not more than one year before the meeting. The attorney-in-fact must be a shareholder, a member of our board of directors, a lawyer or a financial institution, and the power of attorney appointing the attorney-in-fact must comply with certain formalities set forth under Brazilian law. To be admitted to a shareholders’ meeting, a person must produce proof of his or her shareholder status or a valid power of attorney.
In order for a valid action to be taken at a shareholders’ meeting, shareholders representing at least one quarter of our issued and outstanding voting share capital must be present on first call. However, shareholders representing at least two-thirds of our issued and outstanding voting share capital must be present at a shareholders’ meeting to amend our by-laws. If a quorum is not present, our board of directors may issue a second call by publishing a notice as described above at least eight calendar days prior to the scheduled meeting. The quorum requirements do not apply to the second call, when the shareholders’ meetings shall be convened with the presence of shareholders representing any number of shares (subject to the voting requirements for certain matters described below). A shareholder without a right to vote may attend a shareholders’ meeting and take part in the discussion of matters submitted for consideration.
Voting Rights
Under the Brazilian Corporation Law and our by-laws, each of our common shares carries the right to vote at a shareholders’ meeting. Our preferred shares generally do not confer voting rights, except in limited circumstances described below. We may not restrain or deny any voting rights without the consent of the majority of the shares affected. Whenever the shares of any class of share capital are entitled to vote, each share is entitled to one vote.
Except as otherwise provided by law, resolutions of a shareholders’ meeting are passed by a simple majority vote of the holders of our common shares present or represented at the meeting, without taking abstentions into account. Under the Brazilian Corporation Law, the approval of shareholders representing at least a majority of our voting shares is required for the types of action described below, as well as, in the case of the first and second bullet points below, ratification by the majority of issued and outstanding shares of the affected class within one year from the shareholders’ meeting:
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Decisions on the transformation of our company into another form of company require the unanimous approval of our shareholders, including the holders of our class A and class B preferred shares.
Our company is required to give effect to shareholders agreements that contain provisions regarding the purchase or sale of our shares, preemptive rights to acquire our shares, the exercise of the right to vote our shares or the power to control our company, if these agreements are filed with our headquarters in Camaçari. Brazilian Corporation Law obligates the president of any shareholder or board of directors meeting to disregard any vote taken by any of the parties to any shareholders agreement that has been duly filed with our company that violates the provisions of any such agreement. In the event that a shareholder that is party to a shareholders agreement (or a director appointed by such shareholder) is absent from any shareholders’ or board of directors’ meeting or abstains from voting, the other party or parties to that shareholders agreement have the right to vote the shares of the absent or abstaining shareholder (or on behalf of the absent director) in compliance with that shareholders agreement.
Under the Brazilian Corporation Law, neither our by-laws nor actions taken at a shareholders’ meeting may deprive any of our shareholders of certain specific rights, including:
Voting Rights of Minority Shareholders
Shareholders holding shares representing not less than 5.0% of our shares entitled to vote at our shareholders’ meeting have the right to request that we adopt a cumulative voting procedure. Under a cumulative voting procedure, each voting share shall have as many votes as there are positions of directors to be filled, and each shareholder may cast all of its votes for a single candidate or distribute them among various candidates. If the cumulative voting procedure is adopted, our controlling shareholders always retain the right to elect at least one member more than the number of members elected by the other shareholders, regardless of the total number of members of our board of directors. This procedure must be requested by the required number of shareholders at least 48 hours prior to a shareholders’ meeting.
Under the Brazilian Corporation Law, shareholders that are not controlling shareholders, but that together hold either:
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have the right to appoint one member and an alternate to our board of directors at our shareholders’ meeting. If no group of our common or preferred shareholders meets the thresholds described above, shareholders holding preferred shares or common shares representing at least 10% of our total share capital are entitled to combine their holdings to appoint one member and an alternate to our board of directors. The shareholders seeking to exercise these minority rights must prove that they have held their shares for not less than three months preceding the shareholders’ meeting at which the director will be appointed. Any directors appointed by the non-controlling shareholders have the right to veto for cause the selection of our independent registered public accounting firm.
In accordance with the Brazilian Corporation Law, the holders of preferred shares without voting rights or with restricted voting rights are entitled to elect one member and an alternate to our fiscal council in a separate election. Minority shareholders have the same right as long as they jointly represent 10% or more of the voting shares. The other shareholders with the right to vote may elect the remaining members and alternates, who, in any event, must number more than the directors and alternates elected by the holders of the non-voting preferred shares and the minority shareholders.
Voting Rights of Preferred Shares
Holders of our preferred shares are not entitled to vote on any matter, except with respect to the election of a member of our board of directors by preferred shareholders holding at least 10% of our total share capital, the election of a member of the fiscal council and in the limited circumstances described above and as provided below.
The Brazilian Corporation Law and our by-laws provide our preferred shares will acquire unrestricted voting rights after the third consecutive fiscal year that we fail to pay the minimum dividends to which our preferred shares are entitled. This voting right shall continue until the past due minimum dividend for any year in that three consecutive-year period is paid in full. Our preferred shareholders will also obtain unrestricted voting rights if we enter into a liquidation process.
Liquidation
We may be liquidated in accordance with the provisions of Brazilian law. In the event of our extrajudicial liquidation, a shareholders’ meeting will determine the manner of our liquidation, appoint our liquidator and our fiscal council that will function during the liquidation period.
Upon our liquidation, our preferred shares have a liquidation preference over our common shares in respect of the distribution of our net assets. In the event of our liquidation, the assets available for distribution to our shareholders would be distributed first to our preferred shareholders in an amount equal to their pro rata share of our legal capital, prior to making any distributions to our common shareholders. If the assets to be so distributed are insufficient to fully compensate our preferred shareholders for their legal capital, each of our preferred shareholders would receive apro rataamount (based on theirpro ratashare of our legal capital, excluding our common shares in such calculation) of any assets available for distribution.
Conversion Rights
Conversion Rights
Under our by-laws, the general shareholders’ meeting may authorize the conversion of our preferred class A shares into common shares by means of the affirmative vote of shareholders representing the majority of our common shares, which will establish:
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Holders of our class B preferred shares are not permitted to convert their shares into common shares, but any such holder is permitted by our by-laws to convert its shares into our class A preferred shares. The ratio for any such conversion is two class B preferred shares for each class A preferred share.
Preemptive Rights
Under the Brazilian Corporation Law, each of our shareholders has a general preemptive right to subscribe for our shares or securities convertible into our shares in any capital increase, in proportion to the number of our shares held by such shareholder. However, under our by-laws, the holders of our class B preferred shares do not
have preemptive rights. In the event of a capital increase that would maintain or increase the proportion of our capital represented by our class A preferred shares, holders of our class A preferred shares would have preemptive rights to subscribe to newly issued class A preferred shares only. In the event of a capital increase that would reduce the proportion of our capital represented by our class A preferred shares, holders of our preferred shares would have preemptive rights to subscribe to any new class A preferred shares in proportion to the number of our shares that they hold, and to our common shares only to the extent necessary to prevent dilution of their interests in our total capital.
Under our by-laws, except when issuing voting shares or securities convertible into voting shares, our board of directors or our shareholders, as the case may be, may decide to reduce the term of preemptive rights or not to extend preemptive rights to our shareholders with respect to any issuance of our non-voting shares, debentures convertible into our shares or warrants made in connection with a public exchange made to acquire control of another company or in connection with a public offering or through a stock exchange. The preemptive rights are transferable and must be exercised within a period of at least 30 days following the publication of notice of the issuance of shares or securities convertible into our shares. Holders of the ADSs may not be able to exercise the preemptive rights relating to our class A preferred shares underlying their ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights or to take any other action to make preemptive rights available to holders of the ADSs, and we may not file any such registration statement.
Redemption, Amortization, Tender Offers and Rights of Withdrawal
Our by-laws or our shareholders at a shareholders’ meeting may authorize us to use our profits or reserves to redeem or amortize our shares in accordance with conditions and procedures established for such redemption or amortization. The Brazilian Corporation Law defines “redemption” (resgate de ações) as the payment of the value of the shares in order to permanently remove such shares from circulation, with or without a corresponding reduction of our share capital. The Brazilian Corporation Law defines “amortization” (amortização) as the distribution to the shareholders, without a corresponding capital reduction, of amounts that they would otherwise receive if we were liquidated. If an amortization distribution has been paid prior to our liquidation, then upon our liquidation, the shareholders who did not receive an amortization distribution will have a preference equal to the amount of the amortization distribution in the distribution of our capital.
The Brazilian Corporation Law authorizes us to redeem shares not held by our controlling shareholders, if, after a tender offer effected as a consequence of delisting or a substantial reduction in the liquidity of our shares, our controlling shareholders increase their participation in our total share capital to more than 95%. The redemption price in such case would be the same price paid for our shares in any such tender offer.
The Brazilian Corporation Law and our by-laws also require the acquiror of control (in case of a change of control) or the controller (in case of delisting or a substantial reduction in liquidity of our shares) to make a tender offer for the acquisition of the shares held by minority shareholders under certain circumstances described below under “—Mandatory Tender Offers.” The shareholder can also withdraw its capital from our company under certain circumstances described below under “—Rights of Withdrawal.”
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Mandatory Tender Offers
The Brazilian Corporation Law requires that if we are delisted or there is a substantial reduction in liquidity of our shares, as defined by the Brazilian Securities Commission, in each case as a result of purchases by our controlling shareholders, our controlling shareholders must effect a tender offer for acquisition of our remaining shares at a purchase price equal to the fair value of our shares taking into account the total number of our outstanding shares.
Our by-laws provide that all of our shares, including our class A preferred shares, would be entitled to such tag-along rights in the event that the control of our company is transferred, with all shares receiving the same
price per share paid to the controlling shareholders. If our controlling shareholders enter into a transaction which results in a change of control of our company, the controlling shareholders must include in the documentation of the transaction an obligation to effect a public offer for the purchase of all our common shares and preferred shares for the same price per share paid to the controlling shareholders. The tender offer must be submitted to the Brazilian Securities Commission within 30 days from the date of execution of the documents that provide for the change of control.
Our by-laws provide that no change of control will be deemed to occur if the party acquiring control is an existing member of the block of controlling shareholders and/or a signatory to an agreement among our shareholders governing the exercise of rights over the shares held by the controlling shareholders. Our by-laws also provide that the tag-along right will not apply in the event that the change of control occurs as a result of:
Rights of Withdrawal
The Brazilian Corporation Law provides that, in certain limited circumstances, a dissenting shareholder may withdraw its equity interest from our company and be reimbursed by us for the value of our common or preferred shares that it then holds.
This right of withdrawal may be exercised by the holders of the adversely affected common or preferred shares if we decide:
In addition, holders of our common and preferred shares may exercise their right of withdrawal if we decide to undertake any of the following actions:
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Only shareholders who own shares on the date of publication of the first notice convening the relevant shareholders’ meeting or the press release concerning the relevant shareholders’ meeting is published, whichever is earlier, will be entitled to withdrawal rights.
Shareholders will not be entitled to this right of withdrawal if the shares of the entity resulting from a merger, incorporation, consolidation of our company or participation of our company in a group of companies
have minimal market liquidity and are dispersed among a sufficient number of shareholders. For this purpose, shares that are part of general indices representative of portfolios of securities traded in Brazil or abroad are considered liquid, and sufficient dispersion will exist if the controlling shareholder holds less than half of the class and type of the outstanding shares. In case of a spin-off, the right of withdrawal will only exist if there is a significant change in the corporate purpose or a reduction in the mandatory dividend.
The redemption of shares arising out of the exercise of any withdrawal rights would be made at book value per share, determined on the basis of their most recent audited balance sheet approved by our dissenting shareholders. However, if the shareholders’ meeting approving the action that gave rise to withdrawal rights occurred more than 60 days after the date of the most recent approved audited balance sheet, a shareholder may demand that its shares be valued on the basis of a balance sheet prepared specifically for this purpose. The right of withdrawal lapses 30 days after the date of publication of the minutes of the shareholders’ meeting that approved one of the matters described above. Our shareholders may reconsider any resolution giving rise to withdrawal rights within 10 days following the expiration date for such rights if we believe that the withdrawal of shares of dissenting shareholders would jeopardize our financial stability.
Liability of Our Shareholders for Further Capital Calls
Neither Brazilian law nor our by-laws require any capital calls. Our shareholders’ liability for capital calls is limited to the payment of the issue price of any shares subscribed or acquired.
Inspection of Corporate Records
Shareholders that own 5.0% or more of our outstanding share capital have the right to inspect our corporate records, including shareholders’ lists, corporate minutes, financial records and other documents of our company, if (1) we or any of our officers or directors have committed any act contrary to Brazilian law or our by-laws or (2) there are grounds to suspect that there are material irregularities in our company. However, in either case, the shareholder that desires to inspect our corporate records must obtain a court order authorizing the inspection.
Disclosures of Share Ownership
Brazilian regulations require that (1) each of our controlling shareholders, directly or indirectly, (2) shareholders who have elected members of our board of directors, and (3) any person or group of persons representing a person that has directly or indirectly acquired or sold an interest corresponding to at least 5% of the total number of our shares of any type or class to disclose its or their share ownership or divestment to the Brazilian Securities Commission and to the São Paulo Stock Exchange. In addition, a statement (fato relevante) containing certain required information must be published in theDiário Oficial do Estado da Bahia,at least one additional newspaper designated by our shareholders with wide circulation in Bahia, and in at least one newspaper with general circulation in the City of São Paulo, where the São Paulo Stock Exchange, the principal securities market for our shares, is located.
Our controlling shareholders, shareholders that appoint members of our board of directors or fiscal council and members of our board of directors, board of executive officers or fiscal council must file a statement of any change in their holdings of our shares with the Brazilian Securities Commission and the Brazilian stock exchanges on which our securities are traded.
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Regulation of Foreign Investment
There are no restrictions on ownership or voting of our class A preferred shares by individuals or legal entities domiciled outside Brazil. However, the right to convert dividend payments and proceeds from the sale of class A preferred shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment regulations, which generally require, among other things, the electronic registration of the relevant investment with the Central Bank.
Foreign investors may register their investment as foreign direct investments under Law No. 4,131/62 or as foreign portfolio investments under Resolution No. 2,689/00 of the National Monetary Council.
Under Resolution No. 2,689/00, foreign investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are met. Resolution No. 2,689/00 affords favorable tax treatment to foreign portfolio investors who are not residents of a tax haven jurisdiction as defined by Brazilian tax laws (meaning a country that does not impose taxes, a country where the maximum income tax rate is lower than 20% or a country that restricts the disclosure of shareholder composition or the ownership of investments). Nevertheless, securities trading is restricted to transactions carried out on the stock exchanges or organized over-the-counter markets licensed by the Brazilian Securities Commission.
Foreign direct investors under Law No. 4,131/62 may sell their shares in both private or open market transactions, but these investors will generally be subject to less favorable tax treatment on gains with respect to our class A preferred shares or the ADSs.
A foreign portfolio investor under Resolution No. 2,689/00 must:
Securities and other financial assets held by foreign investors pursuant to Resolution No. 2,689/00 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the Brazilian Securities Commission.
A foreign direct investor under Law No. 4,131/62 must:
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Resolution No. 1,927 of the National Monetary Council, which restated and amended Annex V to Resolution No. 1,289 of the National Monetary Council, provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. We filed an application to have the ADSs approved under Resolution 1,927 by the Central Bank and the Brazilian Securities Commission, and we received final approval in January 1993.
At the time that ADSs representing our class A preferred shares were first listed on The New York Stock Exchange, the custodian obtained an electronic registration in the name of the depositary. In addition, after the
global offering of our class “A” preferred shares and our ADSs in September 2004, the custodian and the depositary amended this electronic registration to include the newly issued class “A” preferred shares and ADSs. Pursuant to this electronic registration, the custodian and the depositary are authorized to convert dividends and other distributions with respect to the class A preferred shares underlying by the ADSs into foreign currency and remit the proceeds outside Brazil.
If a holder of ADSs decides to exchange ADSs for the underlying class A preferred shares, the holder will be entitled to: (1) sell the class A preferred shares on the São Paulo Stock Exchange and rely on the depositary’s electronic registration for five business days from the date of exchange to obtain and remit U.S. dollars abroad upon the holder’s sale of our class A preferred shares; (2) convert its investment into a foreign portfolio investment under Resolution No. 2,689/00; or (3) convert its investment into a foreign direct investment under Law No. 4,131/62.
If a holder of ADSs wishes to convert its investment into either a foreign portfolio investment under Resolution No. 2,689/00 or a foreign direct investment under Law No. 4,131/62, it should begin the process of obtaining hisits own foreign investor registration with the Central Bank or with the Brazilian Securities Commission, as the case may be, in advance of exchanging the ADSs for class A preferred shares. If the holder of ADSs does not timely complete this process, the custodian will neither effect the conversion nor deliver the underlying class A shares, and will instruct the depositary to cancel the exchange and return the ADSs to the holder.
The custodian is authorized to update the depositary’s electronic registration to reflect conversions of ADSs into foreign portfolio investments under Resolution No. 2,689/00. If a holder of ADSs elects to convert its ADSs into a foreign direct investment under Law 4,131/62, the conversion will be effected by the Central Bank after receipt of an electronic request from the custodian with details of the transaction.
See “—Taxation—Brazilian Tax Considerations” for details on the determination of the registered capital that will be reflected in the electronic registration resulting from conversions.
If a foreign direct investor under Law No. 4,131/62 wishes to deposit its shares into the ADR program in exchange for ADSs, such holder will be required to present to the custodian evidence of payment of capital gains taxes. The conversion will be effected by the Central Bank after receipt of an electronic request from the custodian with details of the transaction. See “—Taxation—Brazilian Tax Considerations—Taxation of Gains in Brazil” and “—Registered Capital.”
Form and Transfer
Our preferred shares and common shares are in book-entry form, registered in the name of each shareholder or its nominee. The transfer of our shares is governed by Article 35 of the Brazilian Corporation Law, which provides that a transfer of shares is effected by our transfer agent, Banco Itaú S.A., by an entry made by the transfer agent in its books, upon presentation of valid written share transfer instructions to us by a transferor or its representative. When preferred shares or common shares are acquired or sold on a Brazilian stock exchange, the transfer is effected on the records of our transfer agent by a representative of a brokerage firm or the stock exchange’s clearing system. The transfer agent also performs all the services of safe-keeping of our shares. Transfers of our shares by a non-Brazilian investor are made in the same manner and are executed on the investor’s behalf by the investor’s local agent. If the original investment was registered with the Central Bank pursuant to foreign investment regulations, the non-Brazilian investor is also required to amend, if necessary, through its local agent, the electronic certificate of registration to reflect the new ownership.
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The São Paulo Stock Exchange operates a central clearing system. A holder of our shares may choose, at its discretion, to participate in this system, and all shares that such shareholder elects to be put into the clearing system are deposited in custody with the Brazilian Clearing System (Companhia Brasileira de Liquidação e
Custódia) (through a Brazilian institution that is duly authorized to operate by the Central Bank and maintains a clearing account with the Brazilian Clearing System). Shares subject to the custody of the Brazilian Clearing System are noted as such in our registry of shareholders. Each participating shareholder will, in turn, be registered in the register of the Brazilian Clearing System and will be treated in the same manner as shareholders registered in our books.
Material Contracts
We have not entered into any other material contracts, other than those described elsewhere in this annual report or entered into in the ordinary course of business.
Exchange Controls
There are no restrictions on ownership or voting of Braskem’s share capital stock by individuals or legal entities domiciled outside Brazil.
The right to convert dividend payments and proceeds from the sale of the Company’sour share capital stock into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, that the relevant investment have been registered with the Central Bank. Restrictions on the remittance of foreign capital abroad could hinder or prevent Banco Itaú S.A., or the Custodian, as custodian for the class A preferred shares represented by ADSs or holders who have exchanged ADSs for class A preferred shares from converting dividends, distributions or the proceeds from any sale of Preferred Shares into U.S. dollars and remitting such U.S. dollars abroad. Holders of the ADSs could be adversely affected by delays in, or refusal to grant any required government approval for conversions of Brazilian currency payments and remittances abroad of the class A preferred shares underlying the ADSs.
Resolution No. 1,927 of the National Monetary Council, which is the Amended and Restated Annex V to Resolution No. 1,289, or the Annex V Regulations, provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. The Central Bank and the Brazilian Securities Commission have approved the ADSs under the Annex V Regulations. Accordingly, the proceeds from the sale of the ADSs by ADR holders outside Brazil are free of Brazilian foreign investment controls and holders of the ADSs will be entitled to favorable tax treatment. See “—Taxation—Brazilian Tax Considerations.”
A certificate of capital registration has been issued in the name of The Bank of New York, as depositary, or the Depositary, and is maintained by the Custodian on behalf of the Depositary. Pursuant to the certificate, the Custodian and the Depositary are able to convert dividends and other distributions with respect to the class A preferred shares represented by ADRs into foreign currency and remit the proceeds outside Brazil. In the event that a holder of ADRs exchanges ADRs for class A preferred shares, such holder will be entitled to continue to rely on the Depositary’s certificate of capital registration for only five business days after such exchange, following which such holder must seek to obtain its own certificateregistration of capital registrationforeign investment with the Central Bank.Bank (Electronic Registration Statement –Registro Declaratório Eletrônico – RDE). Thereafter, unless the class A preferred shares are held pursuant to the “Annex IV Regulations” of the National Monetary CouncilResolution nº 2.689/00 (portfolio investment) or Law nº 4.131/62 (direct investments) by a duly qualified investor, such holder may not be able to convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, such class A preferred shares, and such holder generally will be subject to less favorable Brazilian tax treatment than a holder of ADRs. See “—Taxation—Brazilian Tax Considerations.”
We make cash distributions with respect to the class A preferred shares in Brazilian currency. Accordingly, exchange rate fluctuations may affect the U.S. dollar amounts received by the holders of the ADSs on conversion by the Depositary of such distributions into U.S. dollars for payment to holders of the ADSs. Fluctuations in the exchange rate betweenreais and the U.S. dollar may also affect the U.S. dollar equivalent of thereais price of the class A preferred shares on the Brazilian stock exchanges.
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Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or serious reasons to foresee such imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. For approximately six months in 1989 and early 1990, for example, to conserve Brazil’s foreign currency reserves, the Brazilian government froze all dividend and capital repatriations that were owed to foreign equity investors. These amounts were subsequently released in accordance with Brazilian Government directives. There can be no assurance that similar measures will not be taken by the Brazilian Government in the future.
For a description of the foreign exchange markets in Brazil, see “Item 3. Key Information—Exchange Rates.”
Taxation
The following summary contains a description of the material Brazilian and U.S. federal income tax consequences of the purchase, ownership and disposition of class A preferred shares and ADSs, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase any such securities. In particular, for U.S. federal income tax purposes, this summary is applicable only to holders that hold class A preferred shares or ADSs as “capital assets” within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, (the “Code”), and does not address the tax treatment of a holder that may be subject to special tax rules, such as financial institutions, insurance companies, real estate investment trusts, regulated investment companies, grantor trusts, tax-exempt entities, traders or dealers in securities or currencies, persons that will hold class A preferred shares or ADSs in a hedging transaction or as a position in a “straddle” or “conversion transaction” for U.S. federal income tax purposes, persons that have a “functional currency” other than the U.S. dollar, persons that are former citizens or long-term residents of the United States, persons that will hold class A preferred shares or ADSs as compensation for the performance of services, persons liable for alternative minimum tax or estate and gift tax or persons that own or are treated as owning 10% or more of the voting shares or value of our company.
The summary is based upon the tax laws of Brazil and the United States and regulations thereunder and administrative and judicial interpretations thereof, in each case as in effect and available on the date of this annual report, which are subject to change (possibly with retroactive effect in the case of changes to U.S. tax laws and regulations thereunder and administrative and judicial interpretations thereof), and to differing interpretations. There is at present no income tax treaty between Brazil and the United States. This summary is also based upon the representations of the depositary and on the assumption that each obligation in the deposit agreement relating to the ADSs and any related documents will be performed in accordance with its terms.
The description below is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of class A preferred shares or ADSs. Prospective purchasers of our class A preferred shares or ADSs are advised to consult their own tax advisors in respect of the consequences that the purchase, ownership or disposition of our class A preferred shares or ADS might trigger under the laws of Brazil, the United States or any other jurisdiction in light of their particular investment circumstances.
Brazilian Tax Considerations
The following discussion summarizes the material Brazilian tax consequences of the acquisition, ownership and disposition of class A preferred shares or ADSs by a holder that is not domiciled or resident in Brazil for purposes of Brazilian taxation and, in the case of a holder of class A preferred shares, which has registered its investment with the Central Bank, or in each case a non-Brazilian holder. The following discussion does not specifically address all of the Brazilian tax considerations applicable to any particular non-Brazilian holder, and each non-Brazilian holder should consult his or her own tax advisor concerning the Brazilian tax consequences of an investment in any of such securities.
Acquisition of ADSs or Class A Preferred Shares
The acquisition of ADSs or class A preferred shares by non-Brazilian holders is not a taxable event in Brazil. See “—Taxation of Gains Outside Brazil” for further information on the tax implications arising from the exchange of existing class A preferred shares for ADSs, as well as those arising from the exchange of ADSs for class A preferred shares.
Taxation of Dividends
Dividends paid with respect to income earned since January 1, 1996, including dividends paid in kind to the depositary in respect of our class A preferred shares underlying the ADSs or to a non-Brazilian holder in respect of class A preferred shares, are not subject to any withholding tax in Brazil.
Dividends paid from profits generated before January 1, 1996 may be subject to Brazilian withholding income tax at variable rates, according to the tax legislation applicable to each corresponding year.
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Interest Attributable to Shareholders’ Equity
Distributions of interest attributable to our shareholders’ equity in respect of our class A preferred shares or the ADSs as an alternative form of dividends are subject to Brazilian withholding tax at the rate of 15% (or 25% in the case of a non-Brazilian holder located in a tax haven jurisdiction (as defined below)). Since 1997 and in accordance with Laws Nos. 9,249/95 and 9,430/96, we may deduct these distributions in calculating the amount of the Social Contribution on Net Income and the income taxes that we owe, provided that each such distribution is approved by our shareholders in a general meeting and complies with the limits established by Brazilian tax legislation.
Taxation of Gains Outside Brazil
Until December 31, 2003, the sale or other disposition of ADSs or class A preferred shares entered into by and between non-Brazilian holders outside Brazil was not subject to Brazilian income tax, as such a transaction did not involve payments by a person located in Brazil. Brazilian Law No. 10,833/03 provides that, commencing on February 1, 2004, “the acquiror, individual or legal entity resident or domiciled in Brazil, or the acquiror’s attorney-in-fact, when such acquiror is resident or domiciled abroad, shall be responsible for the retention and payment of the income tax applicable to capital gains under Article 18 of Law 9,249 of December 26, 1995 earned by the individual or legal entity resident or domiciled abroad who disposes of property located in Brazil.”
The Brazilian tax authorities have recently issued a normative instruction confirming that, pursuant to Law No. 10,833/03, these tax authorities intend to assess income tax on capital gains earned by non-Brazilian residents whose assets are located in Brazil. Holders of the ADSs outside of Brazil may have grounds to assert that Brazilian Law No. 10,833/03 does not apply to sales or other dispositions of ADSs as ADSs are not assets located in Brazil. However, the sale or other disposition of class A preferred shares abroad may be subject to the provisions of Brazilian Law No. 10,833/03. Any capital gains arising from sales or other dispositions outside Brazil would be subject to Brazilian income tax at the rate of 15% or 25% if the investor is located in a tax haven jurisdiction. Brazilian Law No. 10,833/03 requires the purchaser of our class A preferred shares outside Brazil or its attorney-in-fact in Brazil to withhold the tax. A disposition of class A preferred shares can only occur abroad if any investor decides to cancel its investment in ADSs and register the underlying class A preferred shares as a direct foreign investment under Law No. 4,131/62.
Taxation of Gains in Brazil
The exchange of ADSs for class A preferred shares is not subject to Brazilian tax. A holder of the ADSs may exchange its ADSs for the underlying class A preferred shares, sell the class A preferred shares on a Brazilian stock exchange and remit abroad the proceeds of the sale within five business days from the date of exchange (in reliance on the depositary’s electronic registration), with no tax consequences.
Upon receipt of the underlying class A preferred shares in exchange of ADSs, a non-Brazilian investor will be entitled to register with the Central Bank the U.S. dollar value of such shares as a foreign portfolio investment
under Resolution No. 2,689/00. See “—Regulation of Foreign Investments” and “—Registered Capital.” The sale or disposition of class A preferred shares on a Brazilian stock exchange is exempt from capital gains tax, provided that such shares are held by a non- Brazilian holder as a foreign portfolio investment under Resolution No. 2,689/00. The preferential treatment afforded under Resolution 2,689 is not available to investors resident or domiciled in tax haven jurisdictions.
Upon receipt of the underlying class A preferred shares, a non-Brazilian holder is also entitled to register with the Central Bank the U.S. dollar value of such shares as a foreign direct investment under Law 4,131/62. See “—Regulation“Regulation of Foreign Investment” and “—Registered Capital.” A 15% capital gains tax is applicable to the sale or other disposition of preferred class A shares in Brazil where such shares are held by a non-Brazilian holder as a foreign direct investment and the transaction is performed outside a Brazilian stock exchange. If the non-Brazilian holder is domiciled in a tax haven jurisdiction, the income tax rate will be 25%.
If the sale or other disposition of such shares is carried out on a Brazilian stock exchange, the capital gains on the sale or disposition will be taxed at a rate of 15%. This rate applies to all transactions carried out on a Brazilian stock exchange by non-Brazilian holders regardless of whether or not they are domiciled in tax haven jurisdictions. In these transactions, the gain realized is calculated based on the amount registered with the Central Bank. As from January 1, 2005, a withholding tax of 0.005% will also be assessed on the sales price or other disposition value of shares sold or disposed of in transactions carried out on a Brazilian stock exchange. The withholding tax, to be offset against tax due on eventual capital gain, must be withheld by one of the following entities: (1) the agent receiving the sale or disposition order from the client; (2) the stock exchange responsible for registering the transactions; or (3) the entity responsible for the settlement and payment of the transactions.
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The deposit of class A preferred shares in exchange for ADSs is not subject to Brazilian tax, provided that these shares are held by the non-Brazilian holder as a foreign portfolio investment under Resolution No. 2,689/00. In the event our class A preferred shares are held by the non-Brazilian holder as a foreign direct investment under Law No. 4,131/62, the deposit of these shares in exchange for ADSs is subject to payment of Brazilian capital gains tax at the rate of 15% (25% in the case of a non-Brazilian holder located in a tax haven jurisdiction).
The current preferential treatment for non-Brazilian holders of ADSs and non-Brazilian holders of class A preferred shares under Resolution No. 2,689/00 may not continue in the future.
Any exercise of preemptive rights relating to our class A preferred shares will not be subject to Brazilian taxation. Gains on the sale or assignment of preemptive rights relating to our class A preferred shares by the depositary may be subject to Brazilian taxation. Tax authorities may attempt to tax such gains even when the sale or assignment of such rights takes place outside Brazil, based on the provisions of Law No. 10,833/03. These authorities may allege that the preemptive rights relate to assets located in Brazil (the class A preferred shares) and demand payment of capital gains tax at the rate of 15% or 25% (if the beneficiary of the payments is resident of a tax haven jurisdiction). If the preemptive rights are assigned or sold in Brazil, capital gains tax will apply at a rate of 15% (25% in the case of a non-Brazilian holder located in a tax haven jurisdiction). Sales or assignments of preemptive rights effected on Brazilian stock exchanges are exempt from income tax, provided that such preemptive rights relate to shares registered as a foreign portfolio investment under Resolution No. 2,689/00.
Other Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of class A preferred shares or ADSs by a non-Brazilian holder except for gift and inheritance taxes which are levied by some states of Brazil on gifts made or inheritances bestowed by individuals or entities not resident or domiciled in Brazil or domiciled within the state to individuals or entities resident or domiciled within such state in Brazil. There are no Brazilian stamp, issue, registration or similar taxes or duties payable by holders of class A preferred shares or ADSs.
Under Decree 4,4946,306 of December 3, 2002,14, 2007, the amount inreais resulting from the conversion of the proceeds received by a Brazilian entity from a foreign investment in the Brazilian securities market (including those in connection with the investment in our class A preferred shares or ADSs and those made under the provisions of Resolution No. 2,689/00 of the National Monetary Council) is subject to the IOF transaction tax. The IOF tax rate for most of these transactions is currently 0%, but0.38% . Foreign exchange transactions in connection with the investment in our class A preferred shares made under the provisions of Resolution No. 2,689/00 of the National Monetary Council, within a stock, securities or futures exchange environment are currently not subject to the IOF tax. Transactions of same nature performed outside stock, securities or futures exchange environment may be subject to the IOF tax at a 1.5% rate. Remittances of dividends and interest on net equity made by companies whose shares are traded on the BOVESPA to non-Brazilian holders are not subject to the IOF tax. The Minister of Finance has the legal power to increase the rate to a maximum of 25%. Any such increase will be applicable only prospectively.
IOF is also assessed on transactions executed on a stock exchange. As of the date hereof, Article 33, Paragraph 2, of Decree No. 4,4946,306 imposes an IOF tax on such transactions at a 0% rate. The Minister of Finance is empowered to establish the applicable IOF tax rate. Under Law 8,894 of June 21, 1994, such IOF tax rate may be increased at any time to a maximum of 1.5% per day, but any such increase will only be applicable to transactions occurring after such increase becomes effective.
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Until December 31, 2007, CPMF tax iswas levied at a rate of 0.38% on all fund transfers in connection with financial transactions in Brazil. Payments of dividends on our class A preferred shares and the ADSs arewere subject to the CPMF tax. However, only our company is liable forat the CPMF tax on its dividends, which are payable without reduction for this tax. The CPMF tax was scheduled to expire in December 2004, but Amendment No. 42 toend of 2007, the Brazilian Constitution extendedCongress rejected the CPMF tax through December 31, 2007. Since July 12, 2002, stock exchange transactions have been exempted from the CPMF tax. On July 13, 2004, the Brazilian government enacted Law No. 10,892, which establishes that, as from October 1, 2004, debits ofreais from deposit bank accounts exclusively opened for investments in fixed and variable income financial assets (“conta corrente de depósito para investimento”) will not be subject to the CPMF assessment. There can be no assurance that the Brazilian government will not extend the paymentextension of the CPMF tax, beyond 2007, or will convert it intoand, as of January 1, 2008, the CPMF was extinguished. The Federal Government is considering establishing a new permanent tax.tax with the same characteristics of CPMF, but no bill has yet been presented to Congress
Residents of Tax Haven Jurisdictions
The general rules establish that any income, capital gains or earnings received by a beneficiary resident in a tax haven jurisdiction is subject to income tax at the rate of 25%. A tax haven is a location where no income tax is imposed or where its maximum applicable rate is lower than 20%. A country will also be deemed a tax haven if its internal laws require that the identity of shareholders or members of corporate entities organized and existing under the jurisdiction of such country be kept secret or otherwise not be disclosed. Tax benefits granted through the provisions of Resolution No. 2,689/00 and Annex V to Resolution No. 1,289/87 are not applicable to residents in a so-called tax haven jurisdiction. In this case, such investors shall be taxed according to the same rules that are applicable to Brazilian residents. Dividends are not affected by tax haven jurisdiction rules.
Registered Capital
The amount of an investment in class A preferred shares held by a non-Brazilian holder as a foreign direct investment under Law No. 4,131/02 or a foreign portfolio investment under Resolution No. 2,689/00 or in ADSs held by the depositary representing such holder, as the case may be, is eligible for registration with the Central Bank; such registration (the amount so registered is referred to as “registered capital”) allows the remittance outside Brazil of foreign currency, converted at the commercial market rate, acquired with the proceeds of distributions on, and amounts realized with respect to disposition of, such class A preferred shares. The registered capital for class A preferred shares purchased in the form of ADSs, or purchased in Brazil and deposited with the depositary in exchange for an ADS, is equal to their purchase price in U.S. dollars paid by the purchaser. The registered capital for class A preferred shares that are withdrawn upon surrender of ADSs is the U.S. dollar equivalent of (1) the average price of our class A preferred shares on the Brazilian stock exchange on which the greatest number of such class A preferred shares was sold on the day of withdrawal, or (2) if no class A preferred shares were sold on such day, the average price of class A preferred shares that were sold in the fifteen trading sessions immediately preceding such withdrawal. The U.S. dollar value of our class A preferred shares is determined on the basis of the average commercial market rates quoted by the Central Bank on such date (or, if the average price of class A preferred shares is determined under clause (2) of the preceding sentence, the average of such average quoted rates on the same fifteen dates used to determine the average price of our class A preferred shares).
A non-Brazilian holder of class A preferred shares may experience delays in effecting the registration of registered capital, which may delay remittances abroad. Such a delay may adversely affect the amount, in U.S. dollars, received by the non-Brazilian holder. See “—Regulation of Foreign Investment” and “Item 3. Key Information—Risk Factors—Risks Relating to Our Class A Preferred Shares and the ADSs” and “—Regulation of Foreign Investment.ADSs.”
U.S. Federal Income Tax Considerations
The following is a discussion of the material U.S. federal income tax consequences ofthat may be relevant with respect to the acquisition, ownership and disposition of our class A preferred shares or ADSs, which are evidenced by American Depositary Receipts. This description addresses only the U.S. federal income tax considerations of U.S. holders (as defined below) that will hold class A preferred shares or ADSs as capital assets. This description does not address tax considerations applicable to holders that may be subject to special tax rules, such as banks, financial institutions, insurance companies, real estate investment trusts, grantor trusts, regulated investment companies, dealers or traders in securities or currencies, tax-exempt entities, pension funds, persons that received our class A preferred shares or ADSs pursuant to an exercise of employee stock options or rights or otherwise as compensation for the performance of services, persons that will hold our class A preferred shares or ADSs as a position in a “straddle” or as a part of a “hedging”, “conversion” or other risk reduction transaction for U.S. federal income tax purposes, persons that have a “functional currency” other than the U.S. dollar, persons that will own our class A preferred shares or ADSs through partnerships or other pass through entities, holders subject to the alternative minimum tax, certain former citizens or long-term residents of the United States or holders that own (or are deemed to own) 10% or more (by voting power ) of our shares.
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This description does not address any state, local or non-U.S. tax consequences of the acquisition, ownership and disposition of our class A preferred shares or ADSs. Moreover, this description does not address the consequences of any U.S. federal tax other than income tax, including but not limited to the U.S. federal estate and gift taxes. This description is based on (i) the Internal Revenue Code of 1986, as amended (the “Code”), existing, proposed and temporary United States Treasury Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date of this annual report and (ii), in part, on the representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below.
As used below, a “U.S. holder” is a beneficial owner of a class A preferred share or ADS that is, for U.S. federal income tax purposes, (1)(i) an individual citizen or resident of the United States, (2)(ii) a partnership or corporation organized under the laws of the United States, any state thereof or the District of Columbia, (3)(iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (4)(iv) a trust if (a) a court within the United States is able to exercise primary supervision over its administration and (b) one or more United States persons have the authority to control all of the substantial decisions of such trust. As used below, a “Non-U.S. holder” is a beneficial owner of a class A preferred share or ADS that is notneither a U.S. holder.holder nor a partnership (or other entity treated as a partnership for U.S. federal income tax purposes).
If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds class A preferred shares or ADSs, the tax treatment of a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. A partnership or its partners should consult their tax advisor as to its tax consequences.
The class A preferred shares will be treated as equity for U.S. federal income tax purposes. In general, for U.S. federal income tax purposes, a holder of an ADR evidencing an ADS will be treated as the beneficial owner of our class A preferred shares represented by the applicable ADS. The U.S. Treasury Department has expressed concern that depositaries for ADSs, or other intermediaries between the holders of shares of an issuer and the issuer, may be taking actions that are inconsistent with the claiming of U.S. foreign tax credits by U.S. holders of such receipts or shares. Accordingly, the analysis regarding the availability of a United States foreign tax credit for Brazilian taxes and sourcing rules described below could be affected by future actions that may be taken by the U.S. Treasury Department.
Taxation of Dividends
Subject to the discussion under “—Passive Foreign Investment Company Rules,” in general, the gross amount of a distribution made with respect to a class A preferred share or ADS (which for this purpose shall include distributions of interest attributable to shareholders’ equity before any reduction for any Brazilian taxes withheld therefrom) will, to the extent made from the current or accumulated earnings and profits of our company, as determined under U.S. federal income tax principles, constitute a dividend to a U.S. holder for U.S. federal income tax purposes. For taxable years beginning on or before December 31, 2010, non-corporate U.S. holders may be taxed on dividends from a qualified foreign corporation at the lower rates applicable to long-term capital gains (i.e.,gains with respect to capital assets held for more than one year). A foreign corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on shares or ADSs that are readily tradable on an established securities market in the United States. United States Treasury Department guidance indicates that the ADSs (which are listed on the New York Stock Exchange), but not our class A preferred shares, are readily tradable on an established securities market in the United States. Thus, subject to the discussion below under “—Passive Foreign Investment Company Rules,” dividends that we pay on the ADS, but not on our class A preferred shares, currently meet the conditions required for these reduced tax rates. There, however, can be no assurance that the ADSs will be considered readily tradable on an established securities market in later years. Furthermore, non-corporate holders that do not meet a minimumU.S. holder’s eligibility for such preferential rate is subject to certain holding period requirement during which they are not protected fromrequirements and the non-existence of certain risk of loss, that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code or that receive dividendsreduction transactions with respect to which they are obligated to make related payments, will not be eligible for the reduced rates of taxation.ADSs. Such dividends will not be eligible for the dividends
received deduction generally allowed to corporate U.S. corporations.holders. Subject to the discussion below under “—Passive Foreign Investment Company Rules,” if a distribution exceeds the amount of our company’s current and accumulated earnings and profits, it will be treated as a non-taxable return of capital to the extent of the U.S. holder’s tax basis in our class A preferred share or ADS on which it is paid and thereafter as capital gain. Our company does not maintain calculations of our earnings and profits under U.S. federal income tax principles. Therefore, U.S. holders should expect that distributions by our Company generally will be treated as dividends for U.S. federal income tax purposes.
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A dividend paid in Brazilian currencyreais will be includible in the income of a U.S. holder at its value in U.S. dollars calculated by reference to the prevailing spot market exchange rate in effect on the day it is received by the U.S. holder in the case of our class A preferred shares or, in the case of a dividend received in respect of ADSs, on the date the dividend is received by the depositary, whether or not the dividend is converted into U.S. dollars. Assuming the payment is not converted at that time, the U.S. holder will have a tax basis in reais equal to that U.S. dollar amount, which will be used to measure gain or loss from subsequent changes in exchange rates. Any gain or loss realized by a U.S. holder that subsequently sells or otherwise disposes of reais, which gain or loss is attributable to currency fluctuations after the date of receipt of the dividend, will be ordinary gain or loss. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution.
The gross amount of any dividend paid (which will include any amounts withheld in respect of Brazilian taxes) with respect to a class A preferred share or ADS will be subject to U.S. federal income taxation as foreign source dividend income, which may be relevant in calculating a U.S. holder’s foreign tax credit limitation. Subject to generally applicable limitations under U.S. federal income tax law concerning credits or deductions for foreign taxes and certain exceptions for short-term and hedged positions, any Brazilian withholding tax will be treated as a foreign income tax eligible for credit against a U.S. holder’s U.S. federal income tax liability. For purposes ofliability (or at a U.S. holder’s election, may be deducted in computing taxable income if the computation ofU.S. holder has elected to deduct all foreign income taxes for the taxable year). The limitation on foreign taxes eligible for the U.S. foreign tax credit limitationis calculated separately forwith respect to specific categories“baskets” of income, anyincome. For this purpose, the dividends should generally will constitute foreign source “passive category income”, or in the case of certain U.S. holders, “financial services“general category income.” U.S. Holders should note that the “financial services income” category will be eliminatedThe rules with respect to taxable years beginning after December 31, 2006. Thereafter,foreign tax credits are complex, and U.S. holders are urged to consult their own tax advisors regarding the availability of the foreign tax credit limitation categories would be limited to “passive category income” and “general category income.” Alternatively, a U.S. holder may elect not to claim a credit for any of its foreign taxes and deduct all of those taxes in computing taxable income.under their particular circumstances.
Subject to the discussion under “—Information Reporting and Backup Withholding,” a Non-U.S. holder of class A preferred shares or ADSs generally will not be subject to U.S. federal income or withholding tax on dividends received on such shares or ADSs, unless such income is effectively connected with the conduct by such Non-U.S. holder of a trade or business in the United States.
Sale, Exchange or Other Disposition of Class A Preferred Shares or ADSs
A deposit or withdrawal of class A preferred shares by a holder in exchange for an ADS that represent such shares will not result in the realization of gain or loss for U.S. federal income tax purposes. A U.S. holder generally will recognize capital gain or loss upon a sale, exchange or other disposition of a class A preferred share or ADS held by the U.S. holder or the depositary, as the case may be, in an amount equal to the difference between the U.S. holder’s adjusted basis in our class A preferred share or ADS (determined in U.S. dollars) and the U.S. dollar amount realized on the sale, exchange or other disposition. If a Brazilian tax is withheld on the sale, exchange or other disposition of a share, the amount realized by a U.S. holder will include the gross amount of the proceeds of that sale, exchange or other disposition before deduction of the Brazilian tax. In the case of a non-corporate U.S. holder, the maximum marginal U.S. federal income tax rate applicable to capital gain will generally be lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income (other than, as discussed above, certain dividends) if such holder’s holding period for such class A preferred share or ADS exceeds one year (i.e., such gain is a long-term capital gain). Capital gain, if any, realized by a U.S. holder on the sale or exchange of a class A preferred share or ADS generally will be treated as U.S. source income for U.S. foreign tax credit purposes. Consequently, in the case of a disposition or deposit of a class A preferred share or ADS that is subject to Brazilian tax, the U.S. holder may not be able to use the foreign tax credit for that Brazilian tax unless it can apply the credit against U.S. tax payable on other income from foreign sources in the appropriate income category, or, alternatively, it may take a deduction for the Brazilian tax if it elects to deduct all of its foreign income taxes. The deductibility of capital losses is subject to limitations.limitations under the Code.
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The initial tax basis of class A preferred shares or ADSs to a U.S. holder is the U.S. dollar value of thereal-reais-denominated purchase price determined on the date of purchase. If our class A preferred shares or ADSs are
treated as traded on an “established securities market,” a cash basis U.S. holder, or, if it elects, an accrual basis U.S. holder, will determine the dollar value of the cost of such class A preferred shares or ADSs by translating the amount paid at the spot rate of exchange on the settlement date of the purchase. The conversion of U.S. dollars toreaisand the immediate use of that currency to purchase class A preferred shares or ADSs generally will not result in taxable gain or loss for a U.S. holder.
With respect to the sale or exchange of class A preferred shares or ADSs, the amount realized generally will be the U.S. dollar value of the payment received determined on (1)(i) the date of receipt of payment in the case of a cash basis U.S. holder and (2)(ii) the date of disposition in the case of an accrual basis U.S. holder. If our class A preferred shares or ADSs are treated as traded on an “established securities market,” a cash basis taxpayer, or, if it elects, an accrual basis taxpayer, will determine the U.S. dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale.
Subject to the discussion below under “—Information Reporting and Backup Withholding,” a Non-U.S. holder of class A preferred shares or ADSs generally will not be subject to U.S. federal income or withholding tax on any gain realized on the sale or exchange of such shares or ADSs unless (1)(i) such gain is effectively connected with the conduct by such Non-U.S. holder of a trade or business in the United States or (2)(ii) in the case of any gain realized by an individual Non-U.S. holder, such holder is present in the United States for 183 days or more in the taxable year of such sale or exchange and certain other conditions are met.
Passive Foreign Investment Company Rules
Based upon the nature of its current and projected income, assets and activities, our company does not believe that our class A preferred shares or the ADSsNon-U.S. corporation will be considered shares ofclassified as a passive“passive foreign investment company,company”, or a PFIC, for U.S. federal income tax purposes for thein any taxable year ended December 31, 2005. In general, a foreign corporation is a PFIC if,in which, after applying certain look-through rules, with respect to certain subsidiaries,either (1) at least 75%75 percent of its gross income for the taxable year is passive income“passive income” or if(2) at least 50%50 percent of the average value of its gross assets for the taxable yearis attributable to assets that produce passive income“passive income” or areis held for the production of passive income. In general, passivePassive income for this purpose generally includes dividends, interest, royalties, rents royalties, and gains from commodities and securities transactions. The determination
Based on certain estimates of whetherits gross income and gross assets and the nature of its business, our class A preferred shares or the ADSs constitute shares ofcompany believes that it will not be classified as a PFIC is a factual determination made annually,for its taxable year ended December 31, 2007. The company's status in future years will depend on its assets and therefore our company’s failure to constitute a PFIC at one time is subject to change. Ouractivities in those years. The company has no reason to believe that ourits assets or activities will change in a manner that would cause usit to be classified as a PFIC for the taxable year ended December 31, 2008 or any future year, but there can be no assurance that ourthe company will not be considered a PFIC for any taxable year.
If we are treated aswere a PFIC, notwithstanding the discussion in “—Taxation of Dividends” and “—Sale, Exchange or Other Disposition of Class A Preferred Shares or ADSs” above, a U.S. holder of class A preferred shares or ADSs generally would be subject to imputed interest charges and other disadvantageous tax treatment (including the denial of the taxation of dividends received in respect of class A preferred shares or the ADSs at the lower rates applicable to long-term capital gains, as discussed above under “—Taxation of Dividends”) with respect to any gain from the sale or exchange of, and certain distributions with respect to, our class A preferredthe shares or ADSs (including the ADSs.loss of the potential reduced tax rate on certain dividends described above).
If we are treated aswere a PFIC, a U.S. holder of class A preferred shares or ADSs could make a variety of elections that may alleviate certain of the tax consequences referred to above, and one of these elections may be made retroactively. However, it is expected that the conditions necessary for making certain of such elections will not apply in the case of ourthe class A preferred shares or the ADSs. U.S. holders should consult their own tax advisorsadvisers regarding the tax consequences that would arise if we arethe company were treated as a PFIC and the availability of any of the elections described above.PFIC.
Information Reporting and Backup Withholding
U.S. backup withholding tax and information reporting requirements generally apply to certain payments to certain non-corporate holders of shares. Information reporting generally will apply to payments of dividends on,
and to proceeds from the sale or redemption of, our class A preferred shares or the ADSs made within the United States or by a U.S. payor or U.S. middleman to a holder of our class A preferred shares or the ADSs, other than an exempt recipient, including a corporation, a payee that is not a United States person that provides an appropriate certification and certain other persons. Backup withholding tax will apply to any payments of dividends on, or the proceeds from the sale or redemption of, class A preferred shares or the ADSs within the United States or by a U.S. payor or U.S.
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middleman to a holder, other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements. The backup withholding tax rate is 28% for taxable years through 2010.
Backup withholding is not an additional tax. You generally will be entitled to credit any amounts withheld under the backup withholding rules against your U.S. federal income tax liability or a refund of the amounts withheld provided the required information is furnished to the Internal Revenue Service in a timely manner.
The above description is not intended to constitute a complete analysis of all tax consequences relating to ownership and disposition of Preferred Classclass A Sharespreferred shares or Preferred Class A ADSs. Prospective purchasers should consult their own tax advisors concerning the tax consequences of their particular situations.
Documents on Display
Statements contained in this annual report regarding the contents of any contract or other document are not necessarily complete, and, where the contract or other document is an exhibit to the annual report, each of these statements is qualified in all respects by the provisions of the actual contract or other documents.
We are subject to the information requirements of the Exchange Act applicable to a foreign private issuer, and accordingly we file or furnish reports, information statements and other information with the Commission. These reports and other information may be inspected and copied at the public reference room maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies of this material may be obtained by mail from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Electronic filings made through the Electronic Data Gathering, Analysis and Retrieval System are also publicly available through the Commission’s web site on the Internet at http:\\www.sec.gov.
As a foreign private issuer, we are exempt from the proxy requirements of Section 14 of the Exchange Act and from the reporting and “short swing” profit recovery provisions of Section 16 of the Exchange Act, although the rules of the New York Stock Exchange may require us to solicit proxies from our shareholders under some circumstances.
We also file financial statements and other periodic reports with the Brazilian Securities Commission.
Copies of documents referred to in this annual report and our bylaws are available for inspection upon request at our headquarters at: Av. Nações Unidas, 4777, São Paulo, SP – CEP 05477-000 Brazil.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks arising from our normal business activities. These market risks, which are beyond our control, principally involve the possibility that changes in interest rates, exchange rates or commodity prices will adversely affect the value of our financial assets and liabilities or future cash flows and earnings. Market risk is the potential loss arising from adverse changes in market rates and prices.
In order to mitigate the market risks to which we are exposed, we used and we may use foreign-currency,foreign currency, interest rate, commodity derivative instruments, cash and receivables. At December 31, 2005, we had foreign exchange options with an aggregate notional amount of R$631.6 million maturing between January 9, 2006 and May 12, 2006. These foreign exchange options match certain foreign currency-denominated obligations included in our accounts payable at December 31, 2005. At December 31, 2005,2007, we had cross-currency interest rate swaps with an aggregate notional amount of R$279.5731.8 million maturing between March 8, 200610, 2008 and June 28, 2012. These cross-currency interest rate swaps match certain of our foreign currency-denominated debt obligations.
It is our policy to assess the potential and consolidated impact of market risks and to mitigate assessed risks in accordance with our risk management policy. Our risk management policy, in effect since December 31, 2001,April 28, 2004, seeks to mitigate our exposure to exchange rate risks with the objective of maintaining coverage of principal and interest settlements maturing within the following 12 months for, at a minimum:
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Compliance with this policy varies based upon applicable market conditions, credit availability and our cash balances.
At December 31, 2005,2007, we had US$548.5551.8 million in U.S. dollar-denominated cash equivalents and other investments, which may partially offset the effects of any depreciation of therealagainst the U.S. dollar on our ability to service our U.S. dollar-denominated debt to the extent of these U.S. dollar-denominated cash equivalents and other investments.
Interest Rate Risk
Our variable interest rate exposure is primarily subject to the variations of the TJLP rate and the CDI rate forreal-denominated borrowings and short-term cash investments. In addition, the principal amounts of certain of ourreal-denominated obligations are periodically restated by the IGP-M.
As a result of strong worldwide GDP growth and favorable price levels of commodities, Brazil registered a commercial surplus of US$44.840.0 billion, the largest in Brazil’s history, despite the substantial appreciation of therealin relation to the U.S. dollar during 2005.2007. This surplus, together with strong primary surpluses in the federal budget, contributed to a substantial improvement in investors’ perception of Brazil country risk. Moreover, Brazil reduced its level of indebtedness, prepaid its obligations with the IMF and increased its international reserves from US$52.985.8 billion at December 31, 20042006 to US$53.8180.3 billion at December 31, 2005.2007.
The Central Bank succeeded in controlling inflation within its targets and co-ordinatingco-coordinating the expectations of economic agents. This strategy resulted in an increasea decline in interest rates during the first half of 2005, followed by a strong decline during the second half. However,2007. Brazil’s GDP growth continued to lag behindin 2007 was slightly ahead of worldwide growth levels, growing at an estimated 2.3%5.2% during 2005.2007. With respect to Brazilian interest rates:
The table below provides information about our significant interest-rate sensitive instruments:
Payment Schedule – Breakdown by Type of Interest Rate | ||||||||||||||||
At December 31, 2007 | ||||||||||||||||
Expected Maturity Date | ||||||||||||||||
Fair | ||||||||||||||||
2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | Total | Value (1) | |||||||||
(in millions ofreais,unless otherwise indicated) | ||||||||||||||||
LIABILITIES: | ||||||||||||||||
Loans and financings (excluding | ||||||||||||||||
debentures): | ||||||||||||||||
Fixed rate, denominated in U.S. | ||||||||||||||||
dollars | 295.2 | 19.6 | 19.7 | 12.7 | 10.4 | 2,449.3 | 2,807.0 | 2,307.2 | ||||||||
Average interest rate | 9.5% | 9.2% | 9.2% | 9.2% | 9.2% | 9.3% | 9.3% | |||||||||
Variable rate, denominated in | ||||||||||||||||
U.S. dollars | 123.5 | 2,335.5 | 127.3 | 93.0 | 206.4 | 184.9 | 3,070.5 | 2,724.1 | ||||||||
Average interest rate (over LIBOR) | 0.9% | 0.9% | 1.3% | 1.2% | 1.2% | 1.3% | 1.1% |
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Payment schedule—breakdown by type of interest rate | |||||||||||||||||||||||
At December 31, 2005 | |||||||||||||||||||||||
Expected maturity date | |||||||||||||||||||||||
(in millions ofreais) | 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | air value(1) | |||||||||||||||
LIABILITIES: | |||||||||||||||||||||||
Loans and financings (excluding debentures): | |||||||||||||||||||||||
Fixed rate, denominated in U.S. dollars | 66.5 | 46.0 | 654.2 | 10.5 | 10.5 | 1,289.5 | 2,077.2 | 3,622.1 | |||||||||||||||
Average interest rate | 11.3 | % | 11.3 | % | 11.3 | % | 10.7 | % | 10.7 | % | 9.9 | % | 10.0 | % | |||||||||
Variable rate, denominated in U.S. dollars | 285.3 | 166.0 | 128.5 | 58.5 | — | — | 638.3 | 2,275.9 | |||||||||||||||
Average interest rate (over LIBOR) | 1.65 | % | 1.48 | % | 1.44 | % | 1.45 | % | 1.56 | % | |||||||||||||
Fixed rate, denominated in Japanese yen | 1.0 | 0.9 | 0.5 | — | — | — | 2.4 | 7.0 | |||||||||||||||
Average interest rate | 6.9 | % | 6.9 | % | 6.9 | % | 6.9 | % | |||||||||||||||
Fixed rate, denominated inreais | — | — | 3.8 | 7.5 | 7.5 | 41.5 | 60.3 | 55.6 | |||||||||||||||
Average interest rate | 11.9 | % | 11.9 | % | 11.9 | % | 11.9 | % | 11.9 | % | |||||||||||||
Variable rate, denominated inreais (excluding debentures) | 206.3 | 26.2 | 26.7 | 26.7 | 26.7 | 8.9 | 321.5 | 310.0 | |||||||||||||||
Average interest rate (over TJLP) | 3.76 | % | 3.47 | % | 3.35 | % | 3.26 | % | 2.96 | % | 0.84 | % | 3.56 | % | |||||||||
Variable rate, denominated inreais (excluding debentures) | 12.0 | — | — | — | — | — | 12.0 | 17.5 | |||||||||||||||
Average interest rate (over IGP-M) | 6.50 | % | 6.50 | % | |||||||||||||||||||
Variable rate, denominated inreais (excluding debentures) | 39.8 | 68.6 | 53.7 | 42.7 | 35.4 | 43.3 | 283.5 | 284.7 | |||||||||||||||
Average interest rate (% of CDI) | 102.9 | % | 102.8 | % | 102.8 | % | 102.8 | % | 102.8 | % | 102.8 | % | 102.9 | % | |||||||||
Loans and financings (excluding debentures) before proportional consolidation | 610.9 | 307.7 | 867.4 | 145.9 | 80.1 | 1,383.2 | 3,395.2 | 6,572.8 | |||||||||||||||
Loans and financings, of proportionally consolidated companies | 284.1 | 40.8 | 12.6 | 11.4 | 8.4 | — | 357.3 | 357.2 | |||||||||||||||
Total loans and financings (excluding debentures) | 895.0 | 348.5 | 880.0 | 157.3 | 88.5 | 1,383.2 | 3,752.5 | 6,930.0 | |||||||||||||||
Debentures: | |||||||||||||||||||||||
Variable rate, denominated inreais | 9.3 | — | — | 300.0 | 300.0 | — | 609.3 | 653.3 | |||||||||||||||
Average interest rate (% of CDI) | 117.0 | % | 117.0 | % | 117.0 | % | 117.0 | % | |||||||||||||||
Variable rate, denominated inreais | — | 999.3 | — | — | — | — | 999.3 | 951.6 | |||||||||||||||
Average interest rate (over TJLP) | 5.00 | % | 5.00 | % | |||||||||||||||||||
Total debentures | 9.3 | 999.3 | — | 300.0 | 300.0 | — | 1,608.6 | 1,604.9 | |||||||||||||||
ASSETS: | |||||||||||||||||||||||
Cash and cash equivalents and other instruments: | |||||||||||||||||||||||
Variable rate, denominated in U.S. dollars | 1,284.0 | — | — | — | — | — | 1,284.0 | 1,284.0 | |||||||||||||||
Variable rate, denominated in reais | 820.2 | — | — | — | — | — | 820.2 | 820.2 | |||||||||||||||
Cash and cash equivalents and other investments, before proportional consolidation | 2,104.2 | — | — | — | — | — | 2,104.2 | 2,104.2 | |||||||||||||||
Cash and cash equivalents and other investments of proportionally consolidated companies | 177.3 | — | — | — | — | — | 177.3 | 177.3 | |||||||||||||||
Total cash and cash equivalents and other investments | 2,281.5 | — | — | — | — | — | 2,281.5 | 2,281.5 | |||||||||||||||
Payment Schedule – Breakdown by Type of Interest Rate | ||||||||||||||||
At December 31, 2007 | ||||||||||||||||
Expected Maturity Date | ||||||||||||||||
Fair | ||||||||||||||||
2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | Total | Value (1) | |||||||||
Fixed rate, denominated in | ||||||||||||||||
Japanese yen | 0.4 | — | — | — | — | — | 0.4 | 0.5 | ||||||||
Average interest rate | 4.2% | 4.2% | ||||||||||||||
Fixed rate, denominated inreais | 340.4 | 19.1 | 19.1 | 19.1 | 19.1 | 66.8 | 483.6 | 479.6 | ||||||||
Average interest rate | 11.9% | 11.9% | 11.9% | 11.9% | 11.9% | 11.9% | 11.9% | |||||||||
Variable rate, denominated in | ||||||||||||||||
reais(excluding debentures) | 104.7 | 124.6 | 122.9 | 88.8 | 26.8 | — | 467.9 | 476.6 | ||||||||
Average interest rate (over | ||||||||||||||||
TJLP) | 3.4% | 3.3% | 3.2% | 2.9% | 2.4% | 3.3% | ||||||||||
Variable rate, denominated in | ||||||||||||||||
reais(excluding debentures) | 196.6 | 59.2 | 48.1 | 39.2 | 17.0 | — | 360.0 | 360.3 | ||||||||
Average interest rate (% of | ||||||||||||||||
CDI) | 102.8% | 102.9% | 102.8% | 102.8% | 102.9% | 102.8% | ||||||||||
Loans and financings (excluding | ||||||||||||||||
debentures) before proportional | ||||||||||||||||
consolidation | 1,060.8 | 2,558.0 | 337.1 | 252.8 | 279.7 | 2,701.0 | 7,189.4 | 6,348.3 | ||||||||
Loans and financings, of | ||||||||||||||||
proportionally consolidated | ||||||||||||||||
companies | 3.9 | 41.7 | 41.6 | 50.8 | 142.9 | — | 280.9 | 280.9 | ||||||||
Total loans and financings | ||||||||||||||||
(excluding debentures) | 1,064.4 | 2,600.0 | 379.0 | 304.0 | 423.0 | 2,701.0 | 7,470.4 | 6,629.2 | ||||||||
Debentures: | ||||||||||||||||
Variable rate, denominated in | ||||||||||||||||
reais | 111.6 | — | 300.0 | 500.0 | — | — | 911.6 | 917.4 | ||||||||
Average interest rate (% of | ||||||||||||||||
CDI) | 63.3% | 103.7% | 103.6% | 103.5% | 90.7% | |||||||||||
Debentures before proportional | ||||||||||||||||
consolidation | 111.6 | — | 300.0 | 500.0 | — | — | 911.6 | 917.4 | ||||||||
Debentures of proportionally | ||||||||||||||||
consolidated companies | — | — | — | — | — | — | — | — | ||||||||
Total debentures | 111.6 | — | 300.0 | 500.0 | — | — | 911.6 | 917.4 | ||||||||
ASSETS: | ||||||||||||||||
Cash and cash equivalents and other | ||||||||||||||||
instruments: | ||||||||||||||||
Variable rate, denominated in | ||||||||||||||||
U.S. dollars | 977.4 | — | — | — | — | — | 977.4 | 977.4 | ||||||||
Variable rate, denominated in | ||||||||||||||||
reais | 1,281.6 | — | — | — | — | — | 1,281.6 | 1,281.6 | ||||||||
Cash and cash equivalents and other | ||||||||||||||||
investments, before proportional | ||||||||||||||||
consolidation | 2,259.0 | — | — | — | — | — | 2,259.0 | 2,259.0 | ||||||||
Cash and cash equivalents and other | ||||||||||||||||
investments of proportionally | ||||||||||||||||
consolidated companies | 91.9 | — | — | — | — | — | 91.9 | 91.9 | ||||||||
Total cash and cash equivalents and | ||||||||||||||||
other investments | 2,350.9 | — | — | — | — | — | 2,350.9 | 2,350.9 |
(1) | Represents the net present value of the future cash flows from the obligations converted intoreaisat fair market value at December 31, |
In the event that the average interest rate applicable to our financial assets and debt in 20062008 were 1% higher than the average interest rate in 2005,2007, our financial income would increase by approximately R$13.213.3 million and our financial expenses would increase by approximately R$29.67.9 million.
Foreign Currency Exchange Rate Risk
Our liabilities that are exposed to foreign currency exchange rate risk are primarily denominated in U.S. dollars. To partially offset our risk of any devaluation of therealagainst the U.S. dollar, we currently maintain available liquid resources denominated in U.S. dollars and may enter into derivative contracts. Because we borrow in the international markets to support our operations and investments, we are exposed to market risks from changes in foreign exchange rates and interest rates.
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The table below provides information about our significant foreign currency exposure:
Payment schedule—breakdown by currency | ||||||||||||||||
As of December 31, 2005 | ||||||||||||||||
Expected maturity date | ||||||||||||||||
(in millions ofreais) | 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | Fair value(1) | ||||||||
LIABILITIES: | ||||||||||||||||
Loans and financings: | ||||||||||||||||
Loans and financings (excluding debentures): | ||||||||||||||||
Denominated in U.S. dollars | 351.8 | 212.0 | 782.7 | 69.0 | 10.5 | 1,289.5 | 2,715.5 | 5,898.0 | ||||||||
Denominated in Japanese Yen | 1.0 | 0.9 | 0.5 | — | — | — | 2.4 | 7.0 | ||||||||
Denominated inreais | 258.1 | 94.8 | 84.2 | 76.9 | 69.6 | 93.7 | 677.3 | 667.8 | ||||||||
Loans and financings (excluding debentures) before proportional consolidation | 610.9 | 307.7 | 867.4 | 145.9 | 80.1 | 1,383.2 | 3,395.2 | 6,572.8 | ||||||||
Loans and financings, of proportionally consolidated companies | 284.1 | 40.8 | 12.6 | 11.4 | 8.4 | — | 357.3 | 357.2 | ||||||||
Total loans and financings (excluding debentures) | 895.0 | 348.5 | 880.0 | 157.3 | 88.5 | 1,383.2 | 3,752.5 | 6,930.0 | ||||||||
Debentures: | ||||||||||||||||
Denominated inreais | 9.3 | 999.3 | — | 300.0 | 300.0 | — | 1,608.6 | 1,604.9 | ||||||||
Total debentures, including current portion | 9.3 | 999.3 | — | 300.0 | 300.0 | — | 1,608.6 | 1,604.9 | ||||||||
ASSETS: | ||||||||||||||||
Cash and cash equivalents and other investments: | ||||||||||||||||
Denominated in U.S. dollars | 1,284.0 | — | — | — | — | — | 1,284.0 | 1,284.0 | ||||||||
Denominated inreais | 820.2 | — | — | — | — | — | 820.2 | 820.2 | ||||||||
Cash and cash equivalents and other investments, before proportional consolidation | 2,104.2 | — | — | — | — | — | 2,104.2 | 2,104.2 | ||||||||
Cash and cash equivalents and other investments of proportionally consolidated companies | 177.3 | — | — | — | — | — | 177.3 | 177.3 | ||||||||
Total cash and cash equivalents and other investments | 2,281.5 | — | — | — | — | — | 2,281.5 | 2,281.5 | ||||||||
Payment Schedule – Breakdown by Currency | ||||||||||||||||
As of December 31, 2007 | ||||||||||||||||
Expected Maturity Date | ||||||||||||||||
Fair | ||||||||||||||||
2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | Value (1) | |||||||||
(in millions ofreais) | ||||||||||||||||
LIABILITIES: | ||||||||||||||||
Loans and financings: | ||||||||||||||||
Loans and financings (excluding | ||||||||||||||||
debentures): | ||||||||||||||||
Denominated in U.S. dollars | 418.7 | 2,355.1 | 147.0 | 105.7 | 216.8 | 2,634.2 | 5,877.5 | 5,031.3 | ||||||||
Denominated in Japanese Yen | 0.4 | — | — | — | — | — | 0.4 | 0.5 | ||||||||
Denominated inreais | 641.7 | 202.9 | 190.1 | 147.1 | 62.9 | 66.8 | 1,311.5 | 1,316.5 | ||||||||
Loans and financings (excluding | ||||||||||||||||
debentures) before proportional | 1,060.8 | 2,558.0 | 337.1 | 252.8 | 279.7 | 2,701.0 | 7,189.4 | 6,348.3 | ||||||||
consolidation | ||||||||||||||||
Loans and financings, of | ||||||||||||||||
proportionally consolidated | 3.9 | 41.7 | 41.6 | 50.8 | 142.9 | — | 280.9 | 280.9 | ||||||||
companies | ||||||||||||||||
Total loans and financings (excluding | ||||||||||||||||
debentures) | 1,064.4 | 2,600.0 | 379.0 | 304.0 | 423.0 | 2,701.0 | 7,470.4 | 6,629.6 | ||||||||
Debentures: | ||||||||||||||||
Denominated inreais | 111.6 | — | 300.0 | 500.0 | — | — | 911.6 | 917.4 | ||||||||
Total debentures, including current | ||||||||||||||||
portion | 111.6 | — | 300.0 | 500.0 | — | — | 911.6 | 917.4 | ||||||||
ASSETS: | ||||||||||||||||
Cash and cash equivalents and other | ||||||||||||||||
investments: | ||||||||||||||||
Denominated in U.S. dollars | 977.4 | — | — | — | — | — | 977.4 | 977.4 | ||||||||
Denominated inreais | 1,281.6 | — | — | — | — | — | 1,281.6 | 1,281.6 | ||||||||
Cash and cash equivalents and other | ||||||||||||||||
investments, before proportional | ||||||||||||||||
consolidation | 2,259.0 | — | — | — | — | — | 2,259.0 | 2,259.0 | ||||||||
Cash and cash equivalents and other | ||||||||||||||||
investments of proportionally | ||||||||||||||||
consolidated companies | 91.9 | — | — | — | — | — | 91.9 | 91.9 | ||||||||
Total cash and cash equivalents and other | ||||||||||||||||
investments | 2,350.9 | — | — | — | — | — | 2,350.9 | 2,350.9 | ||||||||
(1) | Represents the net present value of the future cash flows from the obligations converted intoreaisat fair market value at December 31, |
Our foreign currency exposure gives rise to market risks associated with exchange rate movements of therealagainst the U.S. dollar. Foreign currency-denominated liabilities at December 31, 20052007 consisted primarily of U.S. dollar-denominated debt. Our foreign currency-denominated debt, including short-term debt and current portion of long-term debt, was R$2,746.65,915.4 million (US$1,173.33,339.6 million) at December 31, 20052007 and R$4,186.93,117.4 million (US$1,788.51,458.1 million) at December 31, 2004.2006. Our foreign currency exposure includes indebtedness of
proportionally consolidated companies of R$72.737.9 million (US$31.121.4 million) at December 31, 20052007 and R$111.780.8 million (US$47.737.8 million) at December 31, 2004.2006. Our foreign currency exposure without the indebtedness of proportionally consolidated companies was R$2,673.95,877.5 million (US$1,142.33,318.2 million) at December 31, 20052007 and R$4,075.23,036.6 million (US$1,740.81,420.3 million) at December 31, 2004.2006. This foreign currency exposure is represented by debt in the form of notes, bonds, pre-export finance facilities and working capital loans. Our cash and funds available in U.SU.S. dollars partially protect us against exposure arising from the U.S. dollar-denominated debt.
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In the event that therealwere to devalue by 10% against the U.S. dollar during 20062008 as compared to thereal/U.S. dollar exchange rate at December 31, 2005,2007, our financial expenses indexed to the dollar in 20062008 would increase by approximately R$291.8592 million, and our financial income would increase by approximately R$128.598 million.
Commodity Prices
Commodity Prices
Although the majority of our revenues are inreais, we do not currently hedge our exposure to changes in prices of naphtha, our principal raw material, which are linked to the Amsterdam-Rotterdam-Antwerp market price denominated in U.S. dollars. We do not hedge this exposure in part because a portion of our sales in 20052007 were exports payable in foreign currencies and linked to the international market prices of these commodities, and in part because the prices of our polyethylene, polypropylene and PVC products sold in domestic markets generally reflect changes in the international market prices of these products. In periods of high volatility in the U.S. dollar price of naphtha or thereal/U.S. dollar exchange rate, there is usually a lag between the time that the U.S. dollar price of naphtha increases or the U.S. dollar appreciates and the time that we can effectively pass on the resulting increased cost inreaisto our customers in Brazil. Accordingly, if the U.S. dollar price of naphtha increases precipitously or therealdevalues precipitously against the U.S. dollar in the future, we may not immediately be able to pass on all of the corresponding increases in our naphtha costs to our customers in Brazil, which could materially adversely affect our results of operations and financial condition. See “Item 3. Key Information—Risk Factors—Informaion—Risks Relating to Our Company and the Petrochemical Industry.”
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our chief executive officer, or CEO, and our chief financial officer, or CFO, are responsible for establishing and maintaining our disclosure controls and procedures. These controls and procedures were designed to ensure that information that we are required to disclose in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms of the Commission, and that it is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 20052007 under the supervision of our CEO and CFO. Based on our evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2005.2007.
Management’s Annual Report on Internal Control over Financial Reporting and Report of Independent Registered Public Accounting Firm
We are filing herewith our management’s report on internal control over financial reporting and the opinion thereonreport of independent registered accounting firm issued by our independent registered public accounting firm. Our management’s report on internal control over financial reporting is included in this annual report on page F-2F-1 and the opinion issued by our independent registered public accounting firm is included in the report of PricewaterhouseCoopers Auditores Independentes that is included in this annual report on page F-3.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the year ended December 31, 20052007 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our fiscal council currently includes a “financial expert” within the meaning of this Item 16A. Our fiscal council has determined that Ismael Campos de Abreu is our fiscal council financial expert. Mr. Abreu’s biographical information is included in “Item 6. Directors, Senior Management and Employees.”
We have adopted a code of ethics that applies to member of our board of directors, fiscal council and board of executive officers, as well as to our other employees. We post our code of ethics on our website at http://www.braskem.com.br. We do not, however, incorporate by reference or otherwise make part of this annual report any information contained on our website.
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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit And Non-Audit Fees
The following table sets forth the fees billed to us by our independent registered public accounting firm, PricewaterhouseCoopers Auditores Independentes, during the fiscal years ended December 31, 20052006 and 2004:2005:
Year ended December 31, | ||||||
2005 | 2004 | |||||
(in millions ofreais) | ||||||
Audit fees(1) | R$ | 9.7 | R$ | 8.1 | ||
Audit-related fees(2) | 1.9 | 1.2 | ||||
Tax fees(3) | 0.6 | 0.5 | ||||
Total fees | R$ | 12.2 | R$ | 9.8 | ||
Year ended December 31, | ||||
2007 | 2006 | |||
(in millions of reais) | ||||
Audit fees(1) | R$7.0 | R$ 15.0 | ||
Audit-related fees(2) | 0.1 | 1.3 | ||
Tax fees(3) | 0.5 | 0.7 | ||
Total fees | R$7.6 | R$ 17.0 | ||
(1) | Audit fees consist of the aggregate fees billed by PricewaterhouseCoopers Auditores Independentes in connection with the audit of our annual financial statements, interim audits, interim reviews of our quarterly financial information, issuance of comfort letters, procedures as related to audit of income tax provisions and related reserves in connection with the audit and review of financial statements and review of documents filed with the Brazilian Securities Commission and the Commission. |
(2) | Audit-related fees consist of the aggregate fees billed by PricewaterhouseCoopers Auditores Independentes for internal control reviews. |
(3) | Tax fees consist of the aggregate fees billed by PricewaterhouseCoopers Auditores Independentes for tax compliance reviews. |
Pre-Approval Policies And Procedures
Our fiscal council and board of directors have approved an Audit and Non-Audit Services Pre-Approval Policy that sets forth the procedures and the conditions pursuant to which services proposed to be performed by our independent auditors may be pre-approved. This policy is designed to (1) provide both general pre-approval of certain types of services through the use of an annually established schedule setting forth the types of services that have already been pre-approved for a certain year and, with respect to services not included in an annual schedule, special pre-approval of services on a case by case basis by our fiscal council and our independent auditors and (2) assess compliance with the pre-approval policies and procedures. Our management periodically reports to our fiscal council the nature and scope of audit and non-audit services rendered by our independent auditors and is also required to report to our fiscal council any breach of this policy of which our management is aware.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
We are relying on the general exemption from the listing standards relating to audit committees contained in Rule 10A-3(c)(3) under the Exchange Act for the following reasons:
192
|
We, however, do not believe that our reliance on this general exemption will materially adversely affect the ability of our fiscal council to act independently and to satisfy the other requirements of the listing standards relating to audit committees contained in Rule 10A-3 under the Exchange Act.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not Applicable.
During the year ended December 31, 2005, there were no purchases made by or on behalf193
We have responded to Item 18 in lieu of responding to this item.
Reference is made to Item 19 for a list of all financial statements filed as part of this annual report.
(a) Financial Statements
Braskem Financial Statements
Copesul Financial Statements
F-15 | ||
Copesul Financial Statements | ||
Report of Independent | ||
Consolidated Balance | ||
Consolidated Statements of Cash Flow for the years ended December 31, 2006, 2005 and 2004 | ||
F-148 | ||
F-207 | ||
Unaudited Interim Consolidated Statement of Income for the three month periods ended March 31, 2007 and 2006 | F-208 | |
Unaudited Interim Statement of Changes in Shareholders’ Equity for the three month periods ended March 31, 2007 and 2006 | F-209 | |
Unaudited Interim Consolidated Statement of Changes in Financial Position for the three month periods ended March 31, 2007 and 2006 | F-210 | |
Unaudited Interim Consolidated Statement of Cash Flows for the three months ended March 31, 2007 and 2006 | F-211 | |
Notes to the Consolidated Financial Statements | F-212 |
(b) List of Exhibits
1.01 | ||||
2.01 | Amended and Restated Deposit Agreement, dated as of |
194
2.02 | Form of Certificate representing American Depositary Shares (incorporated by reference to Exhibit 4.02 to Form F-1 of Braskem S.A. filed on April 6, 2004). | |||
2.03 | The total amount of long-term debt securities of our company and its subsidiaries under any one instrument does not exceed 10% of the total assets of our company and its subsidiaries on a consolidated basis. We agree to furnish copies of any or all such instruments to the Commission upon request. | |||
3.01 | Shareholders Agreement of Braskem S.A., dated as of |
Memorandum of Understanding Regarding Shareholders Agreement, dated July 20, 2001, among Odebrecht Química S.A., Petroquímica da Bahia S.A., PETROS—Fundação Petrobras de Seguridade Social and PREVI—Caixa de Previdéncia dos Funcionários do Banco do | ||||
3.03 | ||||
3.04 | ||||
4.01 | Share Purchase Agreement, dated as of April | |||
4.02 | Protocol and Justification of the Merger of Polialden Petroquímica S.A. into Braskem S.A., dated May 5, 2006 (English translation) (incorporated by reference to Exhibit 4.2 to Form 20-F of Braskem S.A. filed on June 23, 2006). | |||
4.03 | Protocol and Justification of the Merger of Politeno Indústria e Comércio S.A. into Braskem S.A., dated March 12 2007 (English translation) (incorporated by reference to Form 6-K of Braskem S.A. filed on March 19, 2007). | |||
4.04 | Share Purchase Agreement Between the Ipiranga Group Key Shareholders and Ultrapar dated March 18, 2007 (English summary) (incorporated by reference to Exhibit 4.04 to Form 20-F of Braskem S.A. filed on June 7, 2007). | |||
4.05 | Investment Agreement by and between Ultrapar Participações S.A., Braskem S.A. and Petróleo Brasileiro S.A. – Petrobras dated March 18, 2007 (English summary) (incorporated by reference to Exhibit 4.05 to Form 20-F of Braskem S.A. filed on June 7, 2007). | |||
4.06 | Amendment dated April 18, 2007 to the Investment Agreement by and between Ultrapar Participações S.A. and Braskem S.A. and Petróleo Brasileiro S.A. – Petrobras dated March 18, 2007 (English summary) (incorporated by reference to Exhibit 4.06 to Form 20-F of Braskem S.A. filed on June 7, 2007). | |||
4.07 | Private Instrument of Chattel Mortgage in Guarantee between Ultrapar, Braskem and Petrobras dated April 18, 2007 (English summary) (incorporated by reference to Exhibit 4.07 to Form 20-F of Braskem S.A. filed on June 7, 2007). | |||
4.08 | Agreement for Maintenance of Reversibility of Operations, dated April 25, 2007, between Conselho Administrativo de Defesa Econômica – CADE and Braskem S.A. (English translation) (incorporated by reference to Exhibit 4.10 to Form 20-F of Braskem S.A. filed on June 7, 2007). | |||
4.09 |
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4.11 | ||||
4.12 | Naphtha and Gas Oil Purchase and Sale Contract, dated as of June 22, 1978, between Petróleo Brasileiro S.A. and the Registrant (English translation) (incorporated by reference to Exhibit 10.06 to Form F-1 of Braskem S.A. filed on April 6, 2004). | |||
First Amendment to Naphtha and Gas Oil Purchase and Sale Contract, dated as of February 8, 1993, between Petróleo Brasileiro S.A. and the Registrant (English translation) (incorporated by reference to Exhibit 10.07 to Form F-1 of Braskem S.A. filed on April 6, 2004). | ||||
Second Amendment to Naphtha and Gas Oil Purchase and Sale Contract, dated as of February 24, 2003, between Petróleo Brasileiro S.A. and the Registrant. (English translation) (incorporated by reference to Exhibit | ||||
4.16 | ||||
Amendment and Restatement of Section 7 of | ||||
8.01 | List of subsidiaries (incorporated by reference to note 4 to our audited consolidated financial statements included elsewhere in this annual report). | |||
12.01 | ||||
12.02 | ||||
13.01 |
196
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report to be signed on its behalf.
BRASKEM S.A. | |||||
By: | /s/ | ||||
José Carlos Grubisich Filho | |||||
Name: | José Carlos Grubisich Filho | ||||
Title: | Chief Executive Officer | ||||
Date: | June |
197
Braskem Financial Statements
| ||
F-2 | ||
Copesul Financial Statements
F-15 | ||
Copesul Financial Statements | ||
F-207 | ||
F-208 | ||
F-209 | ||
F-210 | ||
F-211 | ||
F-212 |
Management’s Report on Internal ControlControls over Financial Reporting
The management of Braskem S.A. (“(“Braskem” or the “Company”), including the CFOCEO and CEO,CFO, is responsible for establishing and maintaining adequate internal controlcontrols over financial reporting.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, and that the degree of compliance with the policies or procedures may deteriorate.
As disclosed in the Note 1 (xi) of its consolidated financial statements, during 2007, Braskem acquired control of Companhia Petroquímica do Sul (“Copesul”), Ipiranga Química S.A (“Ipiranga Química”) and Ipiranga Petroquimica S.A (“IPQ”). As provided under the Sarbanes –Oxley Act of 2002 and the applicable rules and regulations of the Securities and Exchange Commission, management has elected to exclude Copesul, Ipiranga Química and IPQ from this evaluation. Copesul, Ipiranga Química and IPQ are subsidiaries whose total assets and total revenues represent 16.7% and 27.5%, of the related consolidated financial statement amounts as of and for the year ended December 31, 2007.
F-2
Braskem’s management has assessed the effectiveness of the Company’s internal controlcontrols over financial reporting as of December 31, 20052007 based on the criteria established in Internal Control -– “Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and, based on such criteria, Braskem’s management has concluded that, as of December 31, 2005,2007, the Company’s internal control over financial reporting is effective.
Management’s assessment of theThe effectiveness of the Company’s internal control over financial reporting as of December 31, 20052007 has been audited by PricewaterhouseCoopers Auditores Independentes, an independent registered public accounting firm, as stated in their report which appears herein.
/s/ | |||
By: | José Carlos Grubisich Filho | ||
Chief Executive Officer | |||
/s/ Carlos José Fadigas de Souza Filho | |||
Carlos José Fadigas de Souza Filho | |||
Chief Financial Officer |
F-3
Dated: June 23, 2006
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Braskem S.A.
We have completed an integrated audit of Braskem S.A.’s 2005 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005 and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders’ equity, of changes in financial position and of cash flows present fairly, in all material respects, the financial position of Braskem S.A. and its subsidiaries (“the Company”) at December 31, 20052007 and 2004,2006, and the results of their operations their changes in shareholders’ equity and in financial position and their cash flows for each of the three years in the period ended December 31, 20052007 in conformity with accounting practices adopted in Brazil. TheseAlso in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, are the responsibilityfor maintaining effective internal control over financial reporting and for its assessment of the Company’s management.effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinionopinions on these financial statements and on the Company’s internal control over financial reporting based on our audits.audits (which were integrated audits in 2007 and 2006). We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
opinions.
Accounting practices adopted in Brazil vary in certain significant respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). Information relating to the nature and effect of such differences is presented in Note 31 to the consolidated financial statements.
Internal control overAs described in Note 3(d) and 12 to the consolidated financial reporting
Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, thatstatements, the Company maintained effective internal control over financial reporting aschanged the manner in which accounts for maintenance costs in 2006.
F-4
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers
Auditores Independentes
As described in Management’s Report on Internal Controls over Financial Reporting, management has excluded Companhia Petroquímica do Sul – COPESUL (“Copesul”), Ipiranga Petroquímica S.A. (“Ipiranga Petroquímica”) and Ipiranga Química S.A. (“Ipiranga Química”) from its assessment of internal control over financial reporting as of December 31, 2007 because it was acquired by the Company in a purchase business combination during 2007. We have also excluded Copesul, Ipiranga Petroquímica and Ipiranga Química from our audit of internal control over financial reporting. Copesul, Ipiranga Petroquímica and Ipiranga Química are subsidiaries whose total assets and total revenues represent 16.7% and 27.5%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2007.
Salvador, June 23, 30, 2008
PricewaterhouseCoopers
Auditores Independentes
F-5
Braskem S.A. and Its Subsidiaries |
Consolidated Balance Sheets at December 31 |
In millions of reais |
Assets | 2007 | 2006 | ||
Current assets | ||||
Cash and cash equivalents (Note 4) | 1,890.1 | 1,547.1 | ||
Other investments (Note 5) | 248.7 | 413.9 | ||
Trade accounts receivable (Note 6) | 1,497.0 | 1,594.9 | ||
Inventories (Note 7) | 2,264.3 | 1,767.3 | ||
Investment held for sale (Note 1(c)(xiv)) | 136.7 | - | ||
Taxes recoverable (Note 9) | 310.3 | 408.1 | ||
Deferred income tax and social contribution (Note 17(b)) | 63.0 | 20.6 | ||
Dividends and interest on capital receivable | 3.9 | - | ||
Prepaid expenses | 72.5 | 84.6 | ||
Other receivables | 109.8 | 114.5 | ||
6,596.3 | 5,951.0 | |||
Non-current assets | ||||
Long-term assets | - | - | ||
Other investments (Note 5) | 119.8 | 1.6 | ||
Trade accounts receivable (Note 6) | 41.9 | 52.5 | ||
Inventories (Note 7) | 22.8 | 22.9 | ||
Taxes recoverable (Note 9) | 1,175.0 | 953.1 | ||
Deferred income tax and social contribution (Note 17(b)) | 395.5 | 377.0 | ||
Judicial deposits and compulsory loan (Note 10) | 107.7 | 90.5 | ||
Related parties (Note 8) | 48.5 | 40.7 | ||
Other assets | 47.9 | 58.8 | ||
1,959.1 | 1,597.1 | |||
Permanent assets | ||||
Investments | ||||
Jointly-controlled companies | 6.9 | 6.5 | ||
Advances for acquisition of investments (Note 11(c)) | 1,028.0 | - | ||
Associated companies (Note 11) | 24.5 | 26.2 | ||
Other investments | 13.8 | 14.1 | ||
Property, plant and equipment (Note 12) | 8,404.1 | 6,688.7 | ||
Intangible assets (Note 12) | 172.4 | 129.5 | ||
Deferred charges, including goodwill (Note 13) | 2,686.9 | 1,891.2 | ||
12,336.6 | 8,756.2 | |||
Total assets | 20,892.0 | 16,304.3 | ||
F-6
Braskem S.A. and Its Subsidiaries | ||||
Consolidated Balance Sheets at December31 | ||||
In millions of reais | (continued) | |||
Liabilities and shareholders' equity | 2007 | 2006 | ||
Current liabilities | ||||
Suppliers | 2,967.9 | 3,022.1 | ||
Loans and financing (Note 14) | 1,068.4 | 653.9 | ||
Debentures (Note 15) | 111.6 | 1,157.7 | ||
Salaries and payroll charges | 260.8 | 148.9 | ||
Taxes, charges and contributions | 161.8 | 122.8 | ||
Income tax and social contribution | 15.4 | 14.4 | ||
Interest on own capital and dividends payable (Note 20(e)) | 307.9 | 41.4 | ||
Advances from customers | 23.5 | 26.7 | ||
Creditors for investment acquisition (Notes 1(c)(vi) and 11(c)) | 881.0 | - | ||
Insurance premiums payable | 9.4 | 50.0 | ||
Other liabilities | 115.2 | 269.0 | ||
5,922.9 | 5,506.9 | |||
Non-current liabilities | ||||
Long-term liabilities | - | - | ||
Suppliers | 29.7 | 21.4 | ||
Loans and financing (Note 14) | 6,401.9 | 3,935.8 | ||
Debentures (Note 15) | 800.0 | 982.2 | ||
Taxes and contributions (Note 16) | 1,145.8 | 1,322.0 | ||
Related parties (Note 8) | - | 4.8 | ||
Long-term incentives (Note 19) | 4.9 | 2.3 | ||
Deferred income tax and social contribution (Note 17) | 64.5 | 17.3 | ||
Private pension plans (Note 28) | 35.7 | 64.2 | ||
Other liabilities | 106.4 | 83.3 | ||
8,588.9 | 6,433.3 | |||
Deferred income | ||||
Negative goodwill on investments in | ||||
subsidiary companies | 25.2 | 30.4 | ||
Minority interests | 598.0 | 21.8 | ||
Shareholders' equity (Note 20) | ||||
Capital | 4,641.0 | 3,508.3 | ||
Capital reserves | 458.1 | 408.7 | ||
Treasury shares | (257.6) | (255.6) | ||
Revenue reserves | 1,013.8 | 748.8 | ||
Retained earnings (accumulated deficit) | (98.3) | (98.3) | ||
5,757.0 | 4,311.9 | |||
Total liabilities and shareholders' equity | 20,892.0 | 16,304.3 | ||
The accompanying notes are an integral part of these financial statements.
F-7
Braskem S.A. and Its Subsidiaries | |
Consolidated Statements of Operations | |
Years Ended December 31 | |
In millions of reais, except amounts per shares | (continued) |
2007 | 2006 | 2005 | ||||
Gross sales | ||||||
Domestic market | 17,939.0 | 13,028.4 | 14,099.1 | |||
Foreign market | 4,524.8 | 3,516.9 | 2,944.3 | |||
Taxes, freight and returns on sales | (4,784.4) | (3,552.6) | (3,968.3) | |||
Net sales revenue | 17,679.4 | 12,992.7 | 13,075.1 | |||
Cost of sales and services rendered | (14,441.0) | (10,792.1) | (10,361.7) | |||
Gross profit | 3,238.4 | 2,200.6 | 2,713.4 | |||
Operating expenses (income) | ||||||
Selling | 554.2 | 399.0 | 261.9 | |||
General and administrative | 684.3 | 552.5 | 525.2 | |||
Depreciation and amortization | 479.1 | 385.0 | 355.6 | |||
Other operating income, net (Note 24) | (131.5) | (186.1) | (22.8) | |||
1,586.1 | 1,150.4 | 1,119.9 | ||||
Operating income before equity accounting | ||||||
and financial income | 1,652.3 | 1,050.2 | 1,593.5 | |||
Equity accounting | ||||||
Equity in the results of investees | (0.1) | 0.8 | 1.3 | |||
Amortization of (goodwill)/negative goodwill, net | (106.2) | (57.8) | (152.5) | |||
Foreign exchange variation | (11.6) | (1.4) | 3.6 | |||
Tax incentives | 3.4 | 20.5 | 39.2 | |||
Reversal (provision) for loss | (0.9) | - | - | |||
Other | 8.1 | 9.1 | (1.4) | |||
(107.3) | (28.8) | (109.8) | ||||
Financial income (expenses) (Note 23) | ||||||
Financial expenses | (180.1) | (1,097.9) | (675.8) | |||
Financial income | (113.5) | 159.5 | (33.6) | |||
(293.6) | (938.4) | (709.4) | ||||
Operating income | 1,251.4 | 83.0 | 774.3 | |||
Non-operating income (expenses), net (Note 25) | (67.2) | 7.1 | (25.2) | |||
Income before income tax and social contribution | 1,184.2 | 90.1 | 749.1 | |||
Income tax and social contribution | - | - | - | |||
Current | (273.7) | (88.1) | (147.7) | |||
Deferred | (103.3) | 100.9 | (29.6) | |||
Income before minority interests | 807.2 | 102.9 | 571.8 | |||
Statutory employees' profit sharing | (18.7) | - | - | |||
Minority interests | (240.9) | (1.6) | 54.0 | |||
Net income for the year | 547.6 | 101.3 | 625.8 | |||
Shares outstanding at the end of the year (thousands) | 432,838 | 356,039 | 362,056 | |||
Net income per share at year end - R$ | 1.2651 | 0.2845 | 1.7285 | |||
The accompanying notes are an integral part of these financial statements.
F-8
Braskem S.A. and Its Subsidiaries |
Statement of Changes in Shareholders' Equity |
In millions of reais |
Retained | ||||||||||||||||
Capital reserves | Revenue reserves | earnings | ||||||||||||||
Tax | Legal | Retained | Treasury | (Accumulated | ||||||||||||
Capital | incentives | Other | reserve | earnings | shares | deficit ) | Total | |||||||||
At December 31, 2004 | 3,403.0 | 344.2 | 0.6 | 34.6 | 454.7 | (15.0 ) | (38.4 ) | 4,183.7 | ||||||||
Tax incentives | - | 52.0 | - | - | - | - | - | 52.0 | ||||||||
Interest on own capital (Note 20(f)) | - | - | - | - | - | - | (270.0 ) | (270.0 ) | ||||||||
Net income for the year | - | - | - | - | - | - | 625.8 | 625.8 | ||||||||
Appropriations | ||||||||||||||||
Legal reserve | - | - | - | 34.3 | - | - | (34.3 ) | - | ||||||||
Proposed dividends (Note 20(e)) | - | - | - | - | - | - | (55.7 ) | (55.7 ) | ||||||||
Retained earnings | - | - | - | - | 325.7 | - | (325.7 ) | - | ||||||||
At December 31, 2005 | 3,403.0 | 396.2 | 0.6 | 68.9 | 780.4 | (15.0 ) | (98.3 ) | 4,535.8 | ||||||||
Capital increase (Notes 1(c) and 20(a)) | 105.3 | - | - | - | - | - | - | 105.3 | ||||||||
Tax incentives | - | 11.9 | - | - | - | - | - | 11.9 | ||||||||
Repurchase of shares (Note 20(c)) | - | - | - | - | - | (240.6 ) | - | (240.6 ) | ||||||||
Effect of change in accounting practice (Note 12) | - | - | - | - | - | - | (164.9 ) | (164.9 ) | ||||||||
Transfer from reserve for absorption of prior year | ||||||||||||||||
adjustments (Note 20(d)) | - | - | - | - | (164.9 ) | - | 164.9 | - | ||||||||
Net income for the year | - | - | - | - | - | - | 101.3 | 101.3 | ||||||||
Appropriations | ||||||||||||||||
Legal reserve | - | - | - | 3.9 | - | - | (3.9 ) | - | ||||||||
Proposed dividends (Note 20(e)) | - | - | - | - | - | - | (36.9 ) | (36.9 ) | ||||||||
Retained earnings | - | - | - | - | 60.5 | - | (60.5 ) | - | ||||||||
At December 31, 2006 | 3,508.3 | 408.1 | 0.6 | 72.8 | 676.0 | (255.6 ) | (98.3 ) | 4,311.9 | ||||||||
Capital increase (Note 1(b) and 20(a)) | 1,132.7 | - | - | - | - | (2.0 ) | - | 1,130.7 | ||||||||
Dividends not redeemed and expired | - | - | - | - | - | - | 0.3 | 0.3 | ||||||||
Tax incentives | - | 49.4 | - | - | - | - | - | 49.4 | ||||||||
Effect of exclusion of profits in subsidiaries inventories | - | - | - | - | - | - | (4.4 ) | (4.4 ) | ||||||||
Transfer to reserve | - | - | - | - | 0.2 | - | (0.2 ) | - | ||||||||
Net income for the year | - | - | - | - | - | - | 547.6 | 547.6 | ||||||||
Appropriations | ||||||||||||||||
Legal reserve | - | - | - | 27.2 | - | - | (27.2 ) | - | ||||||||
Proposed dividends (Note 20(e)) | - | - | - | - | - | - | (278.5 ) | (278.5 ) | ||||||||
Retained earnings | - | - | - | - | 237.6 | - | (237.6 ) | - | ||||||||
At December 31, 2007 | 4,641.0 | 457.5 | 0.6 | 100.0 | 913.8 | (257.6 ) | (98.3 ) | 5,757.0 | ||||||||
The accompanying notes are an integral part of these financial statements.
F-9
Braskem S.A. and Its Subsidiaries |
Consolidated Statements of Changes |
in Financial Position |
Years Ended December 31 |
In millions of reais |
2007 | 2006 | 2005 | ||||
Financial resources were provided by | ||||||
Operations | - | - | - | |||
Net income for the year | 547.6 | 101.3 | 625.8 | |||
Expenses (income) not affecting working capital | - | - | - | |||
Depreciation, amortization and depletion | 1,203.6 | 962.4 | 841.5 | |||
Equity accounting | - | - | - | |||
Equity in the results of investees | 0.1 | (0.8) | (1.3) | |||
Amortization of goodwill (negative goodwill), net | 106.2 | 57.8 | 152.5 | |||
Provision for loss on investments | 0.9 | - | - | |||
Foreign exchange variation | 11.6 | 1.4 | (3.6) | |||
Tax incentives | (3.4) | (20.5) | (39.2) | |||
Adjustment to investments' realization value | 1.5 | (11.4) | 2.2 | |||
Impairment and disposal of long-lived assets | 26.4 | 4.4 | 5.1 | |||
Long-term interest and monetary and exchange | ||||||
variations, net | (719.4) | 90.4 | (54.4) | |||
Deferred tax expense (benefit) | 103.7 | (100.9) | 29.6 | |||
Minority interest | 240.9 | 1.6 | (54.0) | |||
Assignment of rights to use | - | (19.7) | (3.6) | |||
Tax recovery | (110.1) | (94.5) | - | |||
Other | (42.3) | (16.1) | (26.2) | |||
Total resulting from operations | 1,367.3 | 955.4 | 1,474.4 | |||
Shareholders | - | - | - | |||
Capital increase | 1,132.7 | 110.9 | 2.5 | |||
Advance for future capital increase | - | - | 0.2 | |||
Effect of working capital on change in interests | 33.9 | - | - | |||
1,166.6 | 110.9 | 2.7 | ||||
Third parties | - | - | - | |||
Transfer from long-term receivables to current assets | 194.6 | 168.3 | 66.4 | |||
Decrease in long-term assets | 295.9 | 28.4 | 123.3 | |||
Increase in long-term liabilities | 3,612.9 | 2,290.1 | 2,036.1 | |||
Dividends receivable | 2.0 | 2.0 | 2.0 | |||
Tax incentives | 53.1 | 32.4 | 91.4 | |||
Working capital of merged companies, net | 285.8 | 84.1 | - | |||
Other | 14.6 | - | 5.9 | |||
4,458.9 | 2,605.3 | 2,325.1 | ||||
Total funds provided | 6,992.8 | 3,671.6 | 3,802.2 | |||
F-10
Braskem S.A. and Its Subsidiaries | |
Consolidated Statements of Changes | |
in Financial Position | |
Years Ended December 31 | |
In millions of reais | (continued) |
2007 | 2006 | 2005 | ||||
Financial resources were used for | ||||||
Dividends proposed and interest on own capital | 302.9 | 66.2 | 331.3 | |||
Transfer from long-term liabilities to current liabilities | 330.1 | 24.8 | 316.2 | |||
Transfer from long-term financing to current liabilities | 482.6 | 1,767.8 | 504.2 | |||
Settlement of long-term financing | 399.6 | 634.0 | 617.2 | |||
Decrease of current liabilities, net | 3.9 | 4.3 | 117.8 | |||
Redemption of shares/debentures | 110.1 | 192.7 | 9.1 | |||
Decrease in long-term liabilities | 423.1 | 148.7 | 3.1 | |||
Increase in long-term receivables | 204.2 | 202.4 | 507.7 | |||
Permanent assets | - | - | - | |||
Investments | 1,980.5 | 483.0 | 22.5 | |||
Property, plant, equipment and intangible assets | 1,377.3 | 1,056.6 | 965.3 | |||
Deferred charges | 1,149.2 | 40.3 | 87.6 | |||
Total funds used | 6,763.5 | 4,620.8 | 3,482.0 | |||
Increase (decrease) in working capital | 229.3 | (949.2) | 320.2 | |||
Changes in working capital | ||||||
Current assets | - | - | - | |||
At the end of the year | 6,596.3 | 5,951.0 | 5,837.5 | |||
At the beginning of the year | 5,951.0 | 5,837.5 | 5,668.3 | |||
645.3 | 113.5 | 169.2 | ||||
Current liabilities | - | - | - | |||
At the end of the year | 5,922.9 | 5,506.9 | 4,444.2 | |||
At the beginning of the year | 5,506.9 | 4,444.2 | 4,595.2 | |||
416.0 | 1,062.7 | (151.0) | ||||
Increase (decrease) in working capital | 229.3 | (949.2) | 320.2 | |||
The accompanying notes are an integral part of these financial statements.
F-11
Braskem S.A. and Its Subsidiaries |
Consolidated Statements of Cash Flows |
Years Ended December 31 |
In millions of reais |
2007 | 2006 | 2005 | ||||
Net income for the year | 547.6 | 101.3 | 625.8 | |||
Adjustment to reconcile net income to cash provided | ||||||
Depreciation, amortization and depletion | 1,203.6 | 962.4 | 841.5 | |||
Amortization of goodwill, net | 106.2 | 57.8 | 152.5 | |||
Equity in earnings of associated companies | 0.1 | (0.8) | (1.3) | |||
Provision for loss on investments | 0.9 | - | - | |||
Tax incentives | (3.4) | (20.5) | (39.2) | |||
Foreign exchange variation on investments | 11.6 | 1.4 | (3.6) | |||
Adjustment to realization value of investments | ||||||
and others | (8.1) | (11.4) | 2.2 | |||
Loss on permanent assets disposed off | 29.1 | 1.4 | 2.2 | |||
Interest and monetary and exchange variations, net | (627.5) | (1.3) | (133.1) | |||
Minority interest | 240.9 | 1.6 | (54.0) | |||
Tax recovery | (110.1) | (94.5) | - | |||
Deferred tax expense (benefit) | 103.3 | (100.9) | 29.6 | |||
Other | (42.5) | 5.3 | (30.9) | |||
Decrease (increase) in assets | ||||||
Other investments | 253.9 | (347.1) | (82.1) | |||
Trade accounts receivable | 493.8 | 53.9 | 161.7 | |||
Inventories | 28.3 | (148.2) | (51.5) | |||
Taxes recoverable | 313.5 | (462.5) | (130.3) | |||
Prepaid expenses | 48.4 | (56.7) | 16.0 | |||
Other receivables | 40.9 | (25.8) | (30.1) | |||
Increase (decrease) in liabilities | ||||||
Suppliers | 286.2 | 415.0 | 485.1 | |||
Taxes and contributions payable | (556.4) | (66.5) | (79.3) | |||
Tax incentives | 53.1 | 32.4 | 91.2 | |||
Advances from customers | (12.2) | (24.4) | (0.6) | |||
Other liabilities | (7.4) | 133.4 | (52.4) | |||
Net cash provided by operating activities | 2,393.8 | 405.3 | 1,719.4 | |||
Proceeds from sale of permanent assets | 28.8 | 0.9 | 1.8 | |||
Effect of cash received from acquired subsidiaries | 193.8 | - | - | |||
Additions to investments | (1,345.5) | (222.7) | (34.0) | |||
Additions to property, plant, equipment and | ||||||
intangible assets | (1,374.4) | (953.0) | (930.2) | |||
Additions to deferred charges | (1,081.8) | (40.3) | (87.6) | |||
Dividends received | 2.0 | 2.0 | 2.0 | |||
Net cash used in investing activities | (3,577.1) | (1,213.1) | (1,048.0) | |||
F-12
Braskem S.A. and Its Subsidiaries | |
Consolidated Statements of Cash Flows | |
Years Ended December 31 | |
In millions of reais | (continued) |
2007 | 2006 | 2005 | ||||
Short-term debt | - | - | - | |||
Issuances | 4,339.5 | 2,793.5 | 948.3 | |||
Repayment | (5,887.6) | (3,613.8) | (2,338.8) | |||
Long-term debt | - | - | - | |||
Issuances | 3,579.8 | 2,235.8 | 1,624.7 | |||
Repayment | (399.6) | (659.1) | (617.2) | |||
Quotas (shares) subject to mandatory redemption | - | - | 400.0 | |||
Related parties | - | - | - | |||
Issuances | 2.0 | 0.2 | 0.2 | |||
Repayment | (5.9) | (4.1) | (124.7) | |||
Dividends paid to shareholders and minorities | (43.8) | (343.4) | (208.7) | |||
Share issuance | 1.5 | 5.4 | 2.5 | |||
Treasury share re-issuances (purchases) | - | (192.7) | - | |||
Repurchase of shares | (60.2) | - | - | |||
Other | 0.6 | (2.6) | (16.0) | |||
Net cash provided by (used in) financing activities | 1,526.3 | 219.2 | (329.7) | |||
Increase (decrease) in cash and cash equivalents | 343.0 | (588.6) | 341.7 | |||
Represented by | ||||||
Cash and cash equivalents, at the beginning of the year | 1,547.1 | 2,135.7 | 1,794.0 | |||
Cash and cash equivalents, at the end of the year | 1,890.1 | 1,547.1 | 2,135.7 | |||
Increase (decrease) in cash and cash equivalents | 343.0 | (588.6) | 341.7 | |||
Supplemental information | ||||||
Cash paid during the year for | ||||||
Interest | 478.9 | 537.0 | 508.0 | |||
Income taxes | 296.5 | 1.6 | 16.8 | |||
The accompanying notes are an integral part of these financial statements.
F-13
Braskem S.A. and Its Subsidiaries | |
Consolidated Statements of Cash Flows | |
Years Ended December 31 | |
In millions of reais | (continued) |
Major non-cash transactions
2007/2006/2005
(i) Issue of Company shares and use of treasury shares to acquire minority interests in its subsidiaries (Notes 1(c)(ii)(vii) and (x)) affecting minority interests and share capital in the amount of R$ 19.2 and R$ 105.0 to Politeno and Polialden respectively.
2007
(ii) Conversion of debentures into shares in the amount of R$ 1,113.5 under Brazilian GAAP (Note 15).
(iii) Advance to Ultrapar as a result of the acquisition of preferred shares held by minority shareholders of companies acquired in the amount of R$ 633.5 under Brazilian GAAP. (Note 11(c)).
2007/2006
(iv) Acquisition of Politeno shares settled in November 2007 in the amount of R$ 247.5 under Brazilian GAAP. (Note 1(c)(vi)).
Braskem S.A. and its Subsidiaries2005
Consolidated Balance Sheets
at December 31
In millions(v) Capitalization ofreais
2005 | 2004 | |||
Assets | ||||
Current assets | ||||
Cash and cash equivalents | 2,135.7 | 1,794.0 | ||
Other investments | 145.8 | 21.6 | ||
Trade accounts receivable | 1,493.3 | 1,630.6 | ||
Inventories | 1,567.5 | 1,562.4 | ||
Taxes recoverable | 324.9 | 476.0 | ||
Deferred income tax | 2.4 | 10.7 | ||
Related parties | 0.6 | 0.6 | ||
Advances to suppliers | 40.0 | 31.6 | ||
Other receivables | 58.9 | 83.0 | ||
Prepaid expenses | 48.8 | 57.8 | ||
5,817.9 | 5,668.3 | |||
Long-term assets | ||||
Trade accounts receivable | 49.7 | 23.1 | ||
Related parties | 40.6 | 35.2 | ||
Other investments | 0.3 | 62.0 | ||
Judicial deposits and compulsory loan | 36.5 | 28.9 | ||
Deferred income tax | 292.6 | 315.3 | ||
Taxes recoverable | 559.4 | 251.3 | ||
Inventories | 75.8 | 50.4 | ||
Other assets | 27.2 | 9.1 | ||
1,082.1 | 775.3 | |||
Permanent assets | ||||
Investments | ||||
Joint-controlled companies | 6.2 | 5.8 | ||
Associated companies | 25.8 | 4.9 | ||
Other investments | 34.2 | 35.8 | ||
Property, plant and equipment | 5,964.2 | 5,457.6 | ||
Deferred charges, including goodwill | 2,660.4 | 3,102.7 | ||
8,690.8 | 8,606.8 | |||
Total assets | 15,590.8 | 15,050.4 | ||
Braskem S.A. and its Subsidiaries
Consolidated Balance Sheets—(Continued)
at December 31
investment with assignment of right to use in millionsthe amount ofreais
2005 | 2004 | |||||
Liabilities and shareholders’ equity | ||||||
Current liabilities | ||||||
Suppliers | 2,580.2 | 2,060.0 | ||||
Loans and financing | 895.0 | 1,785.9 | ||||
Debentures | 9.3 | 5.0 | ||||
Quotas (shares) subject to mandatory redemption | 225.4 | 22.4 | ||||
Salaries and payroll charges | 136.0 | 98.5 | ||||
Taxes and contributions payable | 192.2 | 179.7 | ||||
Income taxes and social contribution payable | 19.0 | 51.5 | ||||
Interest on own capital and dividends payable | 299.2 | 191.6 | ||||
Advances from customers | 42.0 | 47.9 | ||||
Related parties | 3.1 | — | ||||
Insurance premiums payable | 3.2 | 53.2 | ||||
Other liabilities | 39.6 | 99.5 | ||||
4,444.2 | 4,595.2 | |||||
Long-term liabilities | ||||||
Suppliers | 29.7 | 74.1 | ||||
Loans and financing | 2,857.5 | 3,059.6 | ||||
Debentures | 1,599.3 | 1,167.9 | ||||
Quotas (shares) subject to mandatory redemption | 404.1 | 201.8 | ||||
Related parties | 3.0 | 115.8 | ||||
Deferred income tax | 10.4 | 11.7 | ||||
Taxes and contributions payable | 1,324.4 | 1,216.1 | ||||
Private pension plans | 65.1 | 64.8 | ||||
Other liabilities | 108.2 | 63.4 | ||||
6,401.7 | 5,975.2 | |||||
Deferred income | ||||||
Negative goodwill on investments in subsidiary companies | 87.9 | 93.2 | ||||
Minority interest | 121.2 | 203.1 | ||||
Shareholders’ equity | ||||||
Capital | 3,403.0 | 3,403.0 | ||||
Capital reserves | 396.8 | 344.8 | ||||
Revenue reserves | 849.3 | 489.3 | ||||
Treasury shares | (15.0 | ) | (15.0 | ) | ||
Retained earnings (accumulated deficit) | (98.3 | ) | (38.4 | ) | ||
4,535.8 | 4,183.7 | |||||
Total liabilities and shareholders’ equity | 15,590.8 | 15,050.4 | ||||
R$ 58.2 under Brazilian GAAP. (Note 11(b)).
The accompanying notes are an integral part of these financial statements.
F-14
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
1 Operations
(a) Braskem S.A. ("Braskem") and its Subsidiaries
Consolidated Statementssubsidiaries, including its jointly-controlled companies (together, "we", "us", "our" or "the Company"), is the largest integrated petrochemical cracker and thermoplastics producer in Brazil, and produces a diversified portfolio of Operations
Years Ended December 31
In millionspetrochemical products. Braskem's principal corporate objective is manufacturing, selling, importing and exporting chemical and petrochemical products and fuels, as well as producing and supplying utilities to companies in the Camaçari Petrochemical Complex, in Bahia, and the Triunfo Petrochemical Complex, in Rio Grande do Sul, Brazil and rendering of reais,except amounts per shares
2005 | 2004 | 2003 | |||||||
Gross sales | |||||||||
Domestic market | 14,099.1 | 13,579.4 | 10,046.1 | ||||||
Foreign market | 2,944.2 | 2,620.8 | 2,688.5 | ||||||
Taxes, freights and return on sales | (3,968.2 | ) | (3,810.7 | ) | (2,434.4 | ) | |||
Net sales revenue | 13,075.1 | 12,389.5 | 10,300.2 | ||||||
Cost of sales and services rendered | (10,361.7 | ) | (9,223.0 | ) | (8,224.6 | ) | |||
Gross profit | 2,713.4 | 3,166.5 | 2,075.6 | ||||||
Operating expenses (income) | |||||||||
Selling | 261.9 | 291.0 | 167.0 | ||||||
General and administrative | 525.2 | 386.0 | 321.4 | ||||||
Investment in associated companies | |||||||||
Equity in the results | (1.3 | ) | (0.7 | ) | (0.8 | ) | |||
Amortization of goodwill (negative goodwill), net | 152.5 | 152.7 | 256.0 | ||||||
Foreign exchange variation | (3.6 | ) | 9.6 | (22.4 | ) | ||||
Tax incentives and other | (37.8 | ) | (54.0 | ) | (62.3 | ) | |||
Depreciation and amortization | 355.6 | 359.7 | 193.5 | ||||||
Financial expenses | 675.8 | 1,307.2 | 720.8 | ||||||
Financial income | 33.6 | (68.6 | ) | (9.2 | ) | ||||
Other operating income, net | (22.8 | ) | (43.0 | ) | (55.5 | ) | |||
1,939.1 | 2,339.9 | 1,508.5 | |||||||
Operating income | 774.3 | 826.6 | 567.1 | ||||||
Non-operating expenses, net | (25.2 | ) | (29.8 | ) | (4.5 | ) | |||
Income before income tax and social contribution | 749.1 | 796.8 | 562.6 | ||||||
Income tax and social contribution | |||||||||
Current | (147.7 | ) | (226.5 | ) | (146.9 | ) | |||
Deferred | (29.7 | ) | 141.4 | 25.6 | |||||
Income before minority interest | 571.7 | 711.7 | 441.3 | ||||||
Minority interest | 54.1 | (24.6 | ) | (226.2 | ) | ||||
Net income for the year | 625.8 | 687.1 | 215.1 | ||||||
Net income per shares outstanding at the end of the year —R$ (considering the retroactive effect of the 2005 reverse share split for 2004 and 2003) | |||||||||
1.7285 | 1.8977 | 0.7858 | |||||||
services to those companies.
The accompanying notescompanies acquired (Note 1(c)(xi)) are an integral partconsidered separate segments, resulting in a total of these financial statements.
Statement of Changes in Shareholders’ Equity
In millions ofreais
Capital Reserves | Revenue reserve | ||||||||||||||||||||||
Capital | Capital Restatement | Tax Incentives | Other | Legal | Retained earnings | Treasury Share | Retained earnings (Accumulated Deficit) | Total | |||||||||||||||
At December 31, 2002 | 1,845.4 | 2.3 | 714.9 | 0.6 | — | — | (30.4 | ) | (711.0 | ) | 1,821.8 | ||||||||||||
Capital increase | 42.0 | (2.3 | ) | — | — | — | — | — | — | 39.7 | |||||||||||||
Tax incentives | — | — | 28.8 | — | — | — | — | — | 28.8 | ||||||||||||||
Treasury share exchange | — | — | — | — | — | — | 7.2 | — | 7.2 | ||||||||||||||
Net income for the year | — | — | — | — | — | — | — | 215.1 | 215.1 | ||||||||||||||
At December 31, 2003 | 1,887.4 | — | 743.7 | 0.6 | — | — | (23.2 | ) | (495.9 | ) | 2,112.6 | ||||||||||||
Capital increase (Notes 1(c) and 20 (a)) | 1,515.6 | — | — | — | — | — | — | — | 1,515.6 | ||||||||||||||
Exchange of shares (Note 1 (b)) | — | — | — | — | — | — | 8.2 | — | 8.2 | ||||||||||||||
Absorption of accumulated losses (Note 19 (a)) | — | — | (463.2 | ) | — | — | — | — | 463.2 | — | |||||||||||||
Tax incentives | — | — | 63.7 | — | — | — | — | — | 63.7 | ||||||||||||||
Prescribed dividends | — | — | — | — | — | — | — | 0.7 | 0.7 | ||||||||||||||
Interest on own capital | — | — | — | — | — | — | — | (170.0 | ) | (170.0 | ) | ||||||||||||
Net income for the year | — | — | — | — | — | — | — | 687.1 | 687.1 | ||||||||||||||
Appropriations: | |||||||||||||||||||||||
Legal reserve | — | — | — | — | 34.6 | — | — | (34.6 | ) | — | |||||||||||||
Proposed dividends | — | — | — | — | — | — | — | (34.2 | ) | (34.2 | ) | ||||||||||||
Retained earnings | — | — | — | — | — | 454.7 | — | (454.7 | ) | — | |||||||||||||
At December 31, 2004 | 3,403.0 | — | 344.2 | 0.6 | 34.6 | 454.7 | (15.0 | ) | (38.4 | ) | 4,183.7 | ||||||||||||
Tax incentives | — | — | 52.0 | — | — | — | — | — | 52.0 | ||||||||||||||
Interest on own capital (Note 20 (e)) | — | — | — | — | — | — | — | (270.0 | ) | (270.0 | ) | ||||||||||||
Net income for the year | — | — | — | — | — | — | — | 625.8 | 625.8 | ||||||||||||||
Appropriations: | |||||||||||||||||||||||
Legal reserve | — | — | — | — | 34.3 | — | — | (34.3 | ) | — | |||||||||||||
Proposed dividends | — | — | — | — | — | — | — | (55.7 | ) | (55.7 | ) | ||||||||||||
Retained earnings | — | — | — | — | — | 325.7 | — | (325.7 | ) | — | |||||||||||||
At December 31, 2005 | 3,403.0 | — | 396.2 | 0.6 | 68.9 | 780.4 | (15.0 | ) | (98.3 | ) | 4,535.8 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
Braskem S.A. and its Subsidiaries
Consolidated Statements of Changes in Financial Position
Years Ended December 31
In million ofreais
2005 | 2004 | 2003 | |||||||
Financial resources were provided by: | |||||||||
Operations | |||||||||
Net income for the year | 625.8 | 687.1 | 215.1 | ||||||
Expenses (income) not affecting working capital: | |||||||||
Depreciation, amortization and depletion | 841.5 | 798.1 | 575.2 | ||||||
Amortization of goodwill (negative goodwill), net | 152.5 | 152.7 | 256.0 | ||||||
Investment in associated companies | |||||||||
Equity in the results | (1.3 | ) | (0.7 | ) | (0.8 | ) | |||
Foreign exchange variation | (3.6 | ) | 9.6 | (22.4 | ) | ||||
Tax incentives and other | (39.2 | ) | (37.4 | ) | (62.3 | ) | |||
Adjustment to investments realization value | 2.2 | (16.0 | ) | 3.8 | |||||
Impairment and disposal of long-lived assets | 5.1 | 23.7 | 70.1 | ||||||
Long-term interest and monetary variations, net | (54.4 | ) | (94.9 | ) | (96.2 | ) | |||
Deferred tax expense (benefit) | 29.7 | (141.4 | ) | (25.6 | ) | ||||
Minority interest | (54.1 | ) | 24.6 | 226.2 | |||||
Other | (30.0 | ) | 39.0 | 93.0 | |||||
Total resulting from operations | 1,474.2 | 1,444.4 | 1,232.1 | ||||||
Shareholders | |||||||||
Capital increase | 2.5 | 1,211.0 | — | ||||||
Advance for future capital increase | 0.2 | 0.2 | 2.9 | ||||||
Exchange of treasury stock | — | 8.2 | — | ||||||
2.7 | 1,219.4 | 2.9 | |||||||
Third parties | |||||||||
Transfer from long-term receivables to current assets | 46.9 | 516.7 | 374.2 | ||||||
Decrease in long-term assets | 123.3 | 61.1 | 964.2 | ||||||
Increase in long-term liabilities | 2,036.1 | 3,187.3 | 934.2 | ||||||
Dividends receivable | 2.0 | — | 1.2 | ||||||
Tax incentives | 91.4 | 112.5 | (65.0 | ) | |||||
Other | 5.8 | 0.6 | (0.2 | ) | |||||
2,305.5 | 3,878.2 | 2,208.6 | |||||||
Total funds provided | 3,782.4 | 6,542.0 | 3,443.6 | ||||||
Braskem S.A. and its Subsidiaries
Consolidated Statements of Changes in Financial Position—(Continued)
Years Ended December 31
In millions ofreais
2005 | 2004 | 2003 | |||||||
Financial resources were used for: | |||||||||
Increase in long-term receivables | 507.6 | 123.7 | 168.3 | ||||||
Dividends proposed | 331.3 | 209.8 | 5.5 | ||||||
Transfer from long-term liabilities to current liabilities | 316.1 | 48.4 | 1,627.3 | ||||||
Transfer from long-term financing to current liabilities | 504.2 | 2,172.3 | 27.4 | ||||||
Settlement of long-term financing | 617.2 | 1,017.3 | — | ||||||
Decrease of current liabilities, net | 117.8 | 55.5 | — | ||||||
Decrease in long-term liabilities | 3.1 | 126.1 | 108.5 | ||||||
Redemption of shares | 9.1 | — | — | ||||||
Permanent assets | |||||||||
Investments | 22.5 | 23.6 | 71.7 | ||||||
Property, plant and equipment | 815.8 | 442.3 | 223.8 | ||||||
Deferred charges | 237.1 | 549.4 | 255.3 | ||||||
Total funds used | 3,481.8 | 4,768.4 | 2,487.8 | ||||||
Increase in working capital | 300.6 | 1,773.6 | 955.8 | ||||||
Current assets | |||||||||
At the end of the year | 5,817.9 | 5,668.3 | 4,167.4 | ||||||
At the beginning of the year | 5,668.3 | 4,167.4 | 3,617.8 | ||||||
149.6 | 1,500.9 | 549.6 | |||||||
Current liabilities | |||||||||
At the end of the year | 4,444.2 | 4,595.2 | 4,867.9 | ||||||
At the beginning of the year | 4,595.2 | 4,867.9 | 5,274.1 | ||||||
(151.0 | ) | (272.7 | ) | (406.2 | ) | ||||
Increase in working capital | 300.6 | 1,773.6 | 955.8 | ||||||
The accompanying notes are an integral part of these financial statements.
Braskem S.A. and its Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31
In millions ofreais
2005 | 2004 | 2003 | |||||||
Net income for the year | 625.8 | 687.1 | 215.1 | ||||||
Adjustments to reconcile net income to cash provided by operating activities: | |||||||||
Depreciation, amortization and depletion | 841.5 | 798.1 | 575.2 | ||||||
Amortization of goodwill (negative goodwill), net | 152.5 | 152.7 | 256.0 | ||||||
Equity in earnings of associated companies | (1.3 | ) | (0.7 | ) | (0.8 | ) | |||
Foreign exchange variation | (3.6 | ) | 9.6 | (22.4 | ) | ||||
Tax incentives and other effects of investments in associated companies | (39.2 | ) | (37.4 | ) | (62.3 | ) | |||
Adjustment to realization value of investments | 2.2 | (16.0 | ) | 3.8 | |||||
Loss on permanent assets disposed of | 2.2 | 23.7 | 52.4 | ||||||
Interest and monetary and exchange variations | (133.1 | ) | (336.2 | ) | (494.0 | ) | |||
Deferred tax expense (benefit) | 29.7 | (141.4 | ) | (25.6 | ) | ||||
Minority interest | (54.1 | ) | 24.6 | 226.2 | |||||
Other | (30.9 | ) | 18.5 | 66.4 | |||||
Decrease (increase) in assets: | |||||||||
Other investments | (82.1 | ) | 47.8 | 126.5 | |||||
Trade accounts receivable | 161.7 | (451.7 | ) | (242.8 | ) | ||||
Fair market value of derivative financial instruments | — | (4.1 | ) | 33.8 | |||||
Inventories | (51.5 | ) | (389.6 | ) | (197.7 | ) | |||
Taxes recoverable | (130.3 | ) | 289.4 | 321.2 | |||||
Prepaid expenses | 16.0 | 29.6 | 26.0 | ||||||
Other receivables | (30.1 | ) | 28.1 | 186.4 | |||||
Increase (decrease) in liabilities: | |||||||||
Suppliers | 485.1 | 1,152.1 | (612.2 | ) | |||||
Taxes and contributions payable | (79.3 | ) | 174.3 | (40.6 | ) | ||||
Tax incentives | 91.2 | 112.5 | (65.0 | ) | |||||
Advances from customers | (0.6 | ) | (212.3 | ) | 153.0 | ||||
Other liabilities | (52.4 | ) | (42.7 | ) | 118.3 | ||||
Net cash provided by operating activities | 1,719.4 | 1,916.0 | 596.9 | ||||||
Proceeds from sale of permanent assets | 1.8 | — | 17.5 | ||||||
Additions to property, plant and equipment | (780.7 | ) | (442.2 | ) | (223.7 | ) | |||
Additions to investments | (34.0 | ) | (23.6 | ) | (71.7 | ) | |||
Additions to deferred charges | (237.1 | ) | (549.4 | ) | (255.3 | ) | |||
Dividends received | 2.0 | 0.8 | 63.8 | ||||||
Net cash used in investing activities | (1,048.0 | ) | (1,014.4 | ) | (469.4 | ) | |||
Braskem S.A. and its Subsidiaries
Consolidated Statements of Cash Flows—(Continued)
Years Ended December 31
In million ofreais
2005 | 2004 | 2003 | |||||||
Short-term debt | |||||||||
Issuances | 948.3 | 2,059.9 | 416.4 | ||||||
Repayments | (2,338.8 | ) | (4,595.7 | ) | (1,259.4 | ) | |||
Long-term debt | |||||||||
Issuances | 1,624.7 | 2,454.2 | 1,693.5 | ||||||
Repayments | (617.2 | ) | (991.6 | ) | (389.3 | ) | |||
Quotas (shares) subject to mandatory redemption | 400.0 | 88.3 | — | ||||||
Related companies | |||||||||
Issuances | 0.2 | 39.9 | 833.6 | ||||||
Repayments | (124.7 | ) | (109.2 | ) | (843.2 | ) | |||
Dividends paid to shareholders and minority interests | (208.7 | ) | (4.9 | ) | (71.6 | ) | |||
Share issue | 2.5 | 1,211.0 | — | ||||||
Treasury share | — | 8.2 | — | ||||||
Other | (16.0 | ) | 5.9 | (0.9 | ) | ||||
Net cash provided by (used in) financing activities | (329.7 | ) | 166.0 | 379.1 | |||||
Increase in cash and cash equivalents | 341.7 | 1,067.6 | 506.6 | ||||||
Represented by | |||||||||
Cash and cash equivalents, at the beginning of the year | 1,794.0 | 726.4 | 219.8 | ||||||
Cash and cash equivalents, at the end of the year | 2,135.7 | 1,794.0 | 726.4 | ||||||
Increase in cash and cash equivalents | 341.7 | 1,067.6 | 506.6 | ||||||
Supplemental information | |||||||||
Cash paid during the year for: | |||||||||
Interest | 508.0 | 1,029.4 | 675.2 | ||||||
Income taxes | 16.8 | 13.9 | 0.3 | ||||||
Major non-cash transactions | |||||||||
- Corporate reorganization transactions involving companies under common control (Note 1(b)). |
| ||||||||
- Exchange of debt in an aggregate principal amount of R$ 243.0 and debentures of 10th issue for the 11th issue of debentures (Note 16). |
| ||||||||
- Exchange of debt amounting to R$ 145.1 for the 12th issue of debentures (Note 16). |
|
The accompanying notes are an integral part of these financial statements.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
1 Operations
The Company’s operations are structured in four Business Units:seven business units: Basic Petrochemicals; Polyolefins,Polyolefins; Vinyls; Business Development; Copesul; Ipiranga Petroquímica; and Business Development.Ipiranga Química.
(b) On May 16, 2007, the Company announced the temporary discontinuance of its PET resin production unit, located at Camaçari, Bahia. Braskem will continue to supply PET resin to all its customers through purchase agreements entered into with M&G Polímeros Brasil S.A. while the implementation of lower cost technology is being evaluated for the production unit.
(c) Formation of Braskem |
Since its inception on August 16, 2002, the Company has undergone a major corporate restructuring process, disclosed to the market through material event notices. The major developments during 2003, 20042005, 2006 and 20052007 can be summarized as follows:
Industrial S.A.'s shares |
In February 2003, Braskem made a public exchange offer for the remaining voting share capital of Nitrocarbono S.A (“Nitrocarbono”) not owned by the Company. On February 13, 2003, immediately following Braskem’s purchase of the shares tendered in this exchange offer, Braskem owned 99.99% of the voting share capital of Nitrocarbono, representing 93.80% of its total shares capital.
On March 31, 2003, OPP Química S.A. (“OPP Química”), Econômico Empreendimentos S.A. (“ESAE”) and Nitrocarbono, were legally merged into the Company. Before Braskem’s legal merger with OPP Química, Odebrecht Química S.A. (“Odequi”) transferred the shares of OPP Química that it owned to the Company.
On July 31, 2003, we sold 75% of the total capital of our subsidiary Norcell S.A. (“Norcell”) to affiliates of Klabin S.A. (“Klabin”) for R$ 74.6. This amount was originally to be received in 32 quarterly installments beginning in October 2003, but in September 2003 we negotiated early settlement of this receivable for a discount of R$ 28.1. In connection with this transaction, we agreed to transfer an additional 10.54% of Norcell’s total capital to Klabin in exchange for 4.99% of the common shares of Cetrel S.A. – Empresa de Proteção Ambiental (“Cetrel”) owned by Klabin. As a result, the Company’s participation in Cetrel’s total capital increased from 27.17% to 33.92%.
In July 2003, the Company increased its direct and indirect participation in the voting capital of its subsidiaries Trikem S.A (“Trikem”) and Polialden Petroquímica S.A. (“Polialden”) to 87.9% and 100%, respectively, representing 53.6% and 56.3% of Trikem’s and Polialden’s total capital, respectively, in transactions with the minority shareholders Nissho Iwai Corporation and Mitsubishi Chemical Corporation (“Mitsubishi”). Mitsubishi sold its participations in Trikem and Polialden for R$ 28.0 and R$ 21.6, respectively, which includes R$ 5.4 payable when the claim brought by Polialden’s
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
shareholders is settled. Additionally, further consideration of R$ 16.2 is payable to Mitsubishi should settlement of this claim be favorable to Polialden. Nissho Iwai Corporation exchanged its participations in Trikem and Polialden for a participation in Braskem resulting in an increase in Braskem’s capital of R$ 39.7.
On December 4, 2003, immediately following a Brazilian public exchange offer for the outstanding minority interests of Trikem in exchange for shares of the Company, we owned 52.3% of the total capital of Trikem. At an extraordinary general meeting held on January 15, 2004, the Company’s shareholders approved the upstream merger of Trikem into Braskem. As a result of the upstream merger, the Company acquired the remaining minority interests representing 46.4% of the total share capital of Trikem. The Company’s capital was increased by R$ 304.6 through the issue of 8,136,165,484 Class A preferred shares to be delivered to other shareholders of Trikem. Common shares were increased by 0.5% through the conversion of 121,948,261 Class A preferred shares into common shares.
Under an agreement for Purchase and Sale of Shares, dated February 3, 2004, the Company purchased the outstanding minority shareholders of Copene Monômeros Especiais S.A. (“Monômeros”), becoming owner of 100% of the shares of this subsidiary. The acquisition price totaled R$ 14.8, corresponding to the book value of the shares acquired at December 31, 2003. On March 31, 2004, the Extraordinary General Meeting approved the upstream merger of Monômeros into Braskem.
On December 14, 2004, the Board of Directors approved the use of 505,050,433 Class A preferred shares of the Company, held in treasury, to be exchanged for 47,846,610 preferred shares of the subsidiary Polialden, held with third parties. In this transaction, the Company recorded negative goodwill of R$ 28.8.
In February 2005, underpursuant to a Share Purchase and Sale Agreement entered into with Petrobras Química –- Petroquisa S.A. ( “Petroquisa” ),("Petroquisa"), the Company acquired 23,465,165 shares corresponding to 13.74% of the share capital of Companhia Alagoas Industrial S.A. (“Cinal”("CINAL"), for R$ 13.4. In this transaction, the Company recorded goodwill of R$ 0.4, which has been recognized in deferred charges.fully amortized.
(ii) Merger of Odebrecht Química S.A.
("Odequi") into Braskem
TheAt the Extraordinary General Meeting, held on March 31, 2005, shareholders approved the legal merger of Odequi into Braskem.
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Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(iii) Petroquisa option to increase its interest in
the voting share capital of the Company
On April 29, 2005, Odebrecht S.A. ("Odebrecht"), Nordeste Química S.A. ("Norquisa"), ODBPAR Investimentos S.A. ("ODBPAR") and Petroquisa signed the second amendment of an agreement whereby Petroquisa was granted an option to increase its interest in the voting share capital of the Company by up to 30%, through the subscription of new shares of (i) petrochemical companies located at the Triunfo Petrochemical Complex, in Rio Grande do Sul; and (ii) other petrochemical companies considered strategic by the Company.
However, on March 31, 2006, due to absence of a final agreement on the terms and conditions, Petroquisa chose not to exercise the option to increase its percentage holding in the Company's voting share capital.
(iv) Joint venture with Petroquímica Paulínia S.A.
("Petroquímica Paulínia")
At a meeting held on June 22, 2005, the boards of directors of the Company and Petroquisa approved capital expenditures of US$ 240240.0 million to build a plant for the production of polypropilenepolypropylene in Paulínia, São Paulo. The investment will bewas made through the joint venture company Petroquímica Paulínia, S.A. (“Petroquímica Paulínia”), which was organizedincorporated on September 16, 2005.
(v) Formation of Braskem Argentina S.R.L.
At a meeting held on November 8, 2005, the board of directors of the Company approved the formation of an entity in Argentina, named Braskem Argentina S.R.L., as a limited partnership, having as partners the Company and Braskem Distribuidora, holding 98% and 2% of the capital, respectively.
(vi) Acquisition of Politeno Indústria e
Comércio S.A. ("Politeno") shares
On April 4, 2006, Braskem acquired from Suzano Petroquímica, Sumitomo Chemical and Itochu Corporation 100% of the common and preferred shares of Politeno held by those companies, which comprised 62.2% of Politeno's total share capital.
Following such acquisition, Braskem held 100% of the voting share capital and 96.16% of the total share capital of Politeno, a company located in the Northeast Petrochemical Complex, with an annual production capacity of 360 thousand metric tons of polyethylene. The initial consideration paid by Braskem was R$ 237.5 (equivalent to US$ 111.3), which was subject to adjustment based on the performance of the entity acquired.
F-16
Braskem S.A. and its SubsidiariesTable of Contents
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
NotesThe final amount paid for the shares was computed in November 2007, based on Politeno's average performance over the 18 months subsequent to the Consolidated Financial Statements—(Continued)execution of the purchase and sale agreement, in accordance with the difference between the prices of polyethylene and those of ethylene in the Brazilian market, audited by an independent appraisal firm appointed by Braskem and the former shareholders of Politeno. The balance due by Braskem, amounting to R$ 247.5, was paid in January 2008 and as of December 31, 2007, was recorded in current liabilities, under "Creditors for acquisition of investments". This provision gave rise to goodwill of R$ 174.1.
(vii) Merger of Polialden Petroquímica S.A.
("Polialden")
The Extraordinary General Meeting held on May 31, 2006 approved the merger of Polialden into the Company, through an exchange of shares and based on the book value of Polialden's shareholders' equity as of March 31, 2006, in the amount of R$ 289.9. The exchange ratio of Polialden shares for Braskem shares was determined based on the market value of shareholders' equity as of March 31, 2006, according to appraisal reports issued by an independent appraisal firm. This merger provision, resulted in the issuance of new shares by Braskem for the minority interests which exchanged shares (Note 20(a)), and in a cash payment by Braskem to minority interests that did not accept the share exchange.
Preferred shares of Polialden held by third parties were exchanged for Braskem class A preferred shares at the ratio of 33.62 class A preferred shares of Braskem for each 1,000 preferred shares of Polialden, which corresponded to an increase of 6.76% if compared to the ratio derived from the appraisal reports of the market value of shareholders' equity, as shown below:
Braskem | Polialden | |||
Current number of shares issued and outstanding | 362,523,521 | 645,253,380 | ||
Market value of shareholders' equity (in R$) | 8,202,482,686.96 | 459,721,902.03 | ||
Value per share based on the market value of | ||||
shareholders' equity (in R$) | 22.626 | 0.713 | ||
Exchange ratio - Shareholders' equity at market values | 31.49 | 1.00 |
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Braskem | Polialden | |||
Book value of shareholders' equity (in R$) | 4,650,559,014.63 | 289,940,899.44 | ||
Value per share based on the book value (in R$) | 12.828 | 0.449 | ||
Ratio of exchange of Polialden preferred shares for | ||||
Braskem class "A" preferred shares in the merger | 33.62 | 1.00 |
The equity variations determined during the period from the merger base date to the completion of the merger were recorded in the statement of operations of Braskem as equity in earnings.
The balance of goodwill as of the merger date amounted to R$ 337.3 and was based on expectations of future profitability. Such amount was reclassified to deferred charges after the merger. Negative goodwill after the merger was no longer related to any investment and, therefore, the amount of R$ 53.0 was written off on the statement of operations under amortization of goodwill (negative goodwill), net in 2006.
Upon the merger of Polialden, the Company's share capital was increased by R$ 105.3, through the issuance of 7,878,725 class A preferred shares. The Company's share capital after the merger totaled R$ 3,508.3. These shares were fully entitled for distributions in respect of net income in 2006.
(viii) Cinal spin-off
From May 19, 2006 through June 9, 2006 the Company acquired 13.18% of the minority interests in Cinal. The purchase price was R$ 10.9, and the goodwill recorded was R$ 0.1. Following the acquisition, the Extraordinary General meeting held on July 20, 2006 approved the partial spin-off of Cinal and the related merger of Cinal's industrial assets into the Company. The spin-off did not have any impact in the consolidated financial statements of the Company, because Cinal was under common control.
(ix) Formation of Braskem Europe B.V.
At a meeting held on September 29, 2006, the board of directors of the Company approved the formation of an entity in The Netherlands, named Braskem Europe B.V. ("Braskem Europa"), as a limited liability partnership, with the Company as partner holding 100% of the capital.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(x) Merger of Politeno
At the Extraordinary General Meeting held on April 2, 2007, shareholders approved the merger of Politeno, based on its shareholders' equity as of December 31, 2006, amounting to R$ 499.0. The exchange ratio of Politeno shares for Braskem shares was determined based on the companies' shareholders' equity at book value, based on appraisal reports issued by an independent appraisal firm.
The Company's share capital was increased by R$ 19.2 to R$ 3,527.4 through the issuance of 1,533,670 class A preferred shares.
In order to maintain the current capital structure of Braskem, comprising 1/3 common shares and 2/3 preferred shares, the conversion of 486,530 class A preferred shares into common shares was approved.
(xi) Acquisition of Ipiranga Group
On April 18, 2007, Ultrapar Participações S.A. ("Ultrapar") for itself and acting as agent for the Company and Petróleo Brasileiro - S.A. - Petrobras ("Petrobras"), acquired for R$ 2,113.1 the equivalent to 66.2% of common shares and 13.9% of preferred shares issued by Refinaria de Petróleo Ipiranga S.A. ("RPI"), 69.2% of common shares and 13.5% of preferred shares issued by Distribuidora de Produtos de Petróleo Ipiranga S.A. ("DPPI"), and 3.8% of common shares and 0.4% of preferred shares issued by Companhia Brasileira de Petróleo Ipiranga ("CBPI"), held by the controlling shareholders of the Ipiranga Group. The Company and Petrobras paid part of the purchase price (R$ 1,394.7) pursuant to an agency agreement among the parties.
Pursuant to the agreement among Ultrapar, Braskem and Petrobras, the Company now controls certain petrochemical assets, represented by Ipiranga Química S.A. ("Ipiranga Química"), Ipiranga Petroquímica S.A. ("IPQ") and IPQ's interest in Companhia Petroquímica do Sul ("Copesul"). Assets associated with oil refining operations held by RPI are shared on equal terms by Petrobras, Ultrapar and Braskem.
Under the agency agreement, Ultrapar was responsible for carrying out a corporate reorganization of the acquired companies, with the purpose of segregating the assets assigned to each acquiring company. The stages of this process include the following:
(a) Tag-along public tender offer for the acquisition of the common shares of RPI, DPPI and CBPI.
(b) Merger of outstanding shares of RPI, DPPI and CBPI into Ultrapar.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(c) Segregation of assets, as follows: (i) transfer of the petrochemical assets then held by Ultrapar, to be subsequently delivered to Braskem and Petrobras, in accordance with the agency agreement; and (ii) spin-off of CBPI in order to transfer the northern distribution assets to a subsidiary of Petrobras.
As referred to in item (a) above, on October 22, 2007 a public tender offer auction was carried out for the acquisition of outstanding common shares of DPPI and RPI, at a price per share of R$ 112.88 and R$ 107.05, respectively. The acquisition included: (i) 82% of outstanding common shares of RPI, thus increasing Ultrapar's interest in voting share capital from 61.6% to 93.1%, and (ii) 77% of outstanding common shares of DPPI, thus increasing Ultrapar's interest in voting share capital from 84.2% to 96.1% . Total amount disbursed was R$ 473.0, of which Braskem disbursed R$ 156.7.
The CBPI auction was conducted on November 8, 2007. The offer price was R$ 64.91 per share.
Through a public tender offer on October 5, 2007, the Company's subsidiary EDSP58 Participações Ltda. ("EDSP58") acquired 34,040,927 common shares of Copesul for R$ 38.02 per share, representing 98.63% of the total shares eligible to participate in the offer. The financial settlement occurred on October 10, 2007 and the amount paid was approximately R$ 1,294.2, of which Braskem paid R$ 776.5. On October 18, 2007, the Brazilian Securities Commission (Comissão de Valores Mobiliários - "CVM") approved the delisting of Copesul's common shares from the BOVESPA.
As less than 5% of Copesul's share capital remained outstanding, Copesul's board of directors negotiated directly with these shareholders and purchased their common shares, offering the same price per share that was offered in the public tender offer.
On December 6, 2007, the merger of EDSP58 into Copesul was approved. As a consequence, 35,710,357 common shares in Copesul held by EDSP58 were cancelled and Copesul's share capital was decreased by R$ 378.4, resulting in share capital at December 31, 2005, 2004 and 20032007 of R$ 531.6.
All amounts in millionsOn June 28, 2007, Braskem's indirect subsidiary EDSP67 Participações S.A. acquired 100% ofreais, unless otherwise indicated the outstanding shares of IPQ, representing 7.61% of its total share capital. Braskem paid R$ 117.9 for this acquisition. As a result of this acquisition, the CVM approved the delisting request of IPQ on July 18, 2007.
F-20
Notes to |
at December 31, 2007, 2006 and 2005 |
All amounts in |
(xii) Acquisition of Shares and Merger of Tegal
On April 29, 2005,30, 2007, Braskem acquired 3.11% and 1.06% of quotas in TEGAL - Terminal de Gases Ltda. ("Tegal"), owned by Oxiteno Nordeste S.A. Indústria e Comércio ("Oxiteno") and Dow Brasil Nordeste Industrial Ltda., respectively. Following the acquisition, Braskem held 100% of the capital of Tegal, a company located in the Aratu Port, at Camaçari, Bahia, that provides services for the storage and movement of liquefied gases. The amount paid by Braskem was R$ 1.1, giving rise to goodwill of R$ 0.5, fully amortized to income, in accordance with CVM Instruction 247/96.
At the Extraordinary General Meeting held on July 31, 2007, shareholders approved the merger of Tegal, based on its shareholders' equity as of May 31, 2007, amounting to R$ 12.9. Changes in shareholders' equity between May 31, 2007 and the date of merger were recognized in the statement of operations of Braskem.
(xiii) Conversion of ODBPAR INV S.A. Debentures
On June 18, 2007, Odebrecht S.A. (“Odebrecht”("Odebrecht"), Nordeste Químicathrough ODBPAR INV S.A. (“Norquisa”("ODBPAR INV"), ODBPARexercised its right to convert into shares of Braskem 100% of its 59,185 convertible subordinated debentures, in accordance with the indenture, upon maturity of the debentures. The debentures were converted into shares of Braskem on July 31, 2007 (Note 20(a)).
(xiv) Acquisition of Petroflex Shares
On August 15, 2007, the Company exercised its right of first refusal to acquire shares issued by Petroflex Indústria e Comércio S.A. ("Petroflex") owned by SPQ Investimentos S.A. (“ODBPAR”)e Participações Ltda., a subsidiary of Suzano, due to the sale of control of such subsidiary to Petrobras.
Upon transfer of the shares, on October 31, 2007, Braskem's interest in the total share capital of Petroflex increased from 20.12% to 33.53%, and Petroquisa signed the second amendment of an agreement whereby Petroquisa was granted an option to increase its shareinterest in the voting share capital increased from 20.14% to 33.57% . The right of first refusal was exercised at the book value of Petroflex, and in September 2007, the Company paid R$ 61.0 for this acquisition.
In December 2007, Braskem entered into a Share Purchase Agreement under which the Company has agreed to sell all its shares in Petroflex which has been classified as an Investment held for sale at the book value of the Company by upnet investment of R$136.7, to 30%Lanxess Deutschland GmbH for an aggregate price of R$ 252.1. On April 1, 2008, this transaction was completed, as described in Note 30(d).
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(xv) Petrobras Transaction
On November 30, 2007, Braskem entered into an investment agreement with our controlling shareholder Odebrecht, Petrobras, Petroquisa and Odebrecht's subsidiary Nordeste Química S.A.- Norquisa, or "Norquisa", throughwhich we refer to as the subscription of new shares"Petrobras Investment Agreement". We refer to the transactions under the Petrobras Investment Agreement collectively as the "Petrobras Transaction". Under the Petrobras Investment Agreement, the Petrobras Transaction will be completed in two phases. In the first phase Petroquisa will contribute the following companies (i) ownership interest in petrochemical companies located at the Triunfo Petrochemical Complex, in Rio Grande do Sul; and (ii) ownership interests in other petrochemical companies considered of a strategic nature by the Company.
The process was completed on March 31, 2006 when, in the absence of agreement on the terms and conditions, Petroquisa chose notassets to exercise the option to increase its percentage holding in the Company’s voting capital. Accordingly, Petroquisa’s interests remains at 10.02% and 8.45%Braskem:
In the second phase Petroquisa will contribute the following assets to Braskem:
In exchange for these assets, assuming that the Triunfo Option is exercised in full, Braskem will issue an aggregate of 46,903,320 common shares and 56,531,819 class A preferred shares to Petroquisa. In the event that Petroquisa contributes less than 100% of the share capital of Triunfo to Braskem, Petrobras and Petroquisa may, in their discretion, contribute an amount in cash equivalent to the economic value of the share capital of Triunfo not contributed to Braskem or elect to have the number of shares issued to them reduced to reflect the economic value of the share capital of Triunfo not contributed to Braskem.
As a result of the completion of the Petrobras Transaction, assuming that the Triunfo Option is exercised in full, Petrobras and Petroquisa will own, directly and indirectly, 25.0% of our total share capital, including 30.0% of our voting share capital, and Braskem will own, directly and indirectly:
F-22
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
The Petrobras Transaction will be implemented through an exchange of shares (incorporação de ações) to be approved by the shareholders of Braskem, Copesul, Ipiranga Química, Ipiranga Petroquímica, Paulínia and Triunfo, on or prior to May 30, 2008, see Note 30 (f).
(xvi) Capital increase of Petroquímica Paulínia S.A. ("Petroquímica Paulínia")
On November 16, 2007, the Company respectively.and Petrobras paid up for Petroquímica Paulínia shares with shares of CPP - Companhia Petroquímica Paulista ("CPP") at market value. On November 20, 2007, the merger of CPP into Petroquímica Paulínia was approved.
(d) Administrative Council for Economic Defense - CADE
On April 1, 2004,25, 2007, the BoardCompany and CADE entered into an agreement to preserve the reversibility of Directors approved an initial public offeringIpiranga transaction, under which Braskem has undertaken to maintain the normal conditions of Class A preferred shares in Brazil and overseas, through a capital increase.
On September 22 and 27, 2004, the Board of Directors approved the issuance of 12,285,000,000 and 1,170,000,000 shares, respectively,free competition in the amountpolyethylene and polypropylene markets prevalent before April 18, 2007 and to refrain from taking the following actions with respect to the petrochemical assets of R$ 90.00 per thousand shares, for the shares sold in Brazil and US$ 31.38 per thousand shares, forIpiranga Group, until a final decision on the shares sold overseas (collectively, the “Global Offering”).transaction is issued:
The offering closed on September 28, 2004, after the payment of capital
In order to increase the trading liquidity of the Company’s shares, the shareholders at an Extraordinary General Meeting held on March 31, 2005, approved the reverse split of all classes of Braskem’s shares, on the basis of one share for each 250 existing shares. As a result,corporate structure that would imply a change in control;
As from May 16, 2005,Ipiranga product lines;
F-23
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
With regard to Copesul, CADE expressed no objections to the reverse share splittransaction, since the Company and Petrobras will continue to be controlling and minority shareholders, respectively, as prior to April 18, 2007 under the changeshareholders' agreement then in effect.
CADE may decide to review the agreement at any time or may do so at the request of the companies if, in the ratio fordiscretion of CADE's full board, the ADSs, respectively.
The net income per outstanding share for each ofparties are able to prove that the years presented in the consolidated Statements of Operations was as follows:
Without giving effect to the reverse share split (per thousand shares) | As presented after giving effect to the reverse share split (per share) | |||
Year ended December 31, 2005 | 6.9138 | 1.7285 | ||
Year ended December 31, 2004 | 7.5907 | 1.8977 | ||
Year ended December 31, 2003 | 3.1433 | 0.7858 |
Braskem S.A. and its Subsidiaries
Notesreasons that gave rise to the Consolidated Financial Statements—(Continued)agreement are no longer relevant.
at December 31, 2005, 2004 and 2003(e) Corporate governance
All amounts in millions ofreais, unless otherwise indicated
In February 2003, Braskem agreed to comply with Level 1 of the Corporate Governance Standards of the Bovespa, which mainly commits the Company to (1) improve(i) provide additional information provided to the market,market; and (2) to(ii) increase the percentage of capital available for trading in the market, which Braskem satisfied through the Global Offering (Note 1(c)),in 2004, reaching a free float of approximately 47% of free float.. The Company intends to reach Level 2 of the Corporate Governance Standards of the Bovespa in due course.time.
On December 2, 2005, the Company was one of 28 companies selected to comprise the first Corporate Sustainability Index focused on the financial market. The index, designed by Bovespa, together with capital market professional entities, as well as Fundação Getúlio Vargas, Instituto Ethos and Ministry of Environment, is intended to provide investors with a portfolio option comprised of shares in companies known for their social responsibility commitment and corporate sustainability. The index also aims at fostering and encouraging other businesses to engage in sound corporate practices.
In accordance with Article 54, § 3 of Law 8,884/94, notice of the concentration resulting from the change in control of Braskem (see Note 1(b)) was given in a timely manner to the Brazilian anti-trust authorities. In July 2002, the Secretariat for Economic Monitoring of the Finance Ministry issued a favorable opinion on the transactions. In May 2003, the favorable opinion of the Secretariat for Economic Rights was published without any restrictions. The transactions were submitted for the review and analysis of the Administrative Council for Economic Defense (“CADE”), and in November 2003 CADE Prosecution Service also approved the transaction without any restrictions. In February 2004, the transactions were examined by the Federal Department of Public Prosecution, which also recommended the approval of the transactions. On September 14, 2005, CADE approved the transactions by unanimous vote, with no restrictions.
2 Presentation of the Financial Statements
The financial statements have been prepared in accordance with the accounting practices adopted in Brazil (“("Brazilian GAAP”GAAP"), which are based on:
The consolidated financial statements prepared by the Company for statutory purposes, which include the stand-alone financial statements of Braskem S.AS.A. (holding company), were filed with the CVM on February 6, 2006.20, 2008. The financial statements presented herein do not include the holding company’scompany's stand-alone financial statements and are not intended to be used for statutory purposes.
F-24
The following reclassifications and procedures were made in 2004 and 2003, for a better presentation and comparison among 2005, 2004 and 2003 in the financial statements:
Braskem S.A. and its SubsidiariesContents
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
These reclassifications and procedures for 2004 and 2003 can be summarized as follows:
At December 31, 2004 | |||||||||
As previously disclosed | Reclassifications | As reclassified herein | |||||||
Current assets | 5,334.1 | 334.2 | 5,668.3 | ||||||
Long-term assets | 965.9 | (190.6 | ) | 775.3 | |||||
Permanent assets | 8,592.9 | 13.9 | 8,606.8 | ||||||
Total assets | 14,892.9 | 157.5 | 15,050.4 | ||||||
Current liabilities | 4,536.7 | 58.5 | 4,595.2 | ||||||
Long-term liabilities | 5,871.5 | 103.7 | 5,975.2 | ||||||
Shareholders’ equity | 4,187.5 | (3.8 | ) | 4,183.7 | |||||
For the year ended December 31, 2004 | |||||||||
As previously disclosed | Reclassifications | As reclassified herein | |||||||
Net sales revenue | 12,192.0 | 197.5 | 12,389.5 | ||||||
Gross profit | 3,113.7 | 52.8 | 3,166.5 | ||||||
Investment in associated companies | |||||||||
Equity in the results | (18.0 | ) | 17.3 | (0.7 | ) | ||||
Operating income | 824.3 | 2.3 | 826.6 | ||||||
Net income for the year | 690.9 | (3.8 | ) | 687.1 | |||||
For the year ended December 31, 2003 | |||||||||
As previously disclosed | Reclassifications | As reclassified herein | |||||||
Net sales revenue | 10,135.8 | 164.4 | 10,300.2 | ||||||
Gross profit | 2,046.5 | 29.1 | 2,075.6 | ||||||
Investment in associated companies | |||||||||
Equity in the results | (13.6 | ) | 12.8 | (0.8 | ) | ||||
Operating income | 569 | (1.9 | ) | 567.1 | |||||
Net income for the year | 215.1 | — | 215.1 |
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
3 Significant accounting practicesAccounting Practices
(a) Use of estimates |
In the preparation of the financial statements, it is necessary to use estimates to record certain assets, liabilities and transactions. The Company’sCompany's financial statements include, therefore, various estimates regarding derivatives and the selection of the useful lives of property, plant and equipment, deferred charges, amortization periods, for deferred charges, as well as provisions for contingencies, income tax pension plan assumptions and other similar amounts.
(b) Revenue recognition and other |
Revenue is recognized for products sales when risk and title are transferred to the Company’sCompany's customers.
Title generally passes to customer when the product is delivered to our customers or their freight carriers. Shipping and handlingFreight expenses are reported within net sales and amounted R$ 340.2,609.1, R$ 285.4366.9 and R$ 171.1340.2 in 2007, 2006 and 2005, 2004 and 2003, respectively.
The provisions for income tax and the value-added tax on sales and services (Imposto sobre Circulação de Mercadorias e Serviços, or “ICMS”"ICMS") are recorded gross of the tax incentive portions, with the amounts related to tax exemptionexemptions and reductiontax reductions recorded withinunder capital reserves.
Interest and monetaryMonetary and exchange variations onof foreign currency assets and liabilities are classified as financial income and financial expenses, respectively.
The Company has recognized in the results of each year the change in market value of derivative instruments related to liabilities indexed to foreign currency or international interest rates. See Notes 22 and 23.
Advertising expenses are recorded when incurred and were not significant for the years presented herein.
The Company has recognized in the results of each year the change in market value for derivative instruments related to liabilities indexed to foreign currency or international interest rates. At December 31, 2005, the Company had outstanding derivative instruments with negative market value of R$ 15.8 which are all indexed to foreign currency financings. At December 31, 2004, the Company had no outstanding derivative contracts.
Earnings per share are calculated based on the actual number of outstanding shares on the balance sheet date.
F-25
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(c) Current and non-current assets
Cash and cash equivalents consist principally of cash deposits and marketable securities or investments maturing within 90 days or less or which can be liquidated immediately in a secondary market (Note 5)4).
Other investments refers basically to marketable securities that are recorded at the lower of cost and market value, including accrued income earned up to the balance sheet date which is not significantly different from market value.
Derivative instruments are recorded at their estimated fair value, based on market quotations for similar instruments as to future foreign exchange and future interest rates.
The allowance for doubtful accounts is set up at an amount considered sufficient to cover probable losses on the realization of the receivables, taking into account the Company’sCompany's loss experience, and includes amounts subject to litigation.experience. In order to determine the overall adequacy of the allowance for doubtful accounts, we evaluate the amount and characteristics of our accounts receivable on a quarterlymonthly basis.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
Inventories are stated at average purchase or production cost, which is lower than replacement cost or realizablerealization value. Imports in transit are stated at the accumulated cost of each import. Inventories of consumable materials ("Warehouse") are classified in current assets or long-term assets, based onconsidering their history of consumption.
Deferred tax assets are recognized in accordance with CVM Deliberation N°no. 273 and CVM Instruction NoNo. 371, when recoverability is more likely than not.probable. Valuation allowances are recorded for the amounts that will be recovered after ten years. Tax deductible goodwill generates an income tax benefit to the extent that it has been amortized.
Judicial deposits are stated net of the related contingent liabilities, pursuant to CVM Deliberation 489/05.
The otherOther assets are shown at realizable values, including, where applicable, accrued income and monetary variations, or at cost in the case of prepaid expenses.
(d) Permanent assets |
Permanent assets are stated at cost indexed for inflation through December 31, 1995, and take into consideration the following:
F-26
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
the amount paid and the book value of net assets acquired. Total goodwill is divided between the fair values of assets and expected future profitability of the investees and is amortized over the useful life of the related assets or up to ten yearyears in the case of future profitability. Goodwill in legally merged companies is transferred to property, plant and equipment and deferred charges, when based on asset appreciation and future profitability of the investees, respectively. Other investments are carried at the cost of acquisition adjusted for any permanent loss, if applicable;
Braskem S.A.2006 and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004(e) Current and 2003
All amounts in millions ofreais, unless otherwise indicated
These liabilities are stated at known or estimated amounts, including accrued charges and monetary and exchange adjustments, as applicable.
Defined benefit pension plans are accounted for based on the calculations made by independent actuaries, based on assumptions provided by the Company.
Provisions are recorded based on (i) current legislation (even when management believes that this legislation may be considered unconstitutional); (ii) the need to eliminate contingent gains arising from the offsetthat may be obtained by offsetting credits received as a result of credits resulting from litigation;judicial claims; and (iii) estimated payments of indemnities considered probable.
F-27
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(f) Deferred income
Deferred income includes negative goodwill of merged companies, supported by the expected future profitabilityresults of those companies.
(g) Consolidated financial statements |
The consolidated financial statements of cash flows were prepared in accordance with relevant IBRACON standard.
Braskem S.A.the consolidation principles set forth in the Brazilian Corporate Law and its Subsidiaries
Notes torules of the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004CVM and 2003
All amounts in millions ofreais, unless otherwise indicated
4 Consolidated Financial Statements
The consolidated financial statements include the financial statements of Braskem, its subsidiaries, jointly-controlled entitiescompanies, and SPEsSpecial Purpose Entities ("SPEs") in which the Company has direct or indirect share control, as shown below:
Interest in total share capital - % | ||||||||
Head office | ||||||||
(country) | 2007 | 2006 | 2005 | |||||
Subsidiaries | ||||||||
Braskem Argentina S.R.L. | Argentina | 100.00 | 100.00 | 100.00 | ||||
Braskem America Inc. ("Braskem America") (i) | USA | 100.00 | 100.00 | 63.68 | ||||
Braskem Distribuidora de Combustíveis Ltda. (xii) | Brazil | 100.00 | 100.00 | 100.00 | ||||
Braskem Europa (ii) | Holland | 100.00 | 100.00 | - | ||||
Braskem Incorporated Ltd. | Cayman Islands | 100.00 | 100.00 | 100.00 | ||||
Braskem Participações S.A. | Brazil | 100.00 | 100.00 | 100.00 | ||||
Braskem International Ltd. ("Braskem International") (iii) | Bahamas | - | - | 100.00 | ||||
CINAL (iv) | Brazil | 100.00 | 100.00 | 86.82 | ||||
Companhia Petroquímica do Sul ("COPESUL") | Brazil | 62.70 | - | - | ||||
CPP - Companhia Petroquímica Paulista ("CPP") (xix) | Brazil | - | 79.70 | 79.70 | ||||
Ipiranga Química (xvii) | Brazil | 60.00 | - | - | ||||
Polialden (v) | Brazil | - | - | 63.68 | ||||
Politeno (vi) | Brazil | - | 96.16 | - | ||||
Tegal Terminal de Gases Ltda. ("Tegal") (vii) | Brazil | - | 95.83 | 90.79 | ||||
Investimentos Petroquímicos Ltda. ("IPL") (xiii) | Brazil | - | - | 100.00 | ||||
Braskem Importação e Exportação Ltda. | Brazil | 100.00 | 100.00 | 100.00 | ||||
Overseas (xiv) | Cayman Islands | - | 100.00 | 100.00 | ||||
Lantana | Bahamas | 100.00 | 100.00 | 100.00 | ||||
- | - | - | ||||||
Jointly-controlled companies (viii) | - | - | - | |||||
CETREL S.A. - Empresa de Proteção Ambiental ("CETREL") | Brazil | 53.61 | 49.03 | 48.02 |
F-28
Interest in total capital - % | |||||||||||
Head office (country) | 2005 | 2004 | 2003 | ||||||||
Subsidiaries | |||||||||||
Braskem Cayman Ltd. | (i | ) | Cayman Islands | 100.00 | 100.00 | 52.33 | |||||
Braskem Importação e Exportação Ltda. | (ii | ) | Brazil | 100.00 | 100.00 | 100.00 | |||||
Braskem Incorporated Ltd. | (iii | ) | Cayman Islands | 100.00 | 100.00 | 100.00 | |||||
Braskem International Ltd. | (iv | ) | Bahamas | 100.00 | 100.00 | 100.00 | |||||
Braskem Participações S.A. | (v | ) | Brazil | 100.00 | 100.00 | 100.00 | |||||
Cinal | (vi | ) | Brazil | 86.82 | 63.03 | 32.98 | |||||
Monômeros | (vii | ) | Brazil | — | — | 87.24 | |||||
Braskem Distribuidora de Combustíveis Ltda. | (viii | ) | Brazil | 100.00 | 100.00 | 100.00 | |||||
CPP - Companhia Petroquímica Paulista (“CPP”) | (ix | ) | Brazil | 79.70 | 90.71 | 90.71 | |||||
Investimentos Petroquímicos Ltda. | Brazil | 100.00 | 100.00 | 100.00 | |||||||
Lantana Trading Company Inc. | Bahamas | 100.00 | 100.00 | 100.00 | |||||||
Odequi | (x | ) | Brazil | — | 100.00 | 100.00 | |||||
Odebrecht Mineração e Metalurgia Ltda. | (xi | ) | Brazil | — | — | 52.33 | |||||
OPE Investimentos S.A. | (xii | ) | Brazil | — | — | 100.00 | |||||
OPP Finance Ltd. | (xiii | ) | Cayman Islands | — | — | 100.00 | |||||
Odequi Overseas Inc. | Cayman Islands | 100.00 | 100.00 | 100.00 | |||||||
Polialden | (xiv | ) | Brazil | 63.68 | 63.68 | 56.27 | |||||
Polialden América Inc. | (xiv | ) | USA | 63.68 | 63.68 | 56.27 | |||||
Proppet Overseas Ltd. | (xiii | ) | Bahamas | — | — | 100.00 | |||||
Tegal Terminal de Gases Ltda. (“Tegal”) | (xv | ) | Brazil | 90.79 | 90.79 | 89.43 | |||||
Trikem S.A. | (xvi | ) | Brazil | — | — | 52.33 | |||||
TRK Brasil Trust S.A. | (xi | ) | Brazil | — | — | 52.33 | |||||
Jointly-controlled entities | (xvii | ) | |||||||||
Cetrel | (xviii | ) | Brazil | 48.02 | 40.56 | 33.92 | |||||
Codeverde | (xix | ) | — | — | 35.44 | ||||||
Copesul | Brazil | 29.46 | 29.46 | 29.46 | |||||||
Politeno Indústria e Comércio S.A. (“Politeno”) | (xx | ) | Brazil | 33.96 | 33.88 | 33.88 | |||||
Petroflex | (xxi | ) | Brazil | 20.12 | 20.12 | 20.12 | |||||
Petroquímica Paulínia | (xxii | ) | Brazil | 93.75 | — | — | |||||
Special-purpose entities | (xxiii | ) | |||||||||
Chemical Fundo de Investimento em Direitos Creditórios (“Fundo Chemical”) | (xxiv | ) | Brazil | 11.58 | 10.65 | — | |||||
Chemical Fundo de Investimento em Direitos Creditórios (“Fundo Chemical II”) | (xxiv | ) | Brazil | 9.09 | — | ||||||
CSAM Orion Fund Limited (“Orion”) | (xxv | ) | Cayman Islands | — | 100.00 | — | |||||
Fundo Parin | Guernsey | 100.00 | — | ||||||||
Guardian-Protected Cell Company (“Guardian”) | Guernsey | 100.00 | 100.00 | ||||||||
Sol-Fundo de Aplicação em Cotas de Fundos de Investimento (“FIQ Sol”) | Brazil | 100.00 | 100.00 |
Braskem S.A. and its SubsidiariesTable of Contents
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
Braskem |
at December 31, 2007, 2006 and 2005 | |
All amounts in millions of | |
Interest in total share capital - % | ||||||||
Head office | ||||||||
(country) | 2007 | 2006 | 2005 | |||||
Companhia Petroquímica do Sul ("COPESUL") (xvi) | Brazil | 29.46 | 29.46 | |||||
Petroflex Indústria e Comércio S.A. (xviii) | Brazil | 33.53 | 20.12 | 20.12 | ||||
Petroquímica Paulínia (ix) | Brazil | 60.00 | 60.00 | 60.00 | ||||
Politeno (vii) | Brazil | - | - | 33.96 | ||||
Special-purpose entities ("SPEs") | ||||||||
Chemical Fundo de Investimento em Direitos Creditórios ("Chemical Fund") (xi) | Brazil | - | 100.00 | 11.58 | ||||
Chemical Fundo de Investimento em Direitos Creditórios ("Chemical Fund II") (xi) | Brazil | - | 9.19 | 9.09 | ||||
Fundo Parin | 100.00 | |||||||
("Fundo Chemical II") (xv) | Brazil | 9.09 | ||||||
Fundo Parin | Brazil | 100.00 | 100.00 | 100.00 |
(i) Became a direct subsidiary of Braskem after Polialden's merger into the Company on May 31, 2006 (Note 1(c)(vii)).
(ii) Start-up in September 2006 (Note 1(c)(ix)).
(iii) Liquidated in March 2006.
(iv) In June 2006, the Company acquired the remaining shares from minority stockholders (Note 1(c)(viii)).
(v) Merged into the Company on May 31, 2006 (Note 1(c)(vii)).
(vi) Jointly-controlled entity until March 31, 2006. In the second quarter of 2006, the Company acquired the remaining share control of Politeno (Note 1(c)(vi)).
(vii) Interest acquired from subsidiary.
(viii) Investments proportionally consolidated, pursuant to CVM Instruction 247/96.
(ix) Jointly-controlled entity as a result of shareholders' agreement provisions.
(x) Investments consolidated in accordance with CVM Instruction 408/04.
(xi) Interest corresponding to subordinated quotas held by Braskem.
(xii) Upon the merger of IPL, the investment in Braskem Importação e Exportação is held by Braskem Distribuidora.
(xiii) Merged into Braskem Distribuidora in September 2006.
F-29
Notes to the |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of |
(xiv) Company in process of liquidation. (xv) Liquidated in October 2006. (xvi) Investment proportionally consolidated through March 2007 in accordance with CVM Instruction 247/96. (xvii) Investment consolidated as from April 2007, in accordance with the terms of the Grupo Ipiranga acquisition agreement (Note 1(c)). (xviii) Consolidation of the results through November 30, 2007. (xix) Company merged into Petroquímica Paulínia in November 2007 (Note 1(c)(xvi) |
In the consolidated financial statements, the intercompany investments and equity in the results, as well as the intercompany assets, liabilities, income, expenses and unrealized gains arising from transactions between consolidated companies have been eliminated.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
Minority interestsThe minority interest in the equity and in the results of subsidiaries havehas been segregated in the consolidated balance sheets and statements of operations, respectively.operations. Minority interests correspondin the consolidated net income for 2007 include thirty-party interests in EDSP58, Politeno and Tegal calculated up to the respective participations in the capital of Cinal, CPP, Polialden and Tegal.
applicable merger dates.
Goodwill not eliminated on consolidation is reclassifiedclassified to a specific account in permanent assets in accordance with CVM Instruction Nº 247.247/96. Negative goodwill is reclassified to “Deferred income”presented under "Deferred income".
For a better presentation of the consolidated financial statements, the 0.24% of Braskem’s total capitalCompany's shares held by its subsidiary,subsidiaries, Braskem Participações S.A.,and Politeno, which arose from the corporate restructuring, hashave been reclassified to treasury shares."Treasury shares". Braskem's total shares and the percentage of interest in total share capital held by these subsidiaries are presented as follows:
Braskem | ||||
Participações (i) | Politeno(ii) | |||
Common shares | 580,331 | - | ||
Class A preferred shares | 290,165 | 2,186,133 | ||
Interest in total share capital - % | 0.24 | 0.60 |
(i) As of December 31, 2007 and 2006.
(ii) As of December 31, 2006.
F-30
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Pursuant to paragraph 1, Articlearticle 23 of CVM Instruction Nº 247247/96 and authorization by CVM Letter SNC Nº 003/2006,004/2008 and 005/2008, the Company has not proportionally consolidated the balance sheetfinancial statements of a pre-operating jointly-controlled company, Codeverde, at December 31, 2005the companies Companhia de Desenvolvimento Rio Verde - - CODEVERDE and 2004. Codeverde has no operations to date and is accounted for under the equity method. Its balance sheet information doesRPI. These subsidiaries' financial statements do not show significant changesamounts and doesdo not affect, in any material aspect, the Company’sCompany's consolidated financial statements.
Codeverde’s These subsidiaries' summary balance sheets and statements of operations, adjusted balance sheet is summarizedto the Company's accounting practices, are as follows:
Balance Sheet
Codeverde (*) | RPI | |||||||||
Unaudited | 2007 | 2006 | 2007 | |||||||
2005 | 2004 | |||||||||
Assets | ||||||||||
Current assets | 0.4 | 0.2 | 0.4 | 0.3 | 85.3 | |||||
Non-current assets | 0.1 | 0.1 | 3.4 | |||||||
Permanent assets | 43.6 | 42.6 | 46.6 | 45.0 | 34.8 | |||||
Total assets | 44.0 | 42.8 | 47.1 | 45.4 | 123.5 | |||||
Liabilities and stockholders’ equity | ||||||||||
Liabilities and stockholders' equity | ||||||||||
Current liabilities | 0.1 | — | 0.1 | 0.1 | 93.2 | |||||
Long-term liabilities | 1.1 | 1.0 | ||||||||
Stockholders’ equity | 42.8 | 41.8 | ||||||||
Non-current liabilities | 1.7 | 1.4 | 61.5 | |||||||
Shareholders' equity | 45.3 | 43.9 | (31.2) | |||||||
Total liabilities and stockholders’ equity | 44.0 | 42.8 | ||||||||
Total liabilities and stockholders' equity | 47.1 | 45.4 | 123.5 | |||||||
(*) In pre-operating stage.
F-31
Braskem S.A. and its SubsidiariesTable of Contents
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Statement of operations
RPI | ||
2007 | ||
Net sales | 621.0 | |
Cost of sales | (596.2) | |
Gross profit | 24.8 | |
Operating expenses, net | (23.2) | |
Operating income before financial results | 1.6 | |
Financial results | (5.0) | |
Non-operating results | 0.4 | |
Loss before taxes | (3.0) | |
Deferred income tax and social contribution, net | 1.9 | |
Loss for the year | (1.1) | |
F-32
Notes to the Consolidated Financial Statements—(Continued)Table of Contents
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
The balance sheets and statements of operations of jointly-controlled companies and SPEs can be summarized as follows:
Copesul (iii) | Cetrel (i) | Petroflex (ii) | ||||||||||||||||
Three-month | Eleven-month | |||||||||||||||||
period ended | period ended | |||||||||||||||||
March 31, 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | November 30, 2007 | 2006 | 2005 | ||||||||||
Assets | ||||||||||||||||||
Current assets | - | 1,261.8 | - | 31.8 | 25.5 | - | - | 605.0 | - | |||||||||
Long-term receivables | - | 154.6 | - | 11.9 | 12.3 | - | - | 31.3 | - | |||||||||
Permanent assets | - | 1,050.2 | - | 139.2 | 131.2 | - | - | 437.0 | - | |||||||||
Total assets | - | 2,466.6 | - | 182.9 | 169.0 | - | - | 1,073.3 | - | |||||||||
Liabilities and shareholders' equity | ||||||||||||||||||
Current liabilities | - | 840.7 | - | 24.2 | 20.3 | - | - | 390.7 | - | |||||||||
Long-term liabilities | - | 325.7 | - | 31.0 | 39.2 | - | - | 375.8 | - | |||||||||
Shareholders' equity | - | 1,300.2 | - | 127.7 | 109.5 | - | - | 306.8 | - | |||||||||
Total liabilities and shareholders' | ||||||||||||||||||
equity | - | 2,466.6 | - | 182.9 | 169.0 | - | - | 1,073.3 | - | |||||||||
Statement of operations | ||||||||||||||||||
Net sales | 1,727.3 | 6,299.2 | 5,552.6 | 106.2 | 106.2 | 98.2 | 1,300.7 | 1,361.5 | 1,373.2 | |||||||||
Cost of goods sold and services | ||||||||||||||||||
rendered | (1,397.2) | (5,292.3) | (4,610.4) | (70.4) | (74.0) | (79.6) | (1,105.3) | (1,197.0) | (1,088.9) | |||||||||
Gross profit | 330.1 | 1,006.9 | 942.2 | 35.8 | 32.2 | 18.6 | 195.4 | 164.5 | 284.3 | |||||||||
Operating expenses, net | (37.2) | (117.5) | (151.1) | (16.5) | (19.7) | (11.1) | (93.1) | (131.3) | (160.8) | |||||||||
Non operating income | ||||||||||||||||||
(expenses), net | (2.8) | (4.3) | 5.4 | (1.8) | 0.2 | 0.3 | (0.2) | 0.9 | (1.5) | |||||||||
Income before income tax and | ||||||||||||||||||
social contribution | 290.1 | 885.1 | 796.5 | 17.5 | 12.7 | 7.8 | 102.1 | 34.1 | 122.0 | |||||||||
Income tax and social | ||||||||||||||||||
contribution | (97.1) | (269.9) | (230.5) | (4.7) | (2.5) | (0.7) | (33.2) | (8.1) | (33.7) | |||||||||
Net income for the year | 193.0 | 615.2 | 566.0 | 12.8 | 10.2 | 7.1 | 68.9 | 26.0 | 88.3 | |||||||||
Copesul | Cetrel (i) | Petroflex (i) | |||||||||||||||||||||||||
2005 | 2004 | 2003 | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
Assets | |||||||||||||||||||||||||||
Current assets | 907.9 | 754.0 | 1,386.4 | 24.3 | 27.8 | 27.1 | 499.5 | 591.2 | 465.2 | ||||||||||||||||||
Long-term receivables | 154.9 | 294.8 | 445.3 | 15.0 | 12.9 | 8.7 | 29.1 | 35.8 | 32.1 | ||||||||||||||||||
Permanent assets | 1,125.8 | 1,158.8 | 1,230.3 | 111.5 | 108.3 | 107.2 | 384.3 | 330.4 | 297.0 | ||||||||||||||||||
Total assets | 2,188.6 | 2,207.6 | 3,062.0 | 150.8 | 149.0 | 143.0 | 912.9 | 957.4 | 794.3 | ||||||||||||||||||
Liabilities and stockholders’ equity | |||||||||||||||||||||||||||
Current liabilities | 701.6 | 745.7 | 1,052.2 | 20.9 | 26.4 | 20.0 | 474.9 | 363.7 | 334.3 | ||||||||||||||||||
Long-term liabilities | 246.5 | 307.1 | 950.1 | 31.9 | 66.0 | 57.7 | 159.1 | 338.0 | 290.2 | ||||||||||||||||||
Shareholders’ equity | 1,240.5 | 1,154.8 | 1,059.7 | 98.0 | 56.6 | 65.3 | 278.9 | 255.7 | 169.8 | ||||||||||||||||||
Total liabilities and stockholders’ equity | 2,188.6 | 2,207.6 | 3,062.0 | 150.8 | 149.0 | 143.0 | 912.9 | 957.4 | 794.3 | ||||||||||||||||||
Statement of operations | |||||||||||||||||||||||||||
Net sales revenue | 5,552.6 | 5,374.1 | 4,177.9 | 98.2 | 81.8 | 69.4 | 1,373.2 | 1,306.0 | 1,091.8 | ||||||||||||||||||
Cost of goods sold and services rendered | (4,610.4 | ) | (4,417.6 | ) | (3,773.1 | ) | (79.6 | ) | (64.1 | ) | (57.0 | ) | (1,088.9 | ) | (1,043.4 | ) | (947.5 | ) | |||||||||
Gross profit | 942.2 | 956.5 | 404.8 | 18.6 | 17.7 | 12.4 | 284.3 | 262.6 | 144.3 | ||||||||||||||||||
Operating (expenses), net | (151.1 | ) | (155.3 | ) | (208.5 | ) | (11.1 | ) | (25.3 | ) | (19.0 | ) | (160.7 | ) | (134.0 | ) | (92.8 | ) | |||||||||
Non-operating income (expenses), net | 5.4 | (0.8 | ) | (0.9 | ) | 0.3 | (1.1 | ) | 0.1 | (1.5 | ) | 0.5 | 1.5 | ||||||||||||||
Income (loss) before income tax and social contribution | 796.5 | 800.4 | 195.4 | 7.8 | (8.7 | ) | (6.5 | ) | 122.1 | 129.1 | 53.0 | ||||||||||||||||
Income tax and social contribution | (230.5 | ) | (242.0 | ) | (45.5 | ) | (0.7 | ) | — | — | (33.8 | ) | (30.5 | ) | 7.5 | ||||||||||||
Net income (loss) for the year | 566.0 | 558.4 | 149.9 | 7.1 | (8.7 | ) | (6.5 | ) | 88.3 | 98.6 | 60.5 | ||||||||||||||||
(i) Financial statements excluding non-mandatory asset revaluation effects to conform to the Company's accounting policies. (ii) Investment consolidated through November 2007 when the investment was classified as "held for sale". (iii) Investment consolidated as from April 1, 2007. F-33
(i) A development stage company. F-34
(i) Chemical Fund and Chemical Fund II are receivables securitization funds. Such funds are considered controlled SPEs and therefore consolidated for purposes of these financial statements. The senior quotas of these funds held by third-parties are recorded as liabilities in the consolidated financial statements.
F-35
Domestic investments are
5 Other Investments
F-36
The
The Company has a policy of realizing domestic trade accounts In December underlying customers. Changes in the allowance for doubtful accounts are as follows:
F-37
7 Inventories
(*) Based on management's expectation of utilization, part of the maintenance materials inventory was reclassified to long-term maintenance materials. |
Advances to suppliers and expenditures for imports in transit mainly relate to the acquisition of petrochemical naphtha, which is the main raw material used by the Company.
Changes in the provision for adjustment to realization value of inventories can be summarized as follows:
2007 | 2006 | |||
At the beginning of the year | 16.3 | 17.9 | ||
Additions and (reduction) charge to statement of operations | 3.0 | (1.6 ) | ||
At the end of the year | 19.3 | 16.3 | ||
F-38
2005 | 2004 | 2003 | ||||
At the beginning of the year | 12.8 | — | — | |||
Additions charged to statements of operations | 5.1 | 12.8 | — | |||
At the end of the year | 17.9 | 12.8 | — | |||
Braskem S.A. and its SubsidiariesTable of Contents
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
9 Related parties
Balances at December 31, 2005 | ||||||||||||||||
Current assets | Long-term receivables | Current liabilities | Long-term liabilities | |||||||||||||
Trade accounts receivable | Related parties | Related parties | Suppliers | Debentures | Related parties | Suppliers | Related Parties | |||||||||
Jointly-controlled companies | ||||||||||||||||
Copesul | 0.4 | — | — | 353.2 | — | — | — | — | ||||||||
Cetrel | — | — | — | 0.9 | — | 3.1 | — | — | ||||||||
Petroflex | 41.4 | — | — | — | — | — | — | — | ||||||||
Politeno | 18.5 | — | — | — | — | — | — | — | ||||||||
Associated company | ||||||||||||||||
Borealis | 8.7 | — | — | — | — | — | — | — | ||||||||
Related parties | ||||||||||||||||
Alberto Pasqualini - REFAP S.A (related party of Copesul) | 7.9 | — | — | 0.3 | — | — | — | — | ||||||||
Ipiranga Petroquímica S.A. (related party of Copesul) | 12.5 | — | — | 0.5 | — | — | — | — | ||||||||
Construtora Norberto Odebrecht S.A. (“CNO”) | — | 0.6 | — | 12.3 | — | — | — | — | ||||||||
Monsanto Nordeste S.A. (related party of Cetrel) | — | — | — | — | — | — | — | 3.0 | ||||||||
ODBPAR | — | — | — | — | 999.3 | — | — | — | ||||||||
Petróleo Brasileiro S.A.-Petrobrás (“Petrobrás”) | 0.1 | — | 35.3 | 59.1 | — | — | 21.5 | — | ||||||||
Petrobras Distribuidora S.A. | 0.1 | — | — | 20.9 | — | — | 1.6 | — | ||||||||
Other | — | 5.3 | — | — | — | — | — | |||||||||
At December 31, 2005 | 89.6 | 0.6 | 40.6 | 447.2 | 999.3 | 3.1 | 23.1 | 3.0 | ||||||||
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
Balances at December 31, 2004 | ||||||||||||||
Current assets | Long-term receivables | Current liabilities | Long-term liabilities | |||||||||||
Trade accounts receivable | Related parties | Related parties | Suppliers | Suppliers | Debentures | Related parties | ||||||||
Jointly-controlled companies | ||||||||||||||
Copesul | 0.3 | — | — | 9.8 | — | — | 102.9 | |||||||
Cetrel | 0.1 | — | — | 1.0 | — | — | — | |||||||
Petroflex | 40.6 | — | — | — | — | — | — | |||||||
Politeno | 13.2 | — | — | — | — | — | — | |||||||
Associated companies | ||||||||||||||
Borealis | 6.6 | — | — | — | — | — | — | |||||||
Related parties | ||||||||||||||
Ipiranga Petroquímica S.A. (related party of Copesul) | 4.1 | — | — | 0.4 | — | — | — | |||||||
Monsanto Nordeste S.A. (related party of Cetrel) | 0.3 | 0.6 | 0.5 | — | — | — | 1.9 | |||||||
Nitroclor Produtos Químicos S.A. (related party of Cetrel) | 1.7 | — | — | — | — | — | 1.6 | |||||||
Odbpar | — | — | — | — | — | 867.9 | — | |||||||
Petrobras | — | — | 31.5 | 336.0 | 35.0 | — | — | |||||||
Petrobras Distribuidora S.A. | 0.1 | — | — | 4.6 | 30.7 | — | — | |||||||
Pronor (related party of Cetrel) | 0.3 | — | — | — | — | — | 3.2 | |||||||
Other | — | — | 3.2 | — | — | — | 6.2 | |||||||
67.3 | 0.6 | 35.2 | 351.8 | 65.7 | 867.9 | 115.8 | ||||||||
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
Transactions | |||||||||||||||||||||
2005 | 2004 | 2003 | |||||||||||||||||||
Products sales/ revenues | Utilities, services and raw material purchases | Interest income and (expenses) | Products sales/ revenues | Utilities and raw material purchases | Interest income and (expenses) | Products sales/ revenues | Utilities and raw material purchases | Interest income and (expenses) | |||||||||||||
Jointly-controlled companies | |||||||||||||||||||||
Copesul | 4.5 | 1,814.3 | (1.7 | ) | 1.6 | 1,659.7 | (42.5 | ) | 72.0 | 1,220.9 | (80.2 | ) | |||||||||
Cetrel | 0.7 | 13.6 | — | 0.7 | 12.5 | — | 0.1 | 7.5 | — | ||||||||||||
Petroflex | 353.2 | — | — | 312.2 | — | — | 264.7 | — | — | ||||||||||||
Politeno | 696.0 | — | — | 623.1 | — | — | 451.4 | — | — | ||||||||||||
Associated companies | |||||||||||||||||||||
Borealis | 128.5 | — | — | 141.3 | — | — | 107.6 | — | (0.2 | ) | |||||||||||
Related parties | |||||||||||||||||||||
Refinaria Alberto Pasqualini—REFAP S.A. (related party of Copesul) | 35.8 | 636.5 | — | — | 114.3 | — | — | 163.8 | — | ||||||||||||
Ipiranga Petroquímica S.A. (related party of Copesul) | 1,207.2 | 25.6 | 1.2 | 504.8 | 28.2 | 2.0 | 358.2 | 78.9 | 7.4 | ||||||||||||
Construtora Norberto Odebrecht S.A. | — | 109.5 | — | — | 32.5 | — | — | — | — | ||||||||||||
Nitroclor Produtos Químicos (related party of Cetrel) | — | — | — | 0.8 | — | — | — | — | — | ||||||||||||
Monsanto Nordeste S.A. (related party of Cetrel) | — | — | — | 2.5 | — | — | — | — | — | ||||||||||||
ODBPAR | — | — | (131.5 | ) | — | — | — | — | — | — | |||||||||||
Petrobras (*) | — | 5,116.0 | 3.8 | — | 4,190.2 | — | 14.1 | 4,546.9 | 2.8 | ||||||||||||
Petrobras Distribuidora S.A. | — | 195.4 | — | 4.0 | 164.5 | — | — | — | — | ||||||||||||
Pronor (related party of Cetrel) | — | — | — | 1.6 | — | — | — | — | — | ||||||||||||
Other | — | — | — | — | — | 1.9 | — | — | 0.2 | ||||||||||||
2,425.9 | 7,910.9 | (128.2 | ) | 1,592.6 | 6,201.9 | (38.6 | ) | 1,268.1 | 6,018.0 | (70.0 | ) | ||||||||||
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of |
8RelatedParties
Balances at December 31, 2007 | ||||||||
Long-term | Current | |||||||
Current assets | receivables | liabilities | ||||||
Trade | Other | |||||||
accounts | accounts | Related | ||||||
receivable | receivable | parties | Suppliers | |||||
Jointly-controlled companies | ||||||||
CETREL | - | 1.4 | - | 0.1 | ||||
Petroflex | 457.1 | - | - | - | ||||
Petroquímica Paulina | - | - | 4.1 | - | ||||
Associated company | ||||||||
Borealis | 10.7 | - | - | - | ||||
Related parties | ||||||||
Refinaria Alberto Pasqualini - REFAP S.A. | ||||||||
(related party to Copesul) | 26.2 | - | - | - | ||||
CNO | 6.3 | - | - | 17.5 | ||||
Petrobras | 54.9 | - | 41.9 | 579.2 | ||||
Other | 0.8 | - | 2.5 | 2.7 | ||||
At December 31, 2007 | 556.0 | 1.4 | 48.5 | 599.5 | ||||
F-39
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Relatedparties(continued)
Balances at December 31, 2006 | |||||||||||
Current | Long-term | ||||||||||
assets | receivables | Current liabilities | Long-term liabilities | ||||||||
Trade | |||||||||||
accounts | Related | Related | |||||||||
receivable | parties | Suppliers | Debentures | Suppliers | parties | ||||||
Jointly-controlled companies | |||||||||||
CETREL | - | - | 0.6 | - | - | 2.0 | |||||
Copesul | 1.7 | - | 358.5 | - | - | - | |||||
Petroflex | 17.1 | - | - | - | - | - | |||||
Associated company | |||||||||||
Borealis | 2.8 | - | - | - | - | - | |||||
Related parties | |||||||||||
Refinaria Alberto Pasqualini - REFAP S.A. | |||||||||||
(related party to Copesul) | 1.2 | - | 5.8 | - | - | - | |||||
Ipiranga Petroquímica S.A. (related party | |||||||||||
to Copesul) | 4.6 | - | 1.0 | - | - | - | |||||
CNO | 7.7 | - | 6.7 | - | - | - | |||||
Monsanto Nordeste S.A. (related party to | |||||||||||
CETREL) | - | - | - | - | - | 2.8 | |||||
ODBPAR | - | - | - | 1,130.8 | - | - | |||||
Petrobras | 49.7 | 38.8 | 615.8 | - | 17.6 | - | |||||
Other | 0.3 | 1.9 | 9.5 | - | - | - | |||||
At December 31, 2006 | 85.1 | 40.7 | 997.9 | 1,130.8 | 17.6 | 4.8 | |||||
F-40
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Relatedparties(continued)
Transactions | |||||||||||||||||
2007 | 2006 | 2005 | |||||||||||||||
Utilities, | Utilities, | Utilities, | |||||||||||||||
Products | services and | Interest | Products | services and | Interest | Products | services and | Interest | |||||||||
sales/ | raw material | income | sales/ | raw material | income | sales/ | raw material | income | |||||||||
revenues | purchases | (expenses) | revenues | purchases | (expenses) | revenues | purchases | (expenses) | |||||||||
Subsidiary | |||||||||||||||||
Copesul | - | 472.9 | - | - | - | - | - | - | - | ||||||||
Jointly - controlled companies | |||||||||||||||||
Copesul | - | - | - | 12.2 | 1,941.9 | (0.8) | 4.5 | 1,814.3 | (1.7) | ||||||||
Cetrel | 0.1 | 10.0 | - | 0.6 | 11.2 | - | 0.7 | 13.6 | - | ||||||||
Petroflex | 336.3 | - | - | 365.5 | - | 1.6 | 353.2 | - | - | ||||||||
Politeno | - | - | - | 166.7 | - | - | 696.0 | - | - | ||||||||
Associated companies | |||||||||||||||||
Borealis | 143.0 | - | - | 122.1 | - | - | 128.5 | - | - | ||||||||
Related parties | |||||||||||||||||
Refinaria Alberto Pasqualini | |||||||||||||||||
- REFAP S.A. (related | |||||||||||||||||
party of Copesul) | 543.2 | 1,654.2 | - | 22.8 | 264.9 | - | 35.7 | 636.5 | - | ||||||||
Ipiranga Petroquímica S.A. | |||||||||||||||||
(related party of Copesul) | - | - | - | 555.5 | 5.7 | 0.1 | 1,207.2 | 25.6 | 1.2 | ||||||||
Construtora Norberto | |||||||||||||||||
Odebrecht S.A. | - | 120.3 | - | - | 136.2 | - | - | 109.5 | - | ||||||||
Monsanto Nordeste S.A. | |||||||||||||||||
(related party of Cetrel) | 13.7 | - | - | 3.7 | - | - | - | - | - | ||||||||
ODBPAR | - | - | - | - | - | - | - | - | (131.5) | ||||||||
Petrobras (*) | 286.1 | 5,713.1 | (46.6) | 78.9 | 5,390.5 | (2.8) | - | 5,116.0 | 3.8 | ||||||||
Petrobras Distribuidora S.A. | - | - | - | - | 298.1 | - | - | 195.4 | - | ||||||||
Petroquímica União (related | |||||||||||||||||
party of Petroflex) | - | - | - | - | 22.9 | - | - | - | - | ||||||||
Odebrecht | - | - | (74.8) | - | - | (131.4) | - | - | - | ||||||||
Other | 1.7 | - | - | 2.4 | - | - | - | - | - | ||||||||
1,324.1 | 7,970.5 | (121.4) | 1,330.4 | 8,071.4 | (133.3) | 2,425.8 | 7,910.9 | (128.2) | |||||||||
(*) The Company is dependent on Petrobras for supply of raw materials.
F-41
Braskem S.A. and its SubsidiariesTable of Contents
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Trade accounts receivable and suppliers include the balances resulting from transactions with related parties, arising mainly from the following sales and purchases of goods and services:
Sales by Braskem:
Sales of Braskem |
| |
Company | Products/inputs | |
Borealis | Thermoplastic resins | |
| ||
Petroflex | Butadiene |
Purchases by Braskem:
Petrobras |
Gasoline | |
| ||
Purchases of Braskem | ||
Company | Products/inputs/services | |
Cetrel | Utilities, treatment and incineration of waste | |
Petrobras | Naphtha | |
Petrobras Distribuidora | Fuel | |
CNO | Construction and maintenance services |
Transactions with related parties are carried out based on marketat prices and conditions, and takingthat take into account the following two specific conditions for ethylene and naphtha:
The related parties balance includes current account balances and notes payable to affiliates of the Company, imported approximately 31%bearing interest at 100% of its naphtha (2004 – 38%—unaudited and 2003 – 30%—unaudited).
10 Taxes recoverable
2005 | 2004 | |||||
Excise tax (IPI) (regular operations) | 69.2 | 47.8 | ||||
Value-added Tax on Sales and Services (ICMS) (i) | 556.9 | 440.9 | ||||
Social Integration Program (PIS) – Decree Laws Nº 2445 and Nº 2449/88 | 60.2 | 53.7 | ||||
Income tax and social contribution | 62.3 | 63.7 | ||||
Income tax on net income – ILL (ii) | 27.8 | 68.0 | ||||
PIS and Cofins (regular operations) | 40.8 | 11.7 | ||||
Import Duty | 18.2 | 5.2 | �� | |||
Finsocial | 14.5 | 14.5 | ||||
Other | 34.4 | 21.8 | ||||
884.3 | 727.3 | |||||
Current assets | (324.9 | ) | (476.0 | ) | ||
Long-term receivables | 559.4 | 251.3 | ||||
Braskem S.A.CDI. The current accounts are used by the Company and its Subsidiaries
Notesdirect and indirect subsidiaries to centralize available cash in a central pool for settlement of their obligations. Financial charges on remittances and balances of the pool of funds are agreed upon by the account holders, taking into account the cost of funds charged to the Consolidated Financial Statements—(Continued)individual participants by financial institutions, so that such charges are paid/transferred to the Company.
9 Taxes Recoverable
2007 | 2006 | |||
Excise tax (IPI) (standard operations) | 23.7 | 63.0 | ||
Value-added Tax on Sales and Services (ICMS) | 1,090.4 | 936.3 | ||
Social Integration Program (PIS) and Social Contribution | ||||
on Revenues (COFINS) | 61.2 | 118.5 | ||
Social Investment Fund (Finsocial) | - | 12.1 |
F-42
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
2007 | 2006 | |||
PIS - Decrees-Law 2445 and 2449/88 | 87.5 | 62.0 | ||
Income tax and social contribution | 66.7 | 56.9 | ||
Tax on Net Income - ILL | 55.8 | 17.4 | ||
Other | 100.0 | 95.0 | ||
Total | 1,485.3 | 1,361.2 | ||
Current assets | (310.3) | (408.1) | ||
Non-current assets | 1,175.0 | 953.1 | ||
atIPI
On December 31, 2005, 200419, 2002, the Federal Supreme Court (STF) - based on other precedents - entertained an extraordinary appeal lodged by the National Treasury and 2003
All amounts in millions ofreaisaffirmed an earlier decision by the Regional Federal Court (TRF), unless otherwise indicated
Zero-rated4th Circuit, recognizing entitlement to IPI
In July 2000, the merged company OPP Química filed a legal action tax credits relating to sustain the full application of the non-cumulative principle of the Excise Tax (IPI), requesting the right to a tax credit on purchaseacquisition of raw materials that are exempt from IPI, whether or not subjecttaxed at a zero-percent rate, when related to a zero rate, in relation totransactions involving the operationsfacilities of OPP Química S.A. (“OPP Química”, which has merged into the establishmentsCompany) located in the State of Rio Grande do Sul. InThis STF determination confirmed the first quarterentitlement to IPI credits on these acquisitions of 2005,raw materials, covering the Company concludedten-year period prior to the offset operation grantedfiling date and accruing at the SELIC benchmark rate to the date of actual use of the credits. This lawsuit was filed by OPP Química in this claim.July 2000 seeking for full adoption of the non-cumulative tax principle to said facilities.
On December 19, 2002, the Federal Supreme Court (“STF”), based on its previous plenary decisions about this subject, judged an extraordinary appeal lodgedThe STF decision was challenged by the National Treasury and fully confirmed the decision of the Regional Federal Court (“TRF”) of the 4th Region, which recognized that OPP Química has the right to a credit of IPI on these purchases, covering the ten years prior to the filing of the suit, including the related monetary restatement and SELIC rate for the period up to the date of the actual use of the credits.
The STF decision is subject tovia special appeal requested byknown as agravo regimental. In this special appeal, the National Treasury and is still pending judgement by the Second Panel of the STF. The action no longer questionschallenging the rightcompany's entitlement to the IPI tax credit from acquisition of raw materials taxed at a zero rate, but alleges imprecisionrather alleging inaccuracies in the decision regarding exemptcourt's determination as to non-taxed inputs and raw materials, the restatement of the tax credit,credits, and the rate to be used for credit calculation purposes.
rate. According to the opinion of the Company’sCompany's legal advisors, however, all these aspects have already been resolved favorably to OPP Químicasettled in the STF and TRF court decisions favorable to OPP Química, or, even in the plenary decisions of the STF.some cases, in STF full-bench precedents. For this reason, the Company's view is that the special appeal does not represent any possibilityreferred to above poses only a remote risk of changes in the OPP Química’smica decision, although the STF itself has revisited this matter on the merits in a similar lawsuit by another taxpayer.
In light of those aspects referring to the extent of the agravo regimental, OPP Química recorded tax credits of R$ 1,030.1 in December 2002, and the Company used those credits to offset IPI itself and other federal tax debts. Such credits were used up in the first quarter of 2005.
F-43
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
During 2006 and 2007, the Federal Revenue Office issued several infraction notices (autos de infração) against the Company to avoid forfeiture of the tax authorities' right to dispute the credit, sinceuse of tax credits and demanding the STF is considering an appealtax payments paid by the Company by offsetting the tax credits recorded as from December 2002. Further, the Federal Revenue Office rejected approximately 200 applications for using these credits to offset other federal taxes payable by the Company. The Company disputed these rejections through administrative and judicial proceedings, and the likelihood of a similar claim involving another taxpayer (this judgmentfavorable outcome for these disputes is currently suspended).viewed as probable by the Company's outside legal advisors.
InThe tax credits used by the Company (updated at the SELIC benchmark rate until December 2002, OPP Química recognized the corresponding undue2007) amount to R$ 2,506.9. The tax collection proceedings referred to above have reached R$ 2,263.5 to date, plus fines in the overall amount of R$ 1,030.1, which was offset731.0. The Company's outside legal advisors believe that such fines should not be payable by the Company withCompany.
In a session held on December 11, 2007, the STF First Panel granted the National Treasury's agravo regimental, agreeing to hear the extraordinary appeal and voiding the previous STF ruling. Such STF decision, containing the opinions and arguments of STF justices who took part in the judgment, has not been published to date. Braskem is ready to appeal after publication occurs.
All things considered, and in view that the new STF decision should be limited to procedural matters only, Braskem (in reliance on the opinion of its legal advisors) still defends the final and conclusive nature of the earlier STFdecision allowing it to use IPI and other federal taxes due. The Company also has similar lawsuits regardingtax credits deriving from the purchaseacquisition of exempt inputs and raw materials that are either tax-exempt or taxed at a zero-percent rate. In addition, Braskem believes that the new STF judgment on the extraordinary appeal should focus only on the subject ormatter of the agravo regimental (which means that the STF should not longer deliberate on entitlement to IPI tax credits themselves, as discussions over these specific matters should be precluded in this case).
Similar lawsuits have also been filed by the zero rate by itsCompany's branches located in the States of São Paulo, Bahia and Alagoas (Note 17(ii)16(ii)).
(i) Recoverable taxes – ICMS
The Company has recorded ICMS tax credits principally due to its high export volumes and outgoingvolume of exported products subject to deferred taxation.
The Company’sCompany's management is working on a number of actions aimed at the optimal use of such credits, and currently no losses are expected from the realization of those credits. Examples of these actions are:
F-44
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
• | Obtaining from the Rio Grande do Sul State authorities an authorization for transfer of these credits to third parties, as prescribed by the Agreement TSC 036 of 2006 (published in the Official Gazette on October 19, 2006). |
• | Authorization from the State of Bahia Government to increase the percentage of reduction in the calculation basis of ICMS levied on imported petrochemical naphtha from 40% to 60%, pursuant to paragraphs 9 and 10, Article 347 of the State of Bahia ICMS Regulation (Decree 9681/2005). |
• | Increasing the ICMS tax base in connection with the sale of fuel to refineries (from 40% to 100%), as per Article 347 of the Bahia State ICMS Regulations. |
• | Replacing the exports of co-products by domestic market transactions with identified clients. |
• | Starting feedstock imports under specific customs prerogatives, thus ensuring a lower generation of ICMS credits. |
The Company's ICMS credit balance at December 31, 2007 includes R$ 248.1, arising from the merged companies Politeno and Tegal. On a consolidated basis, the increase in the credit balance is mainly attributable to the addition of Ipiranga Group assets, with credit balances of R$ 135.1.
Based on the projections of the Company’sCompany's management concerning realization of those credits, the amount of R$ 349.2865.1 (R$ 596.6 on 2006) was recorded as noncurrent assets.
ILL
This refers to a credit for Tax on Net Income (ILL) paid by subsidiary Copesul between 1989 and 1991, as this tax was considered unconstitutional under the Federal Senate Resolution 82 of November 18, 1996. Copesul has been classifiedtaken measures at the administrative level to offset this credit against other taxes.
F-45
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
10 Judicial Deposits and Compulsory Loan - Long-term Assets
2007 | 2006 | |||
Judicial deposits | ||||
Tax contingencies | 63.6 | 29.7 | ||
Labor and other claims | 23.6 | 41.3 | ||
Compulsory loan | ||||
Eletrobrás | 20.5 | 19.5 | ||
107.7 | 90.5 | |||
11 Investments
(a) Information on investments
Number of shares or quotas held (thousands) | Interest in | |||||||||||||||||
Interest in total | voting share | |||||||||||||||||
2007 | 2006 | share capital - % | capital - % | |||||||||||||||
Common | Pref. | |||||||||||||||||
shares | shares | Quotas | Total | Total | 2007 | 2006 | 2007 | 2006 | ||||||||||
Jointly-controlled | ||||||||||||||||||
companies | ||||||||||||||||||
Cetrel | 745 | - | - | 745 | 730 | 49.89 | 49.03 | 49.89 | 49.03 | |||||||||
CODEVERDE | 9,894 | - | - | 9,894 | 9,755 | 35.53 | 35.55 | 35.53 | 35.55 | |||||||||
Copesul | - | - | - | - | 44,255 | - | 29.46 | - | 29.46 | |||||||||
Petroflex | 7,932 | 3,868 | - | 11,800 | 7,080 | 33.53 | 20.12 | 33.57 | 20.14 | |||||||||
Petroquímica | ||||||||||||||||||
Paulínia | 105,000 | - | - | 105,000 | 67,582 | 60.00 | 60.00 | 60.00 | 60.00 | |||||||||
- | - | - | - | - | - | - | - | |||||||||||
Associated companies | - | - | - | - | - | - | - | - | - | |||||||||
Borealis | 18,949 | - | - | 18,949 | 18,949 | 20.00 | 20.00 | 20.00 | 20.00 | |||||||||
Rionil | - | - | - | - | 3,061 | - | 33.33 | - | 33.33 | |||||||||
Sansuy | - | - | 271 | 271 | 271 | 20.00 | 20.00 | 20.00 | 20.00 |
Financial information from associated companies, excluding non-mandatory asset revaluation effects, conforming to the Company's accounting policies are presented below:
F-46
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Adjustment net income | Adjusted shareholders' equity | |||||||||||
(loss) for the year | (unsecured liabilities) | |||||||||||
2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||
Associated companies | ||||||||||||
Borealis | 11.4 | 13.7 | 13.4 | 119.3 | 117.9 | 114.15 | ||||||
Rionil | 0.3 | 0.2 | - | 5.8 | 6.1 | 5.8 | ||||||
Sansuy | (5.5) | (10.2) | (12.7) | (30.9) | (25.4) | 5.0 |
2007 | 2006 | |||||||||
Borealis | Rionil | Outros | Total | Total | ||||||
At January 1 | 23.6 | 2.0 | 0.6 | 26.2 | 25.8 | |||||
Equity in the results | 2.3 | (0.1) | - | 2.2 | 1.8 | |||||
Write-off through sale | - | (1.9) | - | (1.9) | - | |||||
Dividends | (2.0) | - | - | (2.0) | (2.0) | |||||
Other | - | - | - | - | 0.6 | |||||
At December 31 | 23.9 | - | 0.6 | 24.5 | 26.2 | |||||
Share prices of related parties' shares listed on the São Paulo Stock Exchange are presented below:
Share Price - R$ | |||||||||||
Trading | |||||||||||
Type | Code | 2007 | 2006 | 2005 | unit | ||||||
Copesul(*) | ON | CPSL3 | - | 38.10 | 27.9 | 1 share | |||||
Petroflex | ON | PEFX3 | 17.10 | 14.40 | 16.61 | 1 share | |||||
PNA | PEFX5 | 16.50 | 14.85 | 16.26 | 1 share |
(*) Delisted as long-term assets atfrom October 2007.
At December 31, 2005.2007, the market value of Petroflex, based on the price of shares listed on the São Paulo Stock Exchange, was R$ 199.5.
F-47
(ii) Tax on net income (ILL)Table of Contents
The Company brought suit for recovery of unduly paid income tax on net income in the 1989 and 1990 tax years. The courts eventually held this case valid in a final and conclusive manner, and the Company asked the Federal Revenue Secretariat (“SRF”) to acknowledge the corresponding credit for further offsetting with other subsequent tax debts. Entitlement to a R$ 45.4 credit was acknowledged in November 2005, which was fully offset with PIS and COFINS debts.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
11 Judicial deposits and compulsory loan
2005 | 2004 | |||
Judicial deposits | ||||
Labor claims | 12.7 | 1.7 | ||
Other | 11.6 | 11.4 | ||
Compulsory loan | ||||
Eletrobras compulsory loan | 12.2 | 15.8 | ||
36.5 | 28.9 | |||
As required by CVM Deliberation 489, the Company presents provisions for contingencies net of the corresponding judicial deposits (Notes 2 and 17).
12 Investments
(a) Associated companies
The Company’s participation in associated companies is as follows:
Head office (country) | Interest in total capital (%) | |||||||
2005 | 2004 | 2003 | ||||||
Jointly-controlled company | ||||||||
Codeverde (Note 4) | Brazil | 35.52 | 35.49 | — | ||||
Associated companies | ||||||||
Borealis (Note 6) | Brazil | 20.00 | 20.00 | — | ||||
Rionil Compostos Vinílicos Ltda. (“Rionil”) | Brazil | 33.33 | 33.33 | 33.33 | ||||
Sansuy Indústrias Químicas S.A. (“Sansuy”) | Brazil | 20.00 | 20.00 | 20.00 |
2005 | 2004 | ||||||||||||
Borealis | Rionil | Sansuy | Total | Total | |||||||||
As of January 1 | — | 2.0 | 2.9 | 4.9 | — | ||||||||
Addition through merger (i) | — | — | — | — | 4.2 | ||||||||
Equity in results | 2.7 | — | (1.9 | ) | 0.8 | 0.7 | |||||||
Transfer of investment (Note 6) | 22.1 | — | — | 22.1 | — | ||||||||
Dividends | (2.0 | ) | — | — | (2.0 | ) | — | ||||||
As of December 31 | 22.8 | 2.0 | 1.0 | 25.8 | 4.9 | ||||||||
Notes to the |
at December 31, 2007, 2006 and 2005 |
All amounts in |
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(b) Information on investments in the main jointly-controlledjointly-
controlled companies included in proportional consolidationproportionally
consolidated under CVM Instruction 247
Copesul
Copesul is engaged in the manufacture, sale, import and export of chemical, petrochemical and fuel products and the production and supply of utilities, such as steam, water, compressed air and electric energy to the companies in the Triunfo Petrochemical Complex in the State of Rio Grande do Sul. Copesul also provides other services to these companies, including management of logistic services related to its waterway and terrestrial terminals. Goodwill on this investment is based on future profitability and will be amortized up to August 2011.
Politeno
Politeno is engaged in the manufacture, processing, direct or indirect sale, consignment, export, import and transportation of polyethylene and by-products, as well as the participation in other companies. The main raw material for all of its products is ethylene, which is supplied by Braskem. Politeno operates an industrial plant in Camaçari - Bahia. Goodwill on this investment is based on future profitability and will be amortized up to August 2011.
Cetrel
The principal activitiesactivity of Cetrel areis to provide services related to environmental protection and controls to petrochemical companies. Goodwill on this investment is based on the fair value of assets and will be amortized up tothrough July 2015.
Petroquímica Paulínia
PetroflexOn September 16, 2005, Braskem and Petroquisa formed Petroquímica Paulínia, which will be responsible for the development and operation of a new polypropylene plant to be built in Paulínia - São Paulo. This plant will use polymer-grade propylene supplied by Petrobrás as its main raw material. Operations are scheduled to start by the beginning of 2008, using advanced Braskem technology. The assignment of the right to use this technology gave rise to a gain of R$ 23.3 in 2005 for the Company.
Petroflex
Petroflex is a leading producer of synthetic rubber in Latin America and produces styrene-butadiene, polybutadiene, liquid hidroxylated polybutadiene and other elastomers. The main raw material for all of its products is butadiene, which is supplied by Braskem. Petroflex operates three plants in Brazil located in Rio de Janeiro, Pernambuco and Rio Grande do Sul.
(c) Advance for the acquisition of investments
This balance comprises expenses from the acquisition of the Ipiranga Group petrochemical assets, as mentioned in Note 1(c). The acquisition of RPI, DPPI and CBPI shares was carried out in three steps, as follows:
F-48
13 Property,Table of Contents
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
• | In October and November 2007, the Company purchased common and preferred shares held by minority shareholders of RPI, DPPI and CBPI, as required by the Brazilian Corporate Law. For this acquisition, Braskem made to Ultrapar an advance of R$ 203.7, and recorded a 17.87% interest in the total share capital of Ipiranga Química for purposes of consolidating these assets. |
• | In December 2007, Ultrapar merged the preferred shares owned by minority shareholders in the acquired companies, and afterwards held 100% of the shares in RPI, DPPI and CBPI. Upon completion of this stage, the Company recorded the last purchase price installment to be assigned to Ultrapar in the amount of R$ 633.5 to be disbursed when the Company receives the Ipiranga Química shares from Ultrapar, which occurred in February 2008. This installment has been added to the "Advance for acquisition of investment" line against "Creditors on acquisition of investments". Following the accounting recognition of this stage of the acquisition process, the Company began to record a 60% interest in the total share capital of Ipiranga Química for purposes of consolidation of these assets. |
In addition to the amounts allocated to the purchase of shares, the Company considered as part of the investment cost those expenses directly associated with the process, which amounted to R$ 22.0 through December 2007. Taking into consideration all disbursements already made, in December 2007 the Company recorded goodwill of R$ 1,050.9, attributed to appreciation of property, plant and equipmentequipment.
2005 | 2004 | Annual | |||||||||
Cost | Accumulated depreciation | ||||||||||
Net | Net | ||||||||||
Land | 43.4 | 43.4 | 43.4 | ||||||||
Buildings and improvements | 981.9 | (427.3 | ) | 554.6 | 553.6 | 2 to 10 | |||||
Machinery, equipment and facilities | 7,836.3 | (3,585.9 | ) | 4,250.4 | 4,248.6 | 3.33 to 20 | |||||
Mines and wells | 26.8 | (22.9 | ) | 3.9 | 4.6 | 4 to 10 | |||||
Furniture and fixtures | 45.4 | (38.4 | ) | 7.0 | 5.6 | 10 | |||||
Information technology equipment | 69.0 | (56.2 | ) | 12.8 | 11.3 | 20 | |||||
Construction-in-progress | 1,063.1 | 1,063.1 | 575.3 | ||||||||
Other | 52.5 | (23.5 | ) | 29.0 | 15.2 | Up to 20 | |||||
10,118.4 | (4,154.2 | ) | 5,964.2 | 5,457.6 | |||||||
Braskem S.A. and its Subsidiaries
Notes toThe unaudited pro forma condensed statement of operations for the Consolidated Financial Statements—(Continued)
atyears ended December 31, 2005, 20042007 and 20032006, consider that the acquisition of the Ipiranga Group (Note 1 (c)(xi)) and the Petrobras Transaction (Note 1 (c)(xv)) had occurred on January 1 , 2006, as below::
F-49
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
2007 | 2006 | |||
Unaudited | Unaudited | |||
Net sales revenue | 18,787.2 | 16,898.7 | ||
Cost of sales and services rendered | (15,214.3) | (13,684.3) | ||
Gross profit | 3,572.9 | 3,214.4 | ||
Operating expenses (income) | (1,661.2) | (1,368.8) | ||
Equity accounting | (185.7) | (237.0) | ||
Financial expenses, net | (438.7) | (1,205.9) | ||
Non-operating expenses, net | (69.1) | (28.8) | ||
Income taxes | (422.5) | (131.3) | ||
Profit sharings | (24.5) | (26.5) | ||
Net income for the year | 771.2 | 216.1 | ||
F-50
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
12Property, Plant andEquipment, andIntangibleAssets
2007 | 2006 | Average | ||||||||
annual | ||||||||||
Accumulated | depreciation | |||||||||
Cost | depreciation | Net | Net | rates - % | ||||||
Property, plant and equipment | ||||||||||
Land | 75.0 | - | 75.0 | 61.3 | - | |||||
Buildings and improvements | 1,317.5 | (586.8 ) | 730.7 | 592.1 | 2.7 | |||||
Machinery, equipment and facilities | 12,991.7 | (7,377.5 ) | 5,614.2 | 4,296.9 | 5.9 | |||||
Mines and wells | 9.6 | (5.4 ) | 4.2 | 4.8 | 10.6 | |||||
Furniture and fixtures | 79.7 | (50.7 ) | 29.0 | 16.5 | 10.0 | |||||
Information technology equipment | 142.6 | (103.3 ) | 39.3 | 21.9 | 20.0 | |||||
Maintenance stoppages in progress | 95.5 | - | 95.5 | 77.8 | - | |||||
Constructions in progress | 1,657.3 | - | 1,657.3 | 1,523.8 | - | |||||
Other | 250.0 | (91.1 ) | 158.9 | 93.6 | 16.0 | |||||
16,618.9 | (8,214.8 ) | 8,404.1 | 6,688.7 | - | ||||||
Intangible assets | ||||||||||
Brands and patents | 0.6 | (0.6 ) | - | 0.1 | 10.0 | |||||
Technology | 35.1 | (25.6 ) | 9.5 | 13.8 | 12.3 | |||||
Licensing rights for internal use of operating systems | 215.6 | (52.7 ) | 162.9 | 115.6 | 19.8 | |||||
251.3 | (78.9 ) | 172.4 | 129.5 | - | ||||||
16,870.2 | (8,293.7 ) | 8,576.5 | 6,818.2 | - | ||||||
Constructions in millions ofreais, unless otherwise indicated
Construction-in-progressprogress relates principallymainly to projects for expansion of industrial capacity, operating improvements to increase the useful lifelives of the industrial units, machinery and equipment, as well asprojects in maintenance and production, and programs in the areas of health, technology and security projectssecurity.
F-51
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
At December 31, 2005,2007, property, plant and equipment includesincluded goodwill arising from legally merged companies (Note 1(b)) in the net amount of R$ 878.9 (2004 –765.7 (2006 - R$ 938.0)819.8), transferred in conformity with CVM Instruction Nº 319.319/99.
14 Deferred charges
2005 | 2004 | |||||
Costs | ||||||
Pre-operating expenses | 87.1 | 242.4 | ||||
Rights to manufacturing processes | 28.0 | 57.0 | ||||
Organization and system implementation expenses | 303.7 | 317.4 | ||||
Expenditures for structured operations | 388.9 | 436.0 | ||||
Goodwill on acquisition of investments | 2,269.4 | 2,409.5 | ||||
Expenditures for programmed stoppages | 628.9 | 500.5 | ||||
Research and development | 91.2 | 90.9 | ||||
Other | 100.0 | 104.4 | ||||
3,897.2 | 4,158.1 | |||||
Accumulated amortization | (1,236.8 | ) | (1,055.4 | ) | ||
2,660.4 | 3,102.7 | |||||
In 2005,As from January 1, 2006, in accordance with IBRACON Technical Interpretation 01/2006, the Company wrote offrecords all programmed maintenance shutdown expenses in property, plant and equipment as "Machinery equipment and facilities". These expenses, which arise from partial or full production shutdowns, occur at scheduled intervals from two to six years and are depreciated to production cost during the items with no residual value. Accordingly,period until the beginning of the next maintenance shutdown. Until December 31, 2005, such expenses were recorded as deferred charges and amortized to production cost through the beginning of the next shutdown.
Also, because of the adoption of Technical Interpretation 01/2006, in the first quarter of 2006, the Company recorded an increase in accumulated depreciation of machinery and equipment in the amount of R$ 164.9. As this constituted a change in accounting principle and depreciation relating to years prior to 2006, this amount, was recorded under shareholders' equity, as accumulated amortization decreasedlosses, as required by R$ 331.8.Technical Interpretation 01/2006.
13 Deferred Charges
2007 | 2006 | Average | ||||||||
annual | ||||||||||
Accumulated | amortization | |||||||||
Cost | amortization | Net | Net | rates - % | ||||||
Organization and system implementation expenses | 300.9 | (192.2) | 108.7 | 134.0 | 17.9 | |||||
Expenditures for structured transactions | 320.7 | (219.6) | 101.2 | 158.7 | 14.7 | |||||
Goodwill on acquisition of investments | 3,554.8 | (1,150.0) | 2,404.8 | 1,531.0 | 11.3 | |||||
Pre-operating expenses and other items | 215.8 | (143.5) | 72.2 | 67.5 | 9.8 | |||||
4,392.2 | (1,705.3) | 2,686.9 | 1,891.2 | |||||||
Goodwill on acquisition of investments is based on future profitability and is being amortized over up to ten years, according to the appraisal reports issued by independent experts.appraisal firms. The recognition of goodwill within deferred charges is in conformity with CVM Instruction NºInstructions no. 319 and Nºno. 247.
Goodwill amortization is recorded withinunder depreciation and amortization and amounted to R$ 279.0409.7 in 2005 (2004 –2007 (2006 - R$ 227.0)360.1) . Included in these amounts is
F-52
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
14 Loans andFinancing
Annual financial charges | 2007 | 2006 | |||||
Foreign currency | |||||||
Eurobonds | Note 14(b) | 1,401.2 | 1,715.8 | ||||
Advance on exchange contracts | 2007 | US$ exchange variation + average interest of 5.65% | 28.3 | - | |||
2006 | US$ exchange variation + interest of 5.60% or fixed interest of 7.11% | - | 63.0 | ||||
Export prepayments | Note 14(c) | 1,623.3 | 324.9 | ||||
Medium - term notes | Note 14(d) | 632.5 | 763.5 | ||||
Raw material financing | 2007/2006 | YEN exchange variation + fixed interest of 6.70% | 0.4 | 1.3 | |||
2007 | US$ exchange variation + average interest of 6.76% | 18.3 | - | ||||
2006 | US$ exchange variation + average interest of 5.73% | - | 20.9 | ||||
2007 | EUR exchange variation + average interest of 4.68% | 1.7 | - | ||||
2006 | EUR exchange variation + average interest of 2.0% above 6-month LIBOR | - | 1.8 | ||||
Permanent assets financing | 2007 | US$ exchange variation + 1.60%aa annual LIBOR | 37.9 | - | |||
2007 | US$ exchange variation + 0.35%aa 4-month LIBOR (Note 14(a)) | 1,701.8 | - | ||||
2006 | US$ exchange variation + fixed interest of 7.14% | - | 0.6 | ||||
2006 | US$ exchange variation + interest of 9.73% | - | 8.8 | ||||
BNDES | 2007 | Average fixed interest of 9.70%aa + post-fixed restatement (UMBNDES) | 44.8 | - | |||
2006 | Fixed interest of 10.00%+ post-fixed restatement (UMBNDES) | - | 40.9 | ||||
2006 | US$ exchange variation + average interest of 8.70% | - | 3.1 | ||||
Working capital | 2007 | US$ exchange variation + average interest of 7.83% | 388.2 | - | |||
2006 | US$ exchange variation + interest of 8.10% | - | 168.7 | ||||
2006 | US$ exchange variation + average interest of 6.91% | - | 4.0 |
F-53
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Annual financial charges | 2007 | 2006 | |||||
Local currency | |||||||
Working capital | 2007 | 102% of CDI | 128.8 | - | |||
2006 | Fixed interest of 13.42% + post-fixed restatement (CDI) | - | 6.7 | ||||
Investment funds in credit rights | 2006 | Note 14(f) | - | 422.3 | |||
FINAME | 2007 | Average interest of 4.44% + TJLP | 7.0 | - | |||
2006 | Average interest of 7.50% + TJLP | - | 13.0 | ||||
BNDES | 2007 | Average fixed interest of 3.45% +TJLP | 667.5 | - | |||
2006 | Average fixed interest of 3.94% to 4.00% +TJLP | - | 346.0 | ||||
BNB | 2007 | Fixed interest of 9.88% | 165.9 | - | |||
2006 | Fixed interest of 11.81% | - | 135.0 | ||||
FINEP | 2007 | Post-fixed restatement (TJLP) | 64.3 | - | |||
2006 | US$ exchange variation + post-fixed restatement (TJLP) | - | 83.6 | ||||
Project financing (NEXI) | 2007/2006 | Note 14(e) | 231.2 | 281.9 | |||
Vendor | 2007/2006 | Average interest of 11.55% | 327.2 | 183.9 | |||
Total | 7,470.3 | 4,589.7 | |||||
Current liabilities | (1,068.4) | (653.9) | |||||
Long-term liabilities | 6,401.9 | 3,935.8 | |||||
(i) UMBNDES = BNDES monetary unit.
F-54
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(a) Investment financing
In April 2007, the goodwill amortization in respectCompany completed negotiations to obtain a bridge loan of legally merged companies whichup to US$ 1.2 billion to finance the acquisition of the Ipiranga Group petrochemical assets and delist Copesul. Amounts drawn down by the Company until December 31, 2007, plus charges and the portion released to subsidiary EDSP58, totaled R$ 218.2 in 2005 (2004 – R$ 168.7)1,701.8, and are stated as "Permanent assets financing".
On scheduled dates, varying from one to six years, the Company performs total or partial maintenance shut-downs of its facilities. The costs associated with these maintenance shut-downs are deferred and amortized over the period until the beginning of the next corresponding maintenance shut-down.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
15 Loans and financings
Annual financial charges | 2005 | 2004 | ||||||||
Foreign currency-denominated: | ||||||||||
U.S. dollar – denominated notes and bonds | Note 15 (a) | 743.2 | 700.5 | |||||||
Advance on export contracts | 2005 | US$ exchange variation + interest of 2.75% to 10.99% | 36.3 | — | ||||||
2004 | US$ exchange variation + interest of 2.30% to 6.00% | — | 351.9 | |||||||
Export prepayment | Note 15(b) | 595.9 | 919.0 | |||||||
Medium-term Notes | Note 15 (c) | 1,277.4 | 1,581.5 | |||||||
Raw material financing | 2005/2004 | YEN exchange variation + fixed interest of 6.90% | 2.4 | 4.4 | ||||||
2005 | US$ exchange variation + interest of 0.45% to 2.50% above LIBOR | 47.8 | — | |||||||
2004 | US$ exchange variation + interest of 0.53% to 7.65% above LIBOR | — | 467.1 | |||||||
Permanent asset financing | 2005 | US$ exchange variation + fixed interest of 1.22% to 7.14% | 33.3 | — | ||||||
2004 | US$ exchange variation + interest of 1.22% to 3.88% above LIBOR | — | 30.8 | |||||||
2004 | US$ exchange variation + fixed interest of 4.75% to 13.64% | — | 28.9 | |||||||
Working capital | 2005/2004 | US$ exchange variation + fixed interest of 2.77% to 7.50% | 10.3 | 102.8 | ||||||
Local currency-denominated | ||||||||||
Working capital | 2005 | Interest of 102.5% to 105.5% of CDI | 73.8 | — | ||||||
2004 | Interest of 0.30% to 11.0% + fixed restatement (IGPM, TJLP and CDI) | — | 34.1 | |||||||
2004 | US$ exchange variation + interest of 4.50% | — | 11.0 | |||||||
Government Agency for Machinery and equipment financing (“FINAME”) | 2005/2004 | Fixed interest of 3.00% to 11.00%+ fixed restatement (TJLP) | 30.2 | 17.1 | ||||||
National Bank for Economic and Social Development (“BNDES”) | 2005 | Fixed interest of 6.50% to 12.60% + fixed restatement (TJLP and UMBNDES) | 189.1 | — | ||||||
2004 | Fixed interest of 2.50% to 12.60% + fixed restatement (TJLP and UMBNDES) | — | 180.9 | |||||||
Bank of the Northeast of Brazil (“BNB”) | 2005 | Fixed interest of 11.81% to 14% | 62.9 | — | ||||||
2004 | Fixed interest of 11.81% | — | 31.5 | |||||||
Government Agency for Estudies and Projects (“FINEP”) / Financing for Imports (“FINIMP”) | 2005 | US$ exchange variation + interest of 4.50% p.a. or interest of 0.4% to 5.00% p.a. + fixed restatement (TJLP and UMBNDES) | 31.5 | — | ||||||
Loan for acquisition of shares | Note 15 (e) | 176.3 | 176.3 | |||||||
Project financing | Note 15 (f) | 283.6 | — | |||||||
Vendor | 141.7 | 168.6 | ||||||||
Other | Fixed interest of 14.00% to 21.00% + bonus for timely repayment of 15.00% or 112% of CDI | 16.8 | 39.1 | |||||||
3,752.5 | 4,845.5 | |||||||||
Less: Current liabilities | (895.0 | ) | (1,785.9 | ) | ||||||
Long-term liabilities | 2,857.5 | 3,059.6 | ||||||||
| ||
| ||
| ||
|
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(a)(b) U.S. dollar-denominateddollar - denominated notes and bonds
In June 1997,April 2006, the Company issued notesperpetual bonds in an aggregate principal amount of US$ 150.0 million, maturing in June 2007 and bearing200.0 million. These bonds bear annual interest of 9%9.00%, payable semiannually.
The Company also had outstanding notes originally issued through OPP Química as follows: (1) US$ 125.0 million issuedon a quarterly basis in February 1996, which matured in February 2004arrears on January 28, April 28, July 28 and provided for annual interest of 11.5% payable semiannually; and (2) US$ 100.0 million issued in October 1996, which matured in October 2004 and provided for annual interest of 11%, payable semiannually. These notes were fully paid at maturity.
In July 1997, Trikem issued notes in an aggregate principal amount of US$ 250.0 million, maturing in July 2007 and bearing annual interest of 10.625%, payable semiannually in January and July28 of each year. In June 1, 2005, we issued 9.375% Notes in the aggregate principal amount of US$ 150.0 million.year, commencing on July 28, 2006. The proceeds were used to repayfor working capital purposes and acquisition of our 10.625% Notes originally issued by Trikem.
Politeno shares.
In June 17, 2005,September 2006, the Company issued bonds in an aggregate principal amount of US$ 150.0275.0 million, with no statedan 8% coupon and a maturity (perpetual bonds), bearing annual interest of 9.75% payable on a quarterly basis from September 2005. These bonds may be fully redeemed, atin ten years. Funds raised were used mainly to repurchase the optionthird tranche of the Company, as from June 17, 2010, provided that investors are given a minimum 30-day notice.
(b) Export prepayments
Trikem received an advance of US$ 100.0 million made by a foreign customer in August 1997. This advance provided for annual interest of 12% and the balance was fully paid in October 2004.
On December 28, 2001, the Company obtained funds in the amount of US$ 250.0 million as prepayment of exports. This loan was placed in two tranches. The first tranche, in the amount of US$ 80.0 million, had a settlement term up to December 2004 and provided for annual interest of 4.25%, plus three-month LIBOR, payable on a quarterly basis and was repaid upon maturity. The second tranche, in the amount of US$ 170.0 million, had a settlement term up to December 2006, was also fully amortized in December 2004, and provided for annual interest of 5.25%, plus three-month LIBOR, payable on a quarterly basis.
medium-term notes ("MTNs") (Note 14(d)).
In December 2002, OPP Química received an advance from a foreign customer, in the amount of US$ 97.2 million, which provided for annual interest of 3.75%, plus six-month LIBOR, in addition to the exchange variation. In November 2004,June 2007, the Company renegotiated the terms of this advance, reducing the spread over six-month LIBOR to 1.25%. This advance will be repaid through shipments made up to June 2006. The balance outstanding at December 31, 2005 was US$ 15.9 million – R$ 37.3 (2004 – US$ 47.0 million – R$ 124.8).
In June 2004, the Company obtained funds in the amount of US$ 200.0 million as a prepayment of exports divided in two tranches. The first tranche, in the amount of US$ 145.0 million, had a settlement term up to December 2007 and provided for annual interest of 3.5%, plus six-month LIBOR, payable semiannually. The second tranche, in the amount of US$ 55.0 million, had a settlement term up to June 2009 and provided for annual interest of 4.5%, plus six-month LIBOR, payable semiannually. In June 2005, the two tranches were consolidated, so that both tranches now maturerate on certain bonds issued in June 2009 and bear annual interest at 1.45% above six-month LIBOR, payable semiannually. The balance of this transaction at December 31, 20051997, which decreased from 9.00% per annum to 8.25% per annum, while maturity was US$ 175.4 million – R$ 410.7 (2004 – US$ 200.6 million – R$ 532.6).
Braskem S.A. and its Subsidiaries
Notesextended from 2007 to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
In August 2004, the Company obtained funds in the amount of US$ 50.0 million as a prepayment of exports. In addition to the foreign exchange variation, the advance bears annual interest of 3%, plus six-month LIBOR up to January 2005 and three month LIBOR as from that date up to the final maturity in October 2006. The balance of this transaction, at December 31, 2005 was US$ 20.3 million – R$ 47.5 (2004 – US$ 51.0 million – R$ 135.4).
2024.
The Company has also otherCompany's U.S. dollar-denominated notes and bond positions are summarized as follows:
Amounts in | ||||||||||
Date | US$ million | Maturity | Interest p.a. | 2007 | 2006 | |||||
June 1997 | 150.0 | June 2007 | 8.25 | - | 321.1 | |||||
July 1997 | 250.0 | June 2015 | 9.38 | 267.7 | 35.5 | |||||
June 2005 | 150.0 | None | 9.75 | 266.8 | 322.0 | |||||
April 2006 | 200.0 | None | 9.00 | 360.5 | 435.2 | |||||
September 2006 | 275.0 | January 2017 | 8.00 | 506.2 | 602.0 | |||||
1,401.2 | 1,715.8 | |||||||||
F-55
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(c) Export prepayments
The Company's export prepayment financings. The outstanding balance of these advances amounted to US$ 41.3 million – R$ 96.6 at December 31, 2005 (2004 – US$ 126.9 million – R$ 336.9). These advances will be settled at various dates through January 2008. In addition to the exchange variation, these advances bear annual rates of interest of 1.55% to 3.00% above LIBOR.prepayments positions are summarized as follow:
Amounts in | ||||||||||
Date | US$ million | Maturity | Interest p.a. | 2007 | 2006 | |||||
June 2004 | 200.0 | June 2009 | 1.45 + 6-month LIBOR | - | 268.2 | |||||
January 2005 | 45.0 | January 2008 | 1.55 + 3-month LIBOR | 7.3 | 44.3 | |||||
January 2005 | 28.0 | January 2008 | 1.66 + 6-month LIBOR | - | 12.4 | |||||
May 2006 | 0.4 | June 2008 | US$ exchange variation+ | |||||||
average interest of 5.41 | 1.0 | - | ||||||||
May 2006 | 10.0 | May 2009 | US$ exchange variation + | |||||||
average interest of 5.33 | 17.9 | - | ||||||||
May 2006 | 20.0 | January 2010 | US$ exchange variation + | |||||||
average interest of 5.19 | 37.5 | - | ||||||||
July 2006 | 435.0 | August 2011 | US$ exchange variation + | |||||||
interest of 6.56 | 727.7 | - | ||||||||
April 2007 | 150.0 | April 2014 | 0.77 + 6-month LIBOR | 269.6 | - | |||||
October 2007 | 312.5 | October 2009 | 1.50 + 4-month LIBOR | 562.3 | - | |||||
1,623.3 | 324.9 | |||||||||
(c) Medium-term notes program
In July 2003, Braskem established a medium-term notes (“MTN”(d) Medium-Term Notes ("MTN") program providing for issuance of notes in an aggregate amount of up to US$ 500.0 million. On December 16, 2003, the Company’s Board of Directors authorized an increase in the total of the MTN program to a maximum aggregate principal amount of up to US$ 1 billion and an extension of the term of the MTN program from five to ten years.
The outstanding principal amounts of notes under the MTN program at December 31, 20052007 and 20042006 are as follows:
Amount in | ||||||||||||
Issue | US$ million | Date | Maturity | Interest p.a. | 2007 | 2006 | ||||||
3rd tranche | 275.0 | November 2003 | November 2008 | 12.50% | 163.6 | 197.5 | ||||||
4th tranche | 250.0 | January 2004 | January 2014 | 11.75% | 468.9 | 566.0 | ||||||
632.5 | 763.5 | |||||||||||
US$ million | R$ | ||||||||||||
Tranches | Interest | Maturity | 2005 | 2004 | 2005 | 2004 | |||||||
2ndTranche – October 2003 | 9.25 | % | October 2005 | — | 65.0 | — | 172.5 | ||||||
3rd Tranche – November 2003 | 12.50 | % | November 2008 | 275.0 | 275.0 | 643.7 | 730.0 | ||||||
4th Tranche – January 2004 | 11.75 | % | January 2014 | 250.0 | 250.0 | 585.2 | 663.6 | ||||||
525.0 | 590.0 | 1,228.9 | 1,566.1 | ||||||||||
Interest accrued | 48.5 | 15.4 | |||||||||||
Balance at December 31 | 1,277.4 | 1,581.5 | |||||||||||
(d) Loans from FINAME, BNDES and BNB
These loans relate to various transactions forTo restructure its debt, the increaseCompany repurchased, in production capacity, environmental programs, operating control centers, laboratory and waste treatment stations. Principal interest and other financial charges are payable monthly up to June 2016.
In June 2005, a further BNDES credit line was approved, inSeptember 2006, part of the amountnotes of R$ 384.6. The first tranche in the principal amount of R$ 100.8 was drawn down on July 27, 2005, and the secondthird tranche, in the amount of R$ 30.0 was drawn down on December 21, 2005.
(e) Loan for acquisitionUS$ 184.6 million, corresponding to 67% of shares
the original issue. The Company borrowed funds to finance the acquisition of shares relatedpaid to the acquisition from BNDESPAR of one billion shares of Braskem Participações S.A.noteholders, in September 2001 by Nova Camaçari Participações S.A. The loan principal is payable in full in August 2006. The principal bears annual interest of 4% and Long-Term Interest Rate (“TJLP”), payable annually as from August 2002. Subjectaddition to the rights of existing shareholders, BNDESPAR hasprincipal, the optionamount relating to convert the principal amountaccrued and related accruedfuture interest on this loan into our class A preferred shares at any time prior to the maturity of this loan.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(f)(e) Project financing
(NEXI)
In March and September 2005, the Company obtained Japanese yen–denominatedyen-denominated loans from Nippon Export and Investment Insurance, in the amount of ¥ 5,256.5 million (R$ 136.5) and ¥ 6,628.2 million (R$ 141.5), respectively, to finance several investment projects, including the “Braskem +”"Braskem +" program. These loans bear annual interest of 0.95% above the Tokyo Interbank Rate (TIBOR) plus exchange variation, payable semiannually.semi-annually.
F-56
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Principal is payable in 11 installments, commencing in March 2007, with a final maturity date in March 2012. The financing contracts include insurance that guarantees 95% of commercial risksrisk amounts and 97.5% of political risks.
risk amounts.
As part of its risk management policy (Note 21)22), the Company entered into a swap contract in the total amount of these loans, which, in effect, changechanges the annual interest rate and exchange variation to 101.59% of CDI for the tranche drawn down in March 2005, and 103.98% of CDI and 104.29% of CDI for two tranches drawn down in March and for a tranche drawn down in September 2005, respectively.2005. The swap contract was signedentered into with a leading foreign bank and its maturity, currencies, rates and amounts are perfectly matched to the financing contracts. The effect of this swap contract is recorded in financial results under monetary variation of financing (Note 22).
(f) Investment fund in credit rights
This financing arises from the consolidation of investment funds in credit rights ("FIDC"), named Chemical and Chemical II Funds. FIDCs raise funds by selling senior quotas with interest linked to the variation of the CDI rate. The charters of these funds also provide for the issuance of subordinated quotas in order to maintain the appropriate asset balance. These quotas are remunerated in accordance with the funds profitability. At December 31, 2006, the subordinated quotas in these funds were owned by the Company. With the resources available, the funds purchase trade bills issued by Braskem, taking into account the selection criteria prescribed by the FIDC manager (Note 6).
In December 2006, the Chemical Fund redeemed its senior quotas (December 31, 2005 - R$ 201.6), whose remuneration was 113.5% of CDI. The fund no longer existed in 2007.
The Chemical II Fund issued the first tranche of senior quotas in December 2005, remunerated at 103.75% of CDI and redemption anticipated for December 2008. The subordinated quotas held by the Company were sold in the quarter ended March 2007. At December 31, 2007, the balance of these quotas amounted to zero (2006 - R$ 401.4) .
F-57
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(g) Repayment and guarantee schedule
Long-term loans mature as follows:
2007 | 2006 | |||
2008 | - | 876.8 | ||
2009 | 2,593.7 | 260.3 | ||
2010 | 378.7 | 193.3 | ||
2011 | 304.6 | 127.8 | ||
2012 | 329.1 | 38.4 | ||
2013 and thereafter | 2,795.9 | 2,439.2 | ||
6,402.0 | 3,935.8 | |||
The company believes that it will meet its debt obligations in 2009 with its cash generated from operations, its existing cash and other liquid investment and use of existing credit facilities and receivables transactions, if needed.
2005 | 2004 | |||
2006 | — | 622.2 | ||
2007 | 348.5 | 948.6 | ||
2008 | 880.0 | 774.4 | ||
2009 | 157.3 | 24.5 | ||
2010 and thereafter | 1,471.7 | 689.9 | ||
2,857.5 | 3,059.6 | |||
(h) Guarantees
The Company and its subsidiaries Copesul and IPQ have provided securities for short- and long-term financing, as stated below:
Braskem
Total | Loan | |||||||
Maturity | guaranteed | amount | Guarantees | |||||
BNB | January 2016 | 156.4 | 156.4 | Mortgage, machinery & equipment | ||||
BNDES | November 2012 | 331.4 | 331.4 | Mortgage, machinery & equipment | ||||
NEXI | March 2012 | 154.5 | 231.2 | Insurance premium | ||||
FINEP | March 2012 | 64.3 | 64.3 | Mortgage and surety bond | ||||
Prepayments | April 2014 | 276.9 | 1,138.0 | Mortgage and surety bond | ||||
Other institutions | November 2007 to | Surety/endorsement and promissory | ||||||
December 2012 | 20.3 | 388.5 | notes | |||||
Total | 1,003.8 | 2,309.8 | ||||||
At December 31, 2007, the Company is the direct financing guarantor of the jointly-controlled entity Petroflex for R$ 8.6 (2006 - R$ 6.4), corresponding to 40% of Petroflex's debt to BNDES.
In the case of short-term loans,December 2006, the Company, has given security such as trade bills receivabletogether with Petrobras Química S.A. - Petroquisa, entered into a support agreement with BNDES, under which Braskem and promissory notes.
Some long-term loans are secured by liensPetroquisa undertook to provide, in proportion to their respective interests in the capital of Petroquímica Paulínia, the required funds to meet any insufficiencies arising from delinquency on fixed assets and shares, guaranteesthe part of shareholders, bank guarantees and promissory notes. Certain long-term borrowings are secured by surety bonds and mortgages of certain of the Company’s industrial plants.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
16 Debentures
The Company’s debenture position is summarized as follow:
2005 | 2004 | |||||
Balance at January 1 | 1,172.9 | 1,492.0 | ||||
Accrued interest and financial charges | 229.4 | 444.1 | ||||
Issuance (i) | 300.0 | 1,500.0 | ||||
Repayments | (93.7 | ) | (2,263.2 | ) | ||
Balance at the end of year | 1,608.6 | 1,172.9 | ||||
Less: Current liabilities | (9.3 | ) | (5.0 | ) | ||
Long-term liabilities | 1,599.3 | 1,167.9 | ||||
(a) 1st private issue
On May 31, 2002, OPP Produtos Petroquímicos S.A. (“OPP PP”) issued R$ 591.9 subordinated convertible debentures to Odebrecht, and further transferred its title to ODBPAR. These debentures became the Company’s obligation as a result of the merger of OPP PP intothat company. Accordingly, the Company on August 16, 2002. These debentures have the following terms:may be required to make disbursements to Petroquímica Paulínia of up to R$ 339.7, as capital contribution or loan.
F-58
Braskem S.A. and Its Subsidiaries | |||
Notes to the Consolidated Financial Statements | |||
at December 31, 2007, 2006 and 2005 | |||
All amounts in millions of reais, unless otherwise indicated | |||
|
These amounts correspond to the maximum amount of potential future repayments (not discounted) that the Company may be required to make.
Copesul
Total | Loan | |||||||
Maturity | guaranteed | amount | Guarantees | |||||
Prepayments | January 2010 | 56.4 | 56.4 | Promissory note | ||||
BNDES | January 2014 | 407.9 | 144.7 | Mortgage, machinery & equipment | ||||
BRDE | July 2009 | 5.9 | 5.9 | Financed equipment | ||||
Working capital financing - abroad | 21.3 | 21.3 | Promissory note | |||||
Working capital financing - Brazil | April 2008 | 128.6 | 128.6 | Export Credit Note | ||||
Total | 620.1 | 356.9 | ||||||
Copesul has secondary obligations with financial institutions, where it is guarantor of vendor transactions carried out by Petroflex, in the amount of R$ 18.4. No losses are anticipated from these obligations.
IPQ
Total | Loan | |||||||
Maturity | guaranteed | amount | Guarantees | |||||
Banco Santander do Brasil S.A. | June /2013 | 173.1 | 173.1 | Copesul shares | ||||
Banco Bradesco S.A. | July 2014 | 136.4 | 136.4 | Copesul shares | ||||
Banco Bradesco S.A. | June 2008 | 11.2 | 11.2 | Shareholders' endorsements | ||||
Total | 320.7 | 320.7 | ||||||
(i) Capitalized interest
As described in Note 3(d), the Company adopts the accounting practice of capitalizing interest on financing during the period of asset construction. The Company's policy is to apply the weighted average financial charge rate on the debt to the balance of projects in progress. This amount is limited to the amount of charges incurred in the period.
The average rate used during the period was 6.9% per annum, and the amounts capitalized are stated below:
F-59
Braskem S.A. and Its Subsidiaries |
|
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
2007 | 2006 | |||
Gross financial charges | 669.3 | 609.1 | ||
Less: Capítalized interest | (35.2) | (63.7) | ||
Net financial charges | 634.1 | 545.4 | ||
(j) Loan covenants
Certain loan agreements entered into by the Company establish limits for a number or ratios relating to the ability to incur debts and pay interest. The ratios are as follows:
(*) EBITDA - Earnings before interest, tax, depreciation and amortization.
(**) EBITDA - Earnings before interest, tax, depreciation and amortization (excludes also dividends and interest on shareholders' equity received).
The above covenants are calculated on a consolidated basis for the past 12 months on a quarterly basis. Penalty for noncompliance is the potential acceleration of the debt. All commitments have been accomplished by the Company.
15 Debentures
At a meeting held on August 2, 2006, the board of directors approved the 14th issue of 50,000 simple, unsecured debentures, not convertible into shares, in a single series, for a total of R$ 500.0. The debentures were subscribed and paid up on September 1, 2006.
On June 4, 2007, the Company carried out the early, total redemption of the outstanding debentures of its 12th public issue, for the par value of the debentures, plus remuneration pursuant to clause 5.19 of the indenture.
Details on the Company's debenture transactions:
F-60
Braskem S.A. and Its Subsidiaries | |
| |
at December 31, 2007, 2006 and 2005 | |
Unit | Remuneration | |||||||||||
Issue | value - R$ | Maturity | Remuneration | payment | 2007 | 2006 | ||||||
1st (i) | 10 | Jul/2007 | Long-term interest | |||||||||
rate (TJLP) | ||||||||||||
variation + interest | ||||||||||||
of 5% p.a. | Upon maturity | - | 1,130.8 | |||||||||
12th (ii) | 100 | Jun/2009 | 117.0% of CDI | Biannually as from | ||||||||
Dec/2004 | - | 151.7 | ||||||||||
13th (ii) | 10 | Jun/2010 | 104.1% of CDI | Biannually as from | ||||||||
Dec/2005 | 302.6 | 303.1 | ||||||||||
14th (ii) | 10 | Sep/2011 | 103.5% of CDI | Biannually as from | ||||||||
Mar/2007 | 517.8 | 521.8 | ||||||||||
(iii) | 1 | Jun/2008 | 100.0% of CDI | Upon maturity | 91.2 | - | ||||||
4th (iv) | 10.000 | Dec/2010 | 104.5% of | Every 4 months | ||||||||
accumulated | starting the 3rd | |||||||||||
average daily rates | year as from the | |||||||||||
of DIs | issue date | - | 32.5 | |||||||||
911.6 | 2,139.9 | |||||||||||
ODBPAR has the option to convert these(i) Private issue of convertible debentures which were converted into Class A preferred shares at any time. The payment of its principal and interest will only occur on their final maturity date. There is no partial or total redemption provision allowing payments before this date.July 31, 2007 (Note 20(a)).
(b) 10th public issue
On October 1, 2001, the Company issued and sold two series of the 10th(ii) Public issue of its non-convertible debentures, consisting of 4,108 of the 1st series and 2,142 of the 2nd series, totaling R$ 625.0. In January 2004, the Company redeemed 2,289 of the 1st series of debentures and 945 of the 2nd series of debentures and, at September 30, 2004, the Company redeemed the remaining debentures. All of these debentures were cancelled.
(iii) Issued by subsidiary Ipiranga Química.
(c) 11th public issue
(iv) Issued by jointly-controlled company Petroflex.
The Company issueddebenture changes in 2007 and sold the 11th series2006 were as follows:
2007 | 2006 | |||
Balance at the beginning of the year | 2,139.9 | 1,608.6 | ||
Accrued interest and financial charges | 192.3 | 248.6 | ||
Issuance | - | 532.5 | ||
Addition through acquisition of subsidiary | 83.3 | - | ||
Write-off through deconsolidation of subsidiary | (32.5) | - | ||
Repayments and conversions | (1,471.4) | (249.8) | ||
Balance at the end of the year | 911.6 | 2,139.9 | ||
Less: Current liabilities | (111.6) | (1,157.7) | ||
Non-current liabilities | 800.0 | 982.2 | ||
F-61
Braskem S.A. and its SubsidiariesContents
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(d) 12th public issue
On September 29, 2004, the Company issued and sold the 12th series of its debentures in the aggregate principal amount of R$ 300.0. These debentures are not convertible into shares and have a final maturity date of June 1, 2009. These debentures are repayable at their final maturity date and bear annual interest at the rate of 117% of CDI.
(e) 13th public issue
On June 30, 2005, the Company issued and sold the 13th series of its non-convertible debentures in an aggregate principal amount of R$ 300.0. These debentures have the following terms:
Braskem S.A. and Its Subsidiaries | ||||
| Notes to the Consolidated Financial Statements | |||
|
| December 31, 2007, 2006 and 2005 | ||
|
| All amounts in millions of reais, unless otherwise indicated | ||
|
| |||
|
| |||
|
|
1716 Taxes and contributions payable—Long-term liabilitiesContributions Payable -Long-term Liabilities
2005 | 2004 | ||||||||
Compensation of IPI credits | |||||||||
IPI – export credit | (i | ) | 550.3 | 462.8 | |||||
IPI – zero rate | (ii | ) | 466.3 | 406.9 | |||||
IPI – consumption materials and property, plant and equipment | 37.7 | 85.0 | |||||||
Other taxes and contributions payable | |||||||||
PIS /COFINS – Law 9718/98 | (iii | ) | 316.1 | 320.6 | |||||
Education contribution, SAT and INSS | 40.8 | 33.2 | |||||||
PAES-Law 10684 | (iv | ) | 43.1 | 49.7 | |||||
Other | 9.8 | 28.2 | |||||||
Less: Judicial deposits | (139.7 | ) | (170.3 | ) | |||||
1,324.4 | 1,216.1 | ||||||||
2007 | 2006 | |||
IPI credits offset | ||||
IPI - export credit (i) | 687.8 | 647.8 | ||
IPI - zero-percent rate (ii) | 309.3 | 505.9 | ||
IPI - consumption materials and property, plant | ||||
and equipment | 42.5 | 54.7 | ||
Other taxes and contributions payable | ||||
PIS/COFINS - Law 9,718/98 (iii) | 50.6 | 146.8 | ||
Education contribution, SAT and INSS | 38.6 | 37.1 | ||
PAES - Law 10684 (iv) | 36.4 | 36.6 | ||
Other | 59.2 | 21.5 | ||
Less:Judicial deposits | (78.6) | (128.4) | ||
1,145.8 | 1,322.0 | |||
The Company has brought legal actions challenging certain changes in tax laws and defending, among other things, the right to IPI credits on the purchase of raw materials and the export of products. With regard to the contingent IPI credits, which hadhave been used to offset against several federal taxes payable, the Company recorded liabilities to eliminate the contingent gain and accrued interest on these liabilities based on the SELIC rate. The Company has not recorded tax assets for uncompensated credits that have not been used to offset other tax obligations as they are considered contingent assets pending realization.
(i) IPI export credit
- Export credits
The merged company OPP Química and the merged company Trikem initiated a legal action, requesting the legal recognition of the IPI credit, introduced by Decree-law 491/69 to provide incentives for exports of
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
manufactured products. OPP Química obtained a preliminary injunction in this action, partially confirmed by a ruling, authorizing it to use the benefit calculated on the exports of the units located in Rio Grande do Sul to offset federal taxes due. The decision was revoked, against which special and extraordinary appeals were lodged by the Company.
The Company and merged company Nitrocarbono filed for a writ of security with respect to the right of the IPI credit, in September 2003. The court decision was favorable, guaranteeing that the credit for the past five years as from the date of initiation of the suit and its offset against all taxes administered by the Federal Revenue Secretariat. An appeal by the Federal Government was made and is waiting for a judgment by the TRF of the 1st Region.
The merged company OPP Química obtained a preliminary injunction in this action, partially confirmed by a judgement, authorizing it to use the benefit calculated on the exports of the units located in Rio Grande do Sul, to offset federal taxes due. This decision was revoked by the TRF of the 4th Region, against which special and extraordinary appeals were lodged and are awaiting judgment in the Higher Court of Justice (“STJ”) and STF, respectively.
The merged company Trikem, with respect to its industrial unit installed in São Paulo, filed a injunction to request the same credit. The process is waiting for a judgment in the Trial Court.
The merged companies OPP Química and Trikem, with respect to their industrial units installed in Bahia, filed a civil action on the matter. The decision was unfavorable, and the Company lodged an appeal against it. The judgement of this appeal is pending a decision by the TRF of the 1st Region.
The merged company Trikem, with respect to its industrial units installed in Alagoas, filed a writ of security on the matter. The security was granted and the credit on exports was assured for the ten years before bringing the suit. The TRF of the 5thRegion maintained the favorable decision; however, it limited the length of the term for use of credits to five years. Against this decision, special and extraordinary appeals were lodged and are awaiting judgment in the STJ and STF, respectively.
The external legal advisor of the Company believes that the chances of success with respect to the export credit itself and the effects of monetary restatement (expurgations, monetary restatement and accrual of the SELIC rate) are probable.
(ii) IPI – Purchase of zero-rated materials
In addition to the legal action filed in the State of Rio Grande do Sul, with a decision of the STF in its favor (Note 10), the Company and its merged companies OPP Química, Trikem and TrikemNitrocarbono challenged the expiration of the period of effectiveness of the IPI tax credit (crédito-prêmio) introduced by Decree-Law 491 of 1969 as an incentive to manufactured products exports. Most lower court decisions have similar legal actionsbeen favorable, but such favorable decisions may still be appealed.
In hearing the appeal lodged by another taxpayer seeking court recognition of its current entitlement to use such tax benefit the Superior Court of Justice (STJ) upheld its rejection to such prospective use and affirmed that the above-mentioned tax benefit expired in 1990. When the States of São Paulo, Bahia and Alagoas, to supportSTJ completes its judgment, the STF will revisit the right to the IPI credituse those tax credits after 1990, based on the purchasesapplication of raw materials and input materials exempt, not taxed or taxed Temporary Constitutional Provisions Act (ADCT) 41.
F-62
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
In the zero rate. The process in São Paulo is awaiting decision in the lower court. In this case, the preliminary injunction was denied and the TRFopinion of the 3rd Region granted suspensive effects to recognizeCompany's external legal advisors, it is not probable that the right to that credit. The process originated in Bahia obtained a favorable decision inCompany will lose these cases.
(ii) IPI - Purchase of zero-rated materials
Merged companies OPP Química, Trikem and Polialden have filed lawsuits claiming IPI tax credits from the TRF of the 1st Region, which was the object of a Special and Extraordinary Appeal by the Federal Government. The Special Appeal was not accepted by the TRF and STJ and the Extraordinary Appeal awaits judgment in the STF. The process originated in Alagoas obtained a favorable decision by the TRF of the 5th Region, however a formal error in this judgment caused the STJ to remand the case to the TRF. This case is pending judgment in the STJ awaiting the Company’s motion for clarification.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
In August 1999, Polialden filed a motion for writ of security and was authorized to use the IPI credits originating from acquisition of raw materials and inputs that are exempt, from IPI, not subject to IPI taxationnon-taxed or taxed at a zerozero-percent rate. Lower courts have granted most lawsuits to that end.
In a decision rendered in February 2007 in a case unrelated to the Company, the STF decided against the right to use zero-percent rate for the preceding five years. The TRF of the 1st Region confirmed this decision, which was object of special and extraordinary appeals by the Federal Government. This case awaits judgment in the STF. From March 2000 through December 2005, Polialden used R$ 98.0IPI credits to offset other taxes by a close majority (6 to 5). In June 2007, the IPI tax owedSTF full bench ruled, by majority opinion, that prospective-only effects could not be given to an STF decision that later reversed an earlier taxpayer-friendly determination made by the STF full bench itself (i.e., such reversals apply to the earlier case and not only to future cases). This ruling had a negative bearing on judgment of the cases involving merged companies OPP Química and Trikem in its ordinary course of business. As the offset is considered a contingent asset, a liability has been recordedBahia, leading to offset the contingent gain recorded.
(iii) PIS/COFINS – Law Nº 9718 of 1998
Effective as from February 1999, the basis and applicable rates for PIS and COFINS contributions were increased through Law N° 9718 of 1998.
court.
The Company still benefits from a favorable court decision in different legal actions, has challengedthe lawsuit lodged by its merged company Trikem in Alagoas, allowing the Company to use these tax credits. The Company will have to pay out the offset sums when the court decision on this case is reversed. It should be noted that all of these amounts have been provisioned for, which will mitigate the adverse impact on the Company's results of operations.
(iii) PIS/COFINS - Law 9718 of 1998
The Company and merged companies OPP Química, Trikem and Polialden have brought a number of lawsuits to challenge the constitutionality of the expansion in the calculation basis for the period from February 1999 to November 2002 for PIS and for the period from February 1999 to January 2004 for COFINS. Based on a new PIS law issuedCOFINS, and also the increase in December 2002 and on a newthe tax rate from 2% to 3% for COFINS, law issued inincreased by Law 9,718/98.
In February 2004, the expanded bases are no longer questioned due to the new non-cumulative system introduced by these laws. As from such dates,2006, the Company started payingreceived a final and conclusive favorable decision to one of these contributions as determined by proper legislation. In relation to past periods,actions initiated in March 1999. Accordingly, the Company recorded provisionsreversed a provision totaling R$ 89.6 (included in accordance with amounts due under Law Nº 9718, and, based onNote 24).
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
As the advice of its external legal counsel, the Company believes that it is reasonably possibleSTF full bench had ruled, in November 2005, that the portionexpansion of the Law in respect of the expanded contribution base may be upheld as being constitutional. Provisions have been recorded based on amounts payable under the expanded basis and increased rates in accordance with Law Nº 9718, while awaiting a final decision in relation to constitutionality.
In November 2005, the STF determined that the increase in PIS and COFINS tax basis under Law Nº 9718/9,718/98 is unconstitutional. The status of each action is as follows:
Some of this sum, R$ 64.3 have been deposited in court. As the final decision was favorable to the Company, it has requested that the deposit be released. This request is pending approval. Finally, the undue payment of such contribution at R$ 14.6 was recognized in the Company’s quarterly results.
Braskem S.A. and its Subsidiaries
NotesCOFINS tax rates from 2% to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
cash on December 15, 2006.
(iv) Special Installment Program (PAES)—- PAES - Law Nº 10684/10,684/03
On May 30, 2003, Law Nº 10684 was published, introducingno. 10,684 introduced the PAES program, which offers taxpayers with liabilities to the Federal Revenue Office or the National Treasury (that have been confessed or are being challenged in the courts) the option of paying their overdue tax obligations at February 28, 2003, in up to 180 consecutive monthly installments.
The legislation provides, among other benefits, for a 50% reduction in the fines on arrearsarreas as well as the utilization of the TJLP to update the installments due (replacing the usual SELIC rate which is more onerous).
In August 2003, merged company Trikem choseopted to desist from its legal action in relation to claims relating to COFINS (Note 17(iii)) to take advantagefile a voluntary dismissal of the lawsuit against the COFINS rate increase from 2% to 3% under Law 9,718/98, thus qualifying for the more favorable payment terms ofconditions under the program.PAES program instituted by Federal Law 10,684/03. The amount due is being paid in 120 installments and the option was confirmed with paymentmonthly installments. The total outstanding amount payable is R$ 36.6 as of the first installment on August 31, 2003. At December 31, 2005 the balance due was R$ 49.7, consisting of2007, representing R$ 6.6 in current liabilities and R$ 43.130.0 in long- termnon-current liabilities (2004 –(2006 - R$ 56.3, consisting of43.2, representing R$ 6.6 in current liabilities and R$ 49.736.6 in long-termnon current liabilities).
Even though the Company had met all legal requirements and payments were being made as and when due, the National Treasury Attorney's Office (PFN) disqualified the Company for PAES on two different occasions, and the Company obtained a court relief reinstating it to PAES in these two events. In reliance on the opinion of the Company's advisors, management believes that the Company's eligibility for these installment payments will be upheld as originally requested.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
17Income taxTax and social contributionSocial Contribution on net incomeNet Income
(a) Income tax reconciliation
2007 | 2006 | 2005 | ||||
Income before income tax and minority interest | 1,184.2 | 90.1 | 749.1 | |||
Income tax and social contribution benefit (expense) at | ||||||
statutory rate 34% | (402.6) | (30.6) | (254.7) | |||
Income tax on equity in earnings of associated companies | (0.1) | 6.1 | 3.0 | |||
Non-deductible amortization of goodwill | (29.8) | (30.3) | (38.2) | |||
Exempt exchange losses on foreign currency | (2.9) | (1.9) | (4.5) | |||
Income tax incentives (Note 18(a)) | 0.9 | 5.6 | 15.5 | |||
Other permanent differences | (71.8) | (22.7) | 25.9 | |||
Tax effect of Social Contribution tax exemption (c) below | 52.3 | 5.7 | 70.6 | |||
Net change in valuation allowance | (9.1) | 6.2 | 6.3 | |||
Tax on goodwill of merged subsidiary Polialden | ||||||
(Note 1(c)(vii)) | 85.8 | 75.9 | - | |||
Other | 0.3 | (1.2) | (1.2) | |||
Income tax expense, per consolidated statement | ||||||
of operations | (377.0) | 12.8 | (177.3) | |||
In 2007, R$ 49.4 of the income tax expense was entitled to income tax exemption/ abatement. In 2006, due to tax losses, there were no such benefits (2005 - R$ 44.2) .
2005 | 2004 | 2003 | |||||||
Income before income tax and minority interest | 749.1 | 796.8 | 562.6 | ||||||
Income tax and social contribution benefit (expense) at statutory rate 34% | (254.7 | ) | (270.9 | ) | (191.3 | ) | |||
Income tax on equity in earnings of associates | 3.0 | (15.4 | ) | 20.4 | |||||
Non-deductible amortization of goodwill | (38.2 | ) | (26.4 | ) | (87.0 | ) | |||
Exempt exchange losses on foreign currency | (4.5 | ) | (2.5 | ) | (43.2 | ) | |||
Income tax incentives (Note 19(a)) | 15.5 | 17.0 | 28.8 | ||||||
Other permanent differences | 25.9 | (7.7 | ) | (19.7 | ) | ||||
Tax effect of social contribution tax exemption ((c) below) | 70.6 | 65.1 | 64.0 | ||||||
Net change in valuation allowance | 6.3 | 166.9 | 109.6 | ||||||
Other | (1.3 | ) | (11.2 | ) | (2.9 | ) | |||
Income tax expense, per consolidated statement of operations | (177.4 | ) | (85.1 | ) | (121.3 | ) | |||
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(b) Deferred taxes
income tax
In accordance with a pronouncement issued by IBRACON on the accounting for income tax and social contribution, supplemented by CVM Instruction Nºno. 371, the Company has recognized deferred tax assets as follows:
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2005 | 2004 | |||||
Deferred tax assets | ||||||
Net operating loss carryfowards | 110.3 | 134.9 | ||||
Goodwill and deferred charges | 37.8 | 42.2 | ||||
Non-deductible accrued expenses and other temporary differences | 165.0 | 165.0 | ||||
Gross deferred tax assets | 313.1 | 342.1 | ||||
Valuation allowance | (20.5 | ) | (26.8 | ) | ||
Net long-term deferred tax assets | 292.6 | 315.3 | ||||
Deferred tax liabilities | ||||||
Accelerated depreciation and others | (10.4 | ) | (11.7 | ) | ||
Long-term deferred tax liabilities | (10.4 | ) | (11.7 | ) | ||
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
2007 | 2006 | 2005 | ||||
Deferred tax assets | ||||||
Net operating loss carryfowards | 146.4 | 162.2 | 110.3 | |||
Goodwill and deferred charges | 153.7 | 100.4 | 37.8 | |||
Non-deductible accrued expenses and other temporary | ||||||
differences | 161.2 | 146.9 | 165.0 | |||
Gross deferred tax assets | 461.3 | 409.5 | 313.1 | |||
Valuation allowance | (2.8) | (11.9) | (18.1) | |||
Total income tax | 458.5 | 397.6 | 295.0 | |||
Less: current deferred tax assets | (63.0) | (20.6) | (22.0) | |||
Long-term deferred tax assets | 395.5 | 377.0 | 273.0 | |||
Deferred tax liabilities | ||||||
Accelerated depreciation and other | (64.5) | (17.3) | (10.4) | |||
Long-term deferred tax liabilities | (64.5) | (17.3) | (10.4) | |||
The Company believes that it is more likely than notprobable that the deferred tax asset, net of the valuation allowance, will be recovered within ten years. Deferred tax assets have not been provided for temporary differencedifferences and losses carry forwardloss carryforwards whose realization is not considered more likely than not.
probable.
In addition to the positive results arising from the corporate restructuring process described in Note 1(b)1(c), expected future taxable income is based on projections and feasibility studies based on price, exchange rate, interest rate, market growth assumptions as well asand other variables relevant to the Company.
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The amounts recorded as deferred tax assets in the short-term portion refer to jointly-controlled companies.
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(c) Social contribution
Contribution on Income ("CSL")
In view of the discussions ofover the constitutionality of Law 7689/88,7,689/98, the Company and its merged companies OPP Química, and Trikem and its subsidiary Polialden filed a lawsuitcivil lawsuits against the payment of social contribution.
The TRF of the 1st Region had expressly recognized the unconstitutionality of this tax, and the courts issuedCSL. A final and unappealable decisionscourt decision favorable to the Company, the mergedthese companies and Polialden. was rendered.
However, the Federal Government filed a rescission action to revokesuit on the judgment(ação rescisória) challenging the decisions in favor ofon the lawsuits filed by the Company, Trikem and Polialden, arguingbased on the argument that - after the final decision favorable to those companies - the Plenary Sessionfull bench of the STF had declared the constitutionality of this tax for all years in question except infor 1988. As the Federal Government did not file a rescission actionsuit on the judgment in the case of OPP Química, the first final and conclusive decision remained in force for OPP Química.
force.
The decisionssuit on the judgment is pending review by the STJ and STF of lowera number of appeals concerning this specific matter. Even though the suit on the judgment and first appeal courts were favorable to the Federal Government; however, tax payments are still suspended. Currently,on hold, the mentioned action is awaiting final judgment of the appeals lodged to the STF and STJ.
Based on the referred STF decision, the SRFFederal Revenue Office has issued tax assessmentinfraction notices against the Company and its merged companies, against whichand administrative defense argumentsdefenses have been filed.
Braskem S.A.Based on the opinion of its legal advisors (which stated the likelihood of a favorable outcome as reasonably possible), management believes that the following is likely to occur: (i) the courts will eventually release the Company from paying this tax; and its Subsidiaries
Notes(ii) even if the suit on the judgment is held invalid, the effects of the judgment should not apply retroactively to the Consolidated Financial Statements—(Continued)year of enactment of the law. For these reasons the Company has created no provisions for this tax.
at December 31, 2005, 2004 and 2003
All amounts in millionsIf retrospective collection is required by court order (contrary to the opinion ofreais its legal advisors), unless otherwise indicated
The Company believes that it is reasonably possible that it will lose the appeals to maintain the Company’s exemption. If the appeals are not successful, the Company believes that the losspossibility of being imposed a fine is remote. Accordingly, the exemptionamount payable, adjusted for inflation and accruing interest at Brazil's SELIC benchmark rate, would be effective only as from the date of a final unfavorable decision and may not be applied retroactively. For this reason, no liability has been recorded. However, we believe that it is reasonably possible that we will be required to pay these taxes retroactively. If a retroactive claim were made by the government, the exposure to the Company would be, at December 31, 2005, approximately R$ 651.7 (2004 –809.0 (2006 - R$ 562.0)743.0), not including interest but excluding fines.
18 Tax Incentives
19 Tax incentives
(a) Corporate income tax
FromUntil calendar years 2002 toyear 2011, the Company has the right to reduce by 75% the income tax on the profit arising from the sale of basic petrochemical products and utilities. The two Camaçari polyethylene plant hasplants have the same right for the same period.rights until calendar years 2011 and 2012. The polyvinylchloride (“PVC”("PVC") plant at Camaçari has the same right from 2005 to 2014.until 2013. The PVC plantplants in Alagoas and the polyethylene teraphthalate (“PET”("PET") plant at Camaçari are exempt from corporate income tax calculated on the results of their industrial operations until 2008.
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ProductionsTable of Contents
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Production of caustic soda, chlorine,chloride, ethylene dichloride and caprolactam enjoyenjoys the benefit of the 75% decrease in the income tax rate up to 2012.
At the end of each fiscal year, in the case of taxable profit resulting from the benefited operations, income tax calculated without giving effect to these exemptions and reduced rates is recorded as an expense for the year and the income tax benefit of these exemptions and reduced rates is deducted from income tax payable and credited to a capital reserve account, which may only be used to increase capital or absorb losses.
Incentives determined for the year ended December 31, 2007 were R$ 49.4.
On December 14, 2004,As from 2006, the Board of Directors of Braskem approved the use of R$ 463.2 fromsubsidiary Copesul is entitled to the tax incentive reserveincentives provided for absorption of the balance of accumulated losses.in Law 11,196/05, Decree 5,798/06 and MCT Ordinance 782/06.
(b) Value-added tax –- ICMS
The Company has ICMS tax incentives granted by the States of Rio Grande do Sul and Alagoas, through the Company Operation Fund –- FUNDOPEM and State of Alagoas Integrated Development Program –- PRODESIN, respectively. These incentives are designed to foster the installation and expansion of industrial facilities in those states.States. The incentivesincentive determined for the year ended December 31, 20052007 amounted to R$ 7.8 (2004 –15.9 (2006 - R$ 9.9)12.9) . The accounting treatment of such incentives is the same as that applied to the income tax incentive.
19 Long-term Incentive Plan
In September 2005, an incentive plan called the "Long-Term Incentive Plan" was approved by a Shareholders' Meeting. Under the plan, which is not based on the Company's shares, certain employees nominated by management on an annual basis are entitled to purchase certificates of investments called "investment units". The plan goals include, among others, to foster the alignment of interests of Braskem's employees and shareholders to create long-term value, promote a sense of ownership, and foster the employees' commitment to long-term results.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Each year, the board of directors approves eligible participants, the number of investment units to be issued, the percentage of the Company's contribution in consideration of the acquisition by employees, as well as the number of units offered per participant. A participant's acceptance implies payment in cash of the amount assigned to him or her and the execution of a unit purchase agreement. Braskem then issues the related investment unit certificate.
As an incentive to purchase the certificate of investment, the participants receive a bonus of one investment unit certificate for each investment unit certificated purchased. This incentive is redeemable as from the fifth year at the ratio of 20% in the first year and 10% in subsequent years. The value of these units was determined based on the projected value of the Company's class A preferred shares.
The investment unit value is updated on an annual basis to reflect the average quotation of the Company's class A preferred shares at the closing sessions on the São Paulo Stock Exchange (Bovespa) from October to March. Participants do not become Company shareholders as a result of holding investment units, which do not carry any rights or privileges, including, in particular, voting and other political rights. Investment units are issued in the first half of each year and, in addition to the variation in its face value, their yield is equal to dividends and/or interest on capital distributed by Braskem.
There are three types of investment units:
Investment units (and related certificates) are issued on a strictly personal basis and can only be disposed of upon redemption by Braskem, under the following circumstances:
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
The composition and fair value of units on December 31, 2007 are as follows:
Number | Value | |||
Investment Units | ||||
Issued (Alfa Units) | 285,180 | 4.3 | ||
Granted as incentive (Beta Units) | 285,180 | 0.6 | ||
Total | 570,360 | 4.9 | ||
20 Shareholders’ equityShareholders' Equity
(a) Capital
At December 31, 2005, Braskem’s2007, the Company's subscribed and paid-up capital was R$ 3,403.0, consisting of 120,860,0994,641.0, divided into 449,432,611 shares, comprising 149,810,870 common shares, 240,860,356 Class298,818,675 class A preferred shares, and 803,066 Classclass B preferred shares, all consisting of registered shares, with no par value. At the same date, the Braskem’sCompany's authorized capital comprised 488,000,000 shares, of which 175,680,000 arewere common shares, 307,440,000 are Classwere class A preferred shares, and 4,880,000 are Classwere class B preferred shares.
In January 2004,At the Extraordinary General Meeting held on May 31, 2006, shareholders approved a capital increase of the Company by R$ 105.3 as a result of the merger of Trikemsubsidiary Polialden (Note 1(b)1(c)(vii)), Braskem’sthrough the issuance of 7,878,725 class A preferred shares. On the same date, a conversion of 2,632,043 class A preferred shares into common shares at the ratio of 1:1 was also approved.
At the Extraordinary General Meeting held on April 2, 2007, shareholders approved the merger of Politeno into the Company (Note 1(c)(x)). As a result, the Company's capital was increased by R$ 304.619.1 to reach R$ 2,192.0,3,527.4 through the issue of 8,136,165,484 Class1,533,670 class A preferred shares.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
In September 2004, in connection with the Global Offering (Note 1(c)), Braskem increased its capital in the amount of R$ 1,211.0, through the issue of 13,455,000,000 Class A preferred shares, at the price of R$ 90.00 per thousand shares in Brazil and US$ 31.38 outside Brazil. As a result of the Global Offering, Braskem’s capital totaled R$ 3,403.0.
On January 15, 2004, in order to maintain the minimum ratio between common and preferred shares, in accordance with the Brazilian Corporation Law, before the legal merger of Trikem, the The conversion of 121,948,261 Class486,530 class A preferred shares into common shares was approved by Braskem’s shareholders at an Extraordinary General Meeting. Similarly, on September 17, 2004, before the completion of the Global Offering, the conversion of 4,484,963,007 Class A preferred shares into common shares was approved at the Extraordinary General Meeting.also approved.
From September 2004 to March 2005, in accordance with Article 6 of the by-laws, the conversion of 28,313,178 Class B preferred shares into 14,156,589 Class A preferred shares was carried out. As a result at March 31, 2005, before the approval of the reverse share splitexercise of the right to convert the 1st Issue debentures (Note 1(d)1(c)(xiii)), Braskem’sthe Company's capital comprised 30,215,024,848was increased by R$ 1,113.6 on July 31, 2007 to total capital of R$ 4,641.0, through the issuance of 77,496,595 shares, comprising 25,832,198 common shares 60,215,051,485 Classand 51,664,397 class A preferred shares and 200,841,622 Class B preferred shares.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(b) Share rights
Preferred shares do not carry voting rights, but they have a priority right to a minimum non-cumulative annual dividend of 6% per annum of their nominal value, depending on the availability of net income for distribution. Only Class A preferred shareholders share equally with the common shares in the remaining net income, and common shares are entitled to dividends only after priority dividends have been paid to the holders of preferred shares. The Class A preferred shareholders also share equally with common shares in the distribution of shares resulting from the incorporation of other reserves. Class B preferred shares are not convertible into common shares. However, at the end of the non-transfer period provided under applicable law, Class B preferred shares can be converted into Class A preferred shares at any time, at the ratio of two Class B preferred shares for each Class A preferred share.
Class A and Class B preferred shares have priority toin the return of capital in the event of liquidation of Braskem.
All shareholders are entitled to an annual mandatory dividend of 25% of adjusted net income for the year, in accordance with the Brazilian CorporationCorporate Law.
As set forth in a shareholders’shareholders' agreement and memorandum of understanding, the Company musthas a target to distribute dividends corresponding to not less than 50% of the net income for the year, as long as the required reserve amounts are sufficient to allow for the efficient operation and development of the Company’sCompany's businesses.
However the legal obligation of the Company remains to the mandatory dividend of 25%.
Under the terms of certain U.S. dollar-denominated debt (Notes 15(a) and 15(c)medium-term notes (Note 14(d)), the payment of dividends or interest on own capital or any other profit sharing is limitedcapped at two-times the minimum dividends accorded to 50% of net income for the year, or 6% of the nominal value of the Class A and B preferred shares whichever is higher.under the Company's bylaws.
(c) Treasury shares
On May 3, 2006, Braskem's board of directors approved a Share Buyback Program under which common and class A preferred shares in the Company were to be acquired to be kept in treasury and subsequently sold and/or cancelled, with no reduction in capital.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Under the program, the Company acquired 13,131,054 class A preferred shares at the average cost of R$ 13.88. The low and high quotations during this period were R$ 9.97 and R$ 15.89 per share, respectively.
Upon the merger of Politeno (Note 1(c)(x)), the cross shareholding between the companies ceased. The Company's class A preferred shares held by Politeno, amounting to 2,186,133 shares, were added to treasury shares.
At December 31, 2005,2007, the Company held in treasury 467,347 Class16,595,000 class A preferred shares (2004 – 116,836,839(2006 - 14,363,480 shares) for a total value of R$ 257.6 (2006 - R$ 255.6) .
(d) Retention of revenue reserves
On March 28, 2006, Braskem's shareholders approved the transfer of R$ 164.9 from revenue reserves to retained earnings (accumulated deficit) for absorption of prior year adjustments related to IBRACON Technical Interpretation 01/2006 (Note 12).
Braskem S.A.This refers to retention of the balance of retained earnings, to fund expansion projects included in the business plan, as provided in the capital budget proposed by management and its Subsidiaries
Notessubmitted to the Consolidated Financial Statements—(Continued)approval of the shareholders, in accordance with Article 196 of the Brazilian Corporate Law. Retained earnings appropriated to this reserve in 2006 and 2007 are stated in Note 20(e).
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(d)(e) Appropriation of net income
In accordance with the Company’sCompany's by-laws, net income for each year, adjusted as provided by Brazilian Corporate Law, Nº 6404/76, will be appropriated as follows: (i) 5% for constitution of the legal reserve, not exceeding 20% of capital; and (ii) 25% for payment of non-cumulative mandatory dividends, observing the legal and statutory advantages of the preferred shares.
When the priority dividend amount paid to the preferred shares is equal to or higher than 25% of the adjusted net income for the year, calculated in accordance with Article 202 of the Brazilian CorporationCorporate Law, the full payment of the mandatory dividend is carried out.paid. If there is a remaining mandatory dividend after the payment of priority dividend, it will be used as follows: (i) infor the payment to common shares of a dividend up to the limit of the priority dividend of preferred shares; and (ii) if there is a remaining balance in the distribution of an additional dividend, to common shares and Class A preferred shares, on the same basis, so that each common share and Class A preferred share receives the same dividend.
F-72
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
The calculation of the dividends for 20052007 and 2004 are2006 is as follows:
2007 | 2006 | |||
Net income for the year | 547.6 | 101.3 | ||
Excludes effect of consolidation adjustments (*) | (4.4) | (23.5) | ||
Portion appropriated to legal reserve | (27.1) | (3.9) | ||
Adjusted net income for the calculation of dividends | 516.1 | 73.9 | ||
Distribution of profits | ||||
Dividends proposed | ||||
Common shares - (2007 - R$ 0.644) | 96.2 | |||
Class A preferred shares - R$ 0.644 (2006 - R$ 0.159) | 181.8 | 36.8 | ||
Class B preferred shares - R$ 0.644 (2006 - R$ 0.159) | 0.5 | 0.1 | ||
Total dividends proposed | 278.5 | 36.9 | ||
Amount allocated to revenue reserve | 237.6 | 37.0 | ||
Minimum mandatory dividends - 25% | 129.0 | 18.5 | ||
2005 | 2004 | |||||
Net income for the year | 625.8 | 687.1 | ||||
Excludes effect of consolidation (*) | 59.9 | 5.5 | ||||
Portion allocated to legal reserve | (34.3 | ) | (34.6 | ) | ||
Adjusted net income for the calculation of dividends | 651.4 | 658.0 | ||||
Distribution of profits: | ||||||
Interest on own capital (Note 20(e)) | ||||||
Common shares – R$ 0.746 per share (2004 - R$ 1.125) | 90.2 | 34.0 | ||||
Class A preferred shares – R$ 0.746 per share (2004 - R$ 2.256) | 179.4 | 135.6 | ||||
Class B preferred shares – R$ 0.563 per share (2004 - R$ 2.256) | 0.4 | 0.4 | ||||
Total interest on own capital proposed | 270.0 | 170.0 | ||||
Dividends proposed | ||||||
Common shares – R$ 0.154 per share (2004 - R$ 1.131) | 18.6 | 34.2 | ||||
Class A preferred shares – R$ 0.154 per share | 37.1 | — | ||||
Total dividends proposed | 55.7 | 34.2 | ||||
Total interest on own capital and dividends proposed | 325.7 | 204.2 | ||||
Amount allocated to revenue reserve | 325.7 | 454.0 | ||||
Minimum mandatory dividends - 25% | 162.9 | 164.5 | ||||
DividendsThe amount appropriated to the retention of profits reserve in respect of 2005 proposed by Braskem’s board of directors are subject to approval by Braskem’s shareholders.
Retained earnings are2007 is linked to a capital budget included in the Company’s business plan and approved by the board of directors at a meeting held on December 13, 2005,19, 2007, subject to shareholders' approval at the Annual Shareholders' Meeting to be submitted for approval at 2006 annual shareholders’ meeting.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(e)(f) Interest on own capital
On December 29, 2005, pursuant to an authorization from Braskem’sBraskem's board of directors, Braskem’sBraskem's executive officers approved the payment of interest on own capital in the amount of R$ 270.0, consisting of: (i) R$ 179.4 to holders of Class A preferred shares and holders of ADSs, corresponding to the gross amount of R$ 0.746145 per share and R$ 1.492290 per ADS; (ii) R$ 0.4 to the holders of Class B preferred shares, corresponding to the gross amount of R$ 0.563940 per share, equal to 6% of the share unit value, as provided in Article 9 of Braskem’sBraskem's by-laws; and (iii) R$ 90.2 to the holders of common shares, corresponding to the gross amount of R$ 0.746145 per share. Payment will be made within 60 days after the datebegan on April 18, 2006.
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Table of the 2006 annual shareholders’ meeting.Contents
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Interest on own capital was determined based on share ownership positions atas of December 31, 2005, applying such amount to priority and mandatory dividends for 2005, as prescribed by Law 9249/95 and paragraph 6, Article 44 of Braskem’sBraskem's by-laws. Withholding income tax on interest credited was R$ 35.5 and the benefit for the Company regarding income tax was R$ 67.5.
For disclosure purposes, the expense for interest on own capital was reversed in the statement of operations and the reversal was recorded in operating expenses (income), and also reflected in the statement of changes in stockholders’shareholders' equity, pursuant to CVM Deliberation NºNo. 207.
21 Contingencies
(a) Collective labor agreement
The chemical workers union in the Camaçari region (“("SINDIQUÍMICA”MICA") and the syndicate of chemical manufacturers in the same region (“SINPEQ”("SINPEQ") are disputing in the courts whether the wage and salary indexation clause in their collective labor agreement was overruled by a 1990 economic policy law which restricted wage and salary increases. Braskem Polialden,and Politeno and merged companies Trikem, Polialden and Nitrocarbono operated plants in the region in 1990 and are members of SINPEQ. The workers’workers' union is requesting that salaries and wages be adjusted retroactively and cumulatively since 1990. The most recent ruling by the STF, in December 2002, was favorable to SINPEQ and established that the economic policy law overruled the collective labor agreement. SINDIQUIMICA appealed this decision. In May 2005, the appeal was rejected by unanimous opinion.decision. This decision is pending publication. Nevertheless, the decision is subject to reconsideration by the STF. On October 24, 2005, SINDIQUÍMICA filed a motion to review,review. The appeal was submitted to the Office of the Attorney General of the Federative Republic of Brazil for consideration, which is pending judgment.
issued a legal opinion essentially in favor to the employers' union in November 2006. The judgment started in June 2007 but was suspended by one of the court's judges.
Management believes that it is reasonably possible that the employers’employers' union will lose this suit.lawsuit. If the employers’employers' union loses this law suit and assuming that (a) the Company is required to pay damages from April 1990 to September 1990 (the date of the next collective bargaining agreement) and (b) the employees’employees' union or individual employees file additional claims necessary to quantify the amount of damages, the Company estimates that it could be subject to liability of up to R$ 35.0.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(b) Holders of preferred shares
(b)Some holders of class B preferred shares issued by the Company under a tax incentive program are claiming that they are entitled to participate on an equal basis in the remaining profits with the holders of common and class A preferred shares.
Polialden faced an identical issue in a proceeding before the CVM; on August 10, 2000, the CVM Commission sided with the Poliladen's position that "the dividends payable to preferred shares should range from 6% to 8% of the par value of such shares, or the equivalent to 25% of net profits at year end, whichever is higher, as the company has done over the last 10 years. Such shares are not entitled to remaining profits, as the bylaws have clearly set the maximum dividedns attaching to such shares."
Most court decisions already rendered in this regard have been favorable to the Company. Most of judicial deposits made by the Company have already been released to the Company, and at December 31, 2006 there was only one judicial deposit at the historical value of R$ 0.8, related to the 2004 dividends.
The Company believes that the chances of loss in these cases are remote, based on opinions of outside legal counsel, recent court decisions in similar cases and CVM rulings on this specific issue. The Company continues to pay dividends accordingly up to a limit of 6% of the par value or 25% of the minimum mandatory dividends, as set forth in the Company's bylaws.
(c) Offsetting of tax credits
From May through October 2000, the merged companies OPP Química and Trikem offset their own federal tax debts with IPI tax credits assigned by an export trading company (“Assignor”("Assignor"). These offsetting procedures were recognized by the São Paulo tax officials (DERAT/SP) through offset supporting certificates (“DCCs”("DCCs") issued in response to an injunctive relieforder entered in response to a motion for writ of mandamus (“("MS SP”SP"). Assignor also filed a motion for writ of mandamus against the Rio de Janeiro tax officials (DERAT/RJ) (“("MS RJ”RJ") for recovery of IPI
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
tax credits and their use for offsetting withagainst third-party tax debts, among others. The MS SP was dismissed without prejudice, confirming the Rio de Janeiro administrative and jurisdictional authority of the Rio de Janeiro tax officials to rule on Assignor’sthe Assignor's tax credits.
In June 2005, DERAT/SP issued ordinances, canceling the DCCs. Based on saidthese ordinances, the Federal Revenue Office unit in Camaçari/BAari, Bahia sent collection letters to the Company. Notices of dispute were presented by the Company, but the administrative authorities declined to process them. As a result, past-due federal tax liabilities atof R$ 276.6 were postedassessed in December 2005 concerningfor the Company’sCompany's tax debts originating from purportedly undue offsetting procedures.that had been offset with these credits.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Both Assignor and the Company commenced a number of judicial and administrative proceedings to defend the lawfulness and validity of those offsetting procedures, and the legal advisors to both companies believe the chances of success in those cases are probable, mostly in light of the indisputable validity and liquidity of those credits as confirmed in a specific audit conducted by DERAT/RJ.
On October 3, 2005, the Federal Supreme Court heldruled on the MS RJ favorably to Assignor in a final and conclusive manner, confirming Assignor’sAssignor's definite right to use the IPI tax credits from all its exports and their availability for offsetting withagainst third-party debts. As a result, the legal advisors to assignorAssignor and to the Company believe that the offsetting procedures carried out by the merged companies and duly recognized by DERAT/SP have been confirmed, and for this reason they also hold that the tax liabilities being imputed to the Company are not due. Irrespective of the final and conclusive decision in MS RJ, the legal advisors to Assignor and to the Company, in addition to a jurist when inquired of his opinion on this specific issue, believe that the tax liabilities purportedly related to offsetting procedures carried outthat had been offset with these credits by the merged companies have become time-barred and, as such, can no longer be claimed by the tax authorities.
In January 2006, the Company was ordered to post bond in aid of execution of the tax claim referred to above. This bond will bewas tendered in the form of an insurance policy currently under negotiation betweenamong the Company, the Assignor and insurance companies.
The Company believes, based on the advice of its external legal advisors, that the chances of success in all of the above claims listed above are probable; nevertheless,probable. Nevertheless, if the Company is eventually defeatedunsuccessful in all those cases, it will be entitled to full recourse against the Assignor concerning all amounts paid to the National Treasury, as per thean assignment agreement executed in 2000.
(c)(d) National Social Security Institute –- INSS
The Company is a party to several social security claims totaling R$ 169.9285.9 as of December 31, 2005.2007 (2006 - R$ 164.8) . Out of these sums, the Company has made judicial deposits of R$ 15.1, and R$ 18.2 are secured by a portion of the Company’sCompany's inventory. The Company, based on the opinion of its external legal counsel, has recorded a provision for the probable losses with social security disputes amounting to R$ 8.5 at December 31, 2005. Based on the opinion of its outside legal counsel, the Company believes that the chances of successloss for the remaining amounts are probableremote, and, therefore, no provision has been recorded.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(e) Other litigationcourt disputes involving the Company
and its controlled companies
The Company is party to a civil lawsuit filed by a former caustic soda customer, claiming amounts, at December 31, 2005,2007, of R$ 131.0 (2004 –27.5 (2006 - R$ 168.3)25.8) . Braskem’sBraskem's management, supported by the opinion of its external legal advisors, believe that an unfavorable decision ischances of losses are remote and, for this reason, no provisions have been established.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
recorded.
The Company acts as respondent in an arbitration commenced by a shipping company and its subsidiary Polialden are partiespending in the City of Rio de Janeiro. Braskem was eventually sentenced to certain proceedings brought by some preferred shareholders. Braskem’s management believes, based on its legal advisors’ opinions, that an unfavorable decision is remote and,pay R$ 10.4 for this reason, no provisions have been established. In December 2004, as published a material event notice, some minority shareholders waivedbreach of the lawsuits filed against Polialden, exchanging their Polialden preferred shares for the Company’s Class A preferred shares.original contractual conditions.
DuringIn the second quarter of 2005, the Petrochemical and Chemicals Companies Employees Union of Triunfo, (RS)Rio Grande do Sul and Camaçari, (BA)Bahia brought labor actions claiming payments in respect of overtime. The Company has filed the proper defensedefenses in those lawsuits and does not expect any losses in these lawsuitsactions.
The Company is a defendant in an arbitration in the City of Rio de Janeiro commenced by a freight company. Recently, the arbitrators asked for a technical expert opinion on the subject matter and extent of the dispute, which was estimated at R$ 29.0. However, in reliance on the opinion of legal advisors to the Company interests, the Company believes that it is likely to prevail, and for this reason no losses are expectedamounts were provisioned for these cases.
this matter.
As of December 31, 2005,2007, the Company is a defendant in approximately 1,1001,218 labor claims, including those mentioned in the paragraph above.above, totaling approximately R$ 292.3 (2006 - R$ 260.2) . Based on the opinion of its external legal advisors, the Company has provided a provision of R$12.3 25.0 at December 31,200531, 2007 (2006 - R$ 21.9) for the probable losses in these claims.
The subsidiary Copesul was assessed by the Federal Revenue Office in 1999 for IRPJ and CSL credits recorded for the base period of 1994, with respect to the monetary restatement of the balance sheet and equity in the earnings of subsidiaries, as a result of the recognition of dividends distributed by a foreign subsidiary. The restated amount of this claim, which is pending judgment of an appeal leged by the National Treasury with the Higher Chamber for Tax Appeals, is R$ 21.3. The legal advisors to Copesul believe that a favorable outcome in this claim is possible.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
22 Financial instrumentsInstruments
(a) Risk management
Because the Company operates in the international markets, obtainingraises funds for its operations and makes investments in the international markets, it is exposed to market risks mainly arising from changes in the foreign exchange and interest rates. The Company's bank accounts, financial investments and other accounts receivable are subject to credit risk. The Company has developed policies and procedures for risk evaluation, report preparation and mathematical models for the monitoring of these risks and possible use of derivatives to decrease these risks.
To cover its exposure to market risks, the Company utilizes various types of currency hedges, some involving the use of cash and others not. The most common cash–basedcash-based currency hedges used by the Company are financial instruments denominated in foreign currencies (certificates of deposit, U.S. dollar-denominated securities, foreign mutual funds, time deposits and overnight deposits) and put and call options. The non-cash types of currency hedges used by the Company are swaps of foreign currency and forwards.
To hedge its exposure to exchange and interest rate risks arising from loan and financing agreements, the Company adopted, at December 31, 2001,in May 2004, the following methodology: hedging of the principal and interest (on a consolidated basis), falling due in the next 12 months of, at least, (i) 60% of the debt linked to exports (trade finance), except for advances on exchange contracts of up to six months and advances on export contracts; and (ii) 75% of the debt not linked to exports (non-trade finance).
(b) Exposure to foreign exchange risks
The Company has long-term loans and financing to finance its operations, including cash flows and project financing. A substantial part of the long-term loans and financing is denominated in U.S. dollars.dollars (Note 15)14).
(c) Exposure to interest rate risks
The Company is exposed to interest rate risks on its short-term and long-term debt. The debt in foreign currency, bearing floating interest rates, is mainly subject to LIBOR variation, while the domestic debt, bearing floating interest rates, is mainly subject to fluctuations in the TJLP and the CDI raterates and the IGP-M inflation index.
F-78
Braskem S.A. and its SubsidiariesTable of Contents
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(d) Exposure to commoditiescommodity risks
The Company is exposed to fluctuations in the price of several petrochemical commodities, especially its main raw material, naphtha. Because the Company seeks to transfer to its own selling prices the effect of price changes in its raw material,materials, arising from changes in international quotations for naphtha, part of its sales may be carried out under fixed-price contracts or contracts stating maximum and/or minimum fluctuation ranges. Such contracts are commercial agreements or derivative contracts relating to future sales.
(e) Exposure to credit risk
The Company is subject to concentration of credit risk in connection with bank accounts, financial investments and other accounts receivable, which expose the Company to risks relating to financial institutions involved. In order to manage the credit risk, the Company keeps its bank accounts and financial investments with large financial institutions.
In relation to customer credit risk, the Company protects itself by performing detailed analyses before granting credit and by obtaining security and guarantees, when necessary.
(f) Derivative instrument transactions
(f) MarketAs of December 31, 2007, the Company had the following derivative contracts:
Market value (i) | ||||||||
Notional | December | December | ||||||
Description | Maturity | amount | 2007 | 2006 | ||||
Real/US$ - Option (Put US$) | February 2007 | US$ 306.0 | - | (11.6) | ||||
Real + CDI/Yen + Tibor (swap) | March 2012 | R$ 136.0 | (45.5) | (45.2) | ||||
Real + CDI/Yen + Tibor (swap) | June 2012 | R$ 143.0 | (31.3) | (22.8) | ||||
Real + CDI/US$ (swap) | May 2007 | US$ 100.0 | - | (24.3) | ||||
Real + CDI/US$ (swap) | February 2007 | US$ 200.0 | - | (19.1) | ||||
Tax Sparing II (credit default swap) | June 2015 | US$ 100.0 | 0.1 | 0.1 | ||||
Return Swap over investment funds | December 2007 | US$ 410.0 | 34.7 | 10.2 | ||||
Benzene (non deliverable forward) | January 2007 | 146.7 th.tons | - | (6.9) | ||||
Swap Austrian Notes | January 2010 | R$ 259.6 | (19.2) | - | ||||
Swap Austrian Notes | January 2011 | R$ 243.5 | (20.7) | - | ||||
Swap Cupom vs Libor | July 2008 | US$ 150.0 | 0.2 | - |
(i) The market value represents the amount receivable (payable) if transactions have been settled at December 31, 2006 or 2007, as applicable.
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Table of derivative instrumentsContents
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
To determine the estimated market value of financial instruments, the Company uses reversal transaction quotations or public information available in the financial markets, as well as valuation methodologies generally accepted and utilized by counterparties. These estimates do not necessarily assure that such transactions could be realized in the market at the indicated amounts. The use of different market information and/or valuation methodologies could have a significant effect on the estimated market value.
All outstanding derivative contracts are intended only to offset financial gains and losses (hedge) on the fair value of other Company's assets or liabilities. Accordingly, they are linked to purchases, sales, financial investments or debt agreements.
Braskem S.A. and its Subsidiaries(g) Fair market value of financial instruments
NotesThe estimated fair market value of financial instruments as of December 31, 2007 is similar to their book value, as a result of the maturities or the frequent adjustments to the Consolidated Financial Statements—(Continued)prices of these instruments, as follows:
Book value | Fair value (MTM) | |||
Assets | ||||
Cash and cash equivalents and other investments | 2,350.9 | 2,350.9 | ||
2,350.9 | 2,350.9 | |||
Liabilities | ||||
Short and long-term debt | 7,470.4 | 6,629.6 | ||
Debentures | 911.6 | 917.4 | ||
8,382.0 | 7,547.0 | |||
The fair market value of financial assets and short and long-term debt, when applicable, was determined by applying the current interest rate available for operations with similar conditions and remaining maturities.
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
23 Financial Income (Expenses), net
2007 | 2006 | 2005 | ||||
Financial income | ||||||
Interest income | 134.7 | 140.0 | 140.1 | |||
Monetary variation of financial investments, related parties and | ||||||
accounts receivable | 24.7 | 48.1 | 17.7 | |||
Monetary variation of taxes recoverable | 12.2 | 48.6 | 7.6 | |||
Gains on derivative transactions | 47.3 | 114.1 | 45.7 | |||
Exchange variation on foreign currency assets | (350.4) | (204.2) | (288.8) | |||
Other | 18.0 | 12.9 | 44.1 | |||
(113.5) | 159.5 | (33.6) | ||||
Financial expenses | ||||||
Interest on financing and related parties | (341.9) | (287.8) | (347.0) | |||
Monetary variation on financing and related parties | (203.8) | (255.5) | (203.1) | |||
Monetary variation and interest on taxes and suppliers | (123.8) | (178.5) | (169.7) | |||
Losses on derivative transactions | (44.8) | (161.9) | (61.5) | |||
Expenses for sale of invoices at a discount | (128.3) | (119.7) | (108.2) | |||
Discounts granted | (137.6) | (138.0) | (88.4) | |||
Exchange variation on foreign currency liabilities | 1,073.1 | 333.4 | 556.9 | |||
Taxes and charges on financial transactions | (274.7) | (228.4) | (110.6) | |||
Interest on own capital | - | - | (270.0) | |||
Reversal of interest on own capital | - | - | 270.0 | |||
Other | 1.7 | (61.5) | (144.2) | |||
(180.1) | (1,097.9) | (675.8) | ||||
Financial results, net | (293.6) | (938.4) | (709.4) | |||
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
2005 | 2004 | 2003 | |||||||
Financial income: | |||||||||
Interest income | 140.1 | 160.8 | 65.7 | ||||||
Monetary variation of financial investments, related parties and accounts receivable | 17.7 | 12.8 | 31.2 | ||||||
Monetary variation of taxes recoverable | 7.6 | 31.8 | 88.0 | ||||||
Gains on derivative transactions | 45.7 | 125.8 | — | ||||||
Exchange variation on foreign currency assets | (288.8 | ) | (335.3 | ) | (213.4 | ) | |||
Other | 44.1 | 72.7 | 37.7 | ||||||
(33.6 | ) | 68.6 | 9.2 | ||||||
Financial expenses: | |||||||||
Interest on loans and financing and related parties | (347.0 | ) | (595.3 | ) | (552.1 | ) | |||
Monetary variation of financing and related parties | (203.1 | ) | (380.9 | ) | (293.1 | ) | |||
Monetary variation and interest on taxes, contributions and suppliers | (169.7 | ) | (137.1 | ) | (189.0 | ) | |||
Losses on derivative transactions | (61.5 | ) | (131.4 | ) | (65.2 | ) | |||
Expenses with vendor transactions | (108.2 | ) | (73.6 | ) | (173.9 | ) | |||
Discounts granted | (88.4 | ) | (80.7 | ) | (148.9 | ) | |||
Exchange variation on foreign currency liabilities | 556.9 | 425.4 | 972.1 | ||||||
Taxes and charges on financial transactions | (110.6 | ) | (148.4 | ) | (105.3 | ) | |||
Interest on capital | (270.0 | ) | (170.0 | ) | — | ||||
Reversal of interest on capital | 270.0 | 170.0 | — | ||||||
Other | (144.2 | ) | (185.2 | ) | (165.4 | ) | |||
(675.8 | ) | (1,307.2 | ) | (720.8 | ) | ||||
Financial expenses, net | (709.4 | ) | (1,238.6 | ) | (711.6 | ) | |||
24 Other operating income (expenses)Operating Income (Expenses)
2007 | 2006 | 2005 | ||||
Income (expenses) | ||||||
Rental of facilities and assignment of right of use | 24.3 | 45.4 | 3.9 | |||
Recovery of taxes (Note 16(iii)) | 120.0 | 125.9 | 3.4 | |||
Recovery of costs/inventory adjustments | (21.2) | (9.3) | 10.5 | |||
Other operating income/(expenses), net | 8.4 | 24.1 | 5.0 | |||
131.5 | 186.1 | 22.8 | ||||
Recovery of taxes represents reversals of provisions for contingencies for which final unappeable decisions have been received.
2005 | 2004 | 2003 | |||||
Income (expenses) | |||||||
Rental of installations and assignment of right to use | 3.9 | 20.7 | 18.2 | ||||
Recovery of taxes and compulsory deposits | 3.4 | 16.4 | 29.5 | ||||
Insurance recoveries | — | 1.6 | 11.6 | ||||
Other operating income (expenses), net | 15.5 | 4.3 | (3.8 | ) | |||
22.8 | 43.0 | 55.5 | |||||
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
25 Non-operating income (expenses)Income (Expenses)
2007 | 2006 | 2005 | ||||
Income (expenses) | ||||||
Change in interest in investments | (35.5) | 2.4 | 5.4 | |||
Sale of permanent assets | (2.0) | (0.5) | 0.8 | |||
Provision for loss on investments | - | - | (4.3) | |||
Provision for loss/retirement of assets | (13.8) | - | (22.4) | |||
Other non-operating income (expenses), net | (15.9) | 5.2 | (4.7) | |||
(67.2) | 7.1 | (25.2) | ||||
2005 | 2004 | 2003 | |||||||
Income (expenses) | |||||||||
Gain (loss) on participation in investments | 5.4 | 3.5 | (2.7 | ) | |||||
Gain (loss) on permanent assets disposal | 0.8 | 0.5 | (0.1 | ) | |||||
Assets removal costs | — | — | (16.2 | ) | |||||
Residual value of disposed fixed assets | — | (5.5 | ) | — | |||||
Loss on disposal of permanent assets | (22.4 | ) | (18.2 | ) | (3.8 | ) | |||
Other non-operating expenses, net | (9.0 | ) | (10.1 | ) | 18.3 | ||||
(25.2 | ) | (29.8 | ) | (4.5 | ) | ||||
26 Insurance coverage
Coverage
The Company has a broadly-basedbroadly based risk management program designed to provide coveragecover and protection for all assets, as well as possible losses caused by production stoppages, through an “all risks”"all risks" insurance policy. This policy establishes the amount forof maximum probable damage, which the Company’s management considersconsidered sufficient to cover possible losses, taking into account the nature of the Company’sCompany's activities and the advice of insurance consultants. At December 31, 2005,2007, insurance coverage for inventories, property, plant and equipment, and loss of profits of the Company and its subsidiary Polialden amounted to R$ 4,439.4was US$ 4.3 billion per claim, while the total of all insured assets amounted towas R$ 9,885.3.16,270.2.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
27 Shares traded abroad –Traded Abroad - NYSE and LATIBEX
(a) NYSE
American Depositary Receipts ("ADRs") program
The Company’sCompany's ADSs are traded on the NYSE with the following characteristics:
(b) LATIBEX
The Company’sCompany's Class A preferred shares are traded on LATIBEX, the Madrid Stock Exchange’sExchange's market for Latin American companies quoted in euros. The shares are traded under the symbol “XBRK”"XBRK" and the Brazilian custodian bank is Banco Itaú S.A.
LATIBEX has adjusted and altered the process for quotation and trading to comply with the new Corporate Governance Standards adopted by Bovespa. Accordingly, as from May 16, 2005, the shares have been traded in groups of five shares.units.
28 Private pension plans
Pension Plans
The actuarial obligations relating to the pension and retirement plans are accrued in conformity with the procedures established by CVM Deliberation Nº 371, except for ODEPREV – Odebrecht Previdência (“ODEPREV”), for which such procedures are not applicable.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
The formation of Braskem (Note 1 (b)) involved the integration of six sponsoring companies and three different pension plans managed by Fundação PETROBRAS de Seguridade Social–PETROS (“PETROS”), PREVINOR–Associação de Previdência Privada (“PREVINOR”) and ODEPREV–Odebrecht Previdência (“ODEPREV”). In addition to sponsoring different private pension plans, the Company has approximately 800 employees who do not participate in Company–sponsored pension plans, as no new benefits have been granted to employees since the inception of the Company. The Company’s management ceased to provide benefits to new employees in order to devise a single, legitimate solution for all participants, with a view to protecting the plan participants’ financial assets.
Experts engaged by the Company recommended that ODEPREV be the only supplementary pension plan entity sponsored by the Company. Furthermore, employees who do not participate in the PETROS and (a) PETROS/PREVINOR plans were offered the opportunity to join the ODEPREV plan, retroactively to August 16, 2002.
In early June 2005, the Company communicated to PETROS and PREVINOR its intended withdrawalintention to withdraw as a sponsor effective as of June 30, 2005. With regard to PETROS, the Company is completing the calculation of mathematical reserves of participants was completed in November 2006 and submitted in that define potential requirements of contribution bymonth to the Company to cover previous pension commitments. Following the completion of actuarial calculations, the proposed withdrawal as a sponsor will be submitted for the approval of the National Superintendency for Supplementary Pension Plans,Plan Secretary, a Social Security Ministry department in charge of regulating and inspecting private pension plans. To support the above–mentioned potential contribution, theThe Company recordedhas a provision of R$ 58.6 in long–term liabilities. During 2005,19.6 (2006 - R$ 58.6), which is considered sufficient to face any disbursements at the Company’s contributions to PETROS totaled R$ 2.8 (2004 – R$ 6.2), while employees’ contributions amounted to R$ 1.8 (2004 – R$ 3.5).time the commitments of this plan are settled.
F-82
During 2005, the Company’s contributions to PREVINOR totaled R$ 0.6 (2004 – R$ 1.2), while participants’ contributions amounted to R$ 0.4 (2004 – R$ 0.7). At December 31, 2005, there were only 12 participants in the defined benefit plan.Table of Contents
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Benefits to retired employees and pensioners will continue to be paid on a regular basis up to completion of the process.
The merged company Politeno was a sponsor of PREVINOR until January 2007. The computation of the mathematical reserves was completed, as well as the Sponsorship Withdrawal Memorandum to be sent to SPC. Plans maintained by Politeno have a funded status and no disbursements by Braskem are required.
(a)It is expected that the Sponsorship Withdrawal Memorandum will be lodged with the authorities in the first quarter of 2008.
Polialden's commitments to participants under the PRENINOR plan were settled in the first half of 2007 with no requirement of contributions by the Company.
(b) ODEPREV
The Company has a defined–defined contribution plan for its employees. The plan is managed by ODEPREV–ODEPREV - Odebrecht Previdência which is sponsoredwas set up by Odebrecht S.A. as a closed private pension entity. ODEPREV offers participatingits participants, employees of the sponsoring companies, the Optional Plan, a defined–defined contribution plan, under which monthly and periodicsporadic participant contributions and annual and monthly sponsor contributions are accumulated and managed in individual retirement savings accounts.
The Board of Trustees of ODEPREV defines each year in advance the parameters for contributions to be made by the participants and the sponsoring companies. With regard to the payment of benefits under the Optional Plan, the obligation of ODEPREV is limited to the total value of the quotas held by its participants and, to comply with the regulations for a defined–contributiondefined-contribution plan, it will not be able to require any obligation or responsibility on the part of the sponsoring company to assure minimum levels of benefits to the participants who retire.
Currently,At December 31, 2007, the number of active participants in ODEPREV total 2,131 (2004 –1,133).
During 2005, sponsor’samounted to 2,512 (2006 - 2,354), and employees��the Company's and employees' contributions to ODEPREVin 2007 amounted to R$ 4.6 (2004 –5.9 (2006 - R$ 2.4)7.9) and R$ 9.3 (2004 –16.3 (2006 - R$ 5.8)13.2), respectively.
(c) Copesul
Braskem S.A.Copesul and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(b) PETROS
At December 31, 2005, jointly-controlled companies Copesul and Petroflex take part in the defined benefit plan for employees managed by PETROS. The main objectives of the plan are to: (i) supplement retirement benefits provided by the Government; and (ii) implement social assistance programs with the support of the sponsoring companies. The sponsoring companies and their employees pay monthlymake contributions to PETROS based on- Fundação Petrobras de Seguridade Social, under retirement and defined benefit pension plans. In 2006, the employees’ compensation.rate of the contribution salary was 12.93% over the total compensation of employees who participate in the plan. In 2007, contributions made by Copesul added up to R$ 5.7 (2006 - R$ 5.6) .
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Pursuant to PETROS's charter and applicable law, in the event of a material insufficiency of technical reserves, both the sponsors and participants will be required to make a financial contribution, otherwise the plan benefits will be downsized in accordance with the available funds. As of the balance sheet date, this subsidiary was not required to make any supplementary contribution.
In accordance with CVM Deliberation Nº 371, which approved NPC Nº 26 of IBRACON—“Accounting for Employee Benefits”, the subsidiaries carried outDecember 13, 2000, Copesul determined the actuarial liabilities as of December 2007 of post-retirement benefits granted to its employees, by using the valuation method - credit units projected based on actual information up to November 30 of the plans and, accordingly, recorded actuarial liabilities in long-term liabilities.
each year. The amounts of the jointly-controlled plansvaluation results are as follows:
2007 | 2006 | |||
Fair value of asset plans | 437.4 | 388.0 | ||
Present value of actuarial liabilities | 496.8 | 405.9 | ||
Actuarial liabilities | (59.4) | (17.9) | ||
Net actuarial liabilities to be provided for | (59.4) | (17.9) | ||
Actuarial liabilities provided for | 8.9 | 8.9 | ||
Net actuarial liabilities - not provided for | (50.5) | (9.0) | ||
2005 | 2004 | ||||
Present value of actuarial liabilities | 197.4 | 175.5 | |||
Fair value of asset plans at year end | 198.0 | 164.8 | |||
(0.6 | ) | 10.7 | |||
Actuarial liabilities | (0.6 | ) | 10.7 | ||
Actuarial liabilities provided for | 6.6 | 6.1 | |||
Unrecognized actuarial gains (losses) | (7.2 | ) | 4.6 | ||
In compliance with CVM Deliberation 371, of December 31, 2000, as from year 2000, Copesul records R$ 8.9 on a monthly basis, relating to benefits to which employees will be entitled after the required grace period, in accordance with an actuarial study performed by an independent expert for the base date of December 31, 2001.
ActuarialThe actuarial assessment as of November 30, 2007 found that Copesul will be required to increase its future contributions to be able to raise the benefits. However, as the Company is within the limits set forth in CVM Deliberation 371 and in compliance with accounting practices adopted in Brazil, it chose not to make the adjustment of the supplementary actuarial liability.
Gains (losses) previously recorded are associated with the profitability of the plan assets - differences between the actuarial assumptions and real facts. Such differences are considered actuarial gains (losses). Copesul's policy is to recognize such gains (losses) as income (expenses) only at such time as their accumulated amounts exceed, in each year, the higher of the following limits: (i) 10% of the present value of the total actuarial obligation of the defined benefit, and (ii) 10% of the plan assets fair value. The portion to be recognized is amortized on a yearly basis, with the amortization amount determined by dividing its amount by the average remaining service time estimated for the plan participants.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
The main actuarial assumptions at the balance sheet date (expressedare shown as weighted average) are:follows:
2007 | 2006 | |||
Actual discount rate | 6% | 6% | ||
Expected yield rate of plan assets | 6% | 6% | ||
Salary real growth | 2% up to 47 years and zero | 2% up to 487 years and zero | ||
after 48 years of age | after 48 years of age | |||
Biometric bases | ||||
Mortality for pension and savings (able individuals) | AT-2000 | AT-2000 | ||
Mortality for pension and savings (disabled individuals) | C.A.P. experience (*) | C.A.P. experience (*) | ||
Disability | Álvaro Vindas (**) | Álvaro Vindas (**) | ||
Other charges | STEA experience (***) | STEA experience(***) |
(*) C.A.P. - Caixa de Aposentados e Pensionistas used as a basis to develop the mortality table for actuarial computations.
(**) Álvaro Vindas - Disability Table used in actuarial computations.
(***) STEA - Serviços Técnicos de Estatística e Atuária Ltda.
In May 2003, the board of directors of Copesul approved the implementation of the Copesul Supplementary Private Pension Plan, called COPESULPREV. This is a closed, defined contribution plan intended to cover those employees not included in the former PETROS plan, which currently does not accept new participants. The plan is independently managed by PETROS - Fundação Petrobras de Seguridade Social, with no links to any other pension plan managed at present by that entity, pursuant to the provisions of Complementary Law 109/2001. In 2007, Copesul's contributions added up to R$ 1.4 (2006 - R$ 1.1).
(d) Ipiranga Química and IPQ
Subsidiaries Ipiranga Química and IPQ sponsor Fundação Francisco Martins Bastos - FFMB, a closed supplementary private pension entity designed to manage pension benefit plans for the employees of Empresas Petróleo Ipiranga.
During the year ended December 31, 2007, the subsidiaries' contributions amounted to R$ 1.7 and R$ 0.5 relating to basic and supplementary benefits, respectively. The supplementary benefits and pension plan amounts were determined at the annual actuarial valuation carried out by independent actuaries, Towers Perrin Forster & Crosby Ltda., and are recorded in the financial statements in accordance with NPC 26.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
The reconciliation of liabilities for post-retirement benefits at December 31 is as follows:
|
2007 | |
| ||
Present value of funded obligations | ||
| ||
| ||
| ||
Net liabilities for post-retirement benefits | (7.0) | |
Current liabilities | (1.7) | |
Non-current liabilities | (5.3) | |
The portion of actuarial gains or losses to be recorded as income or expenses corresponds to the amount of unrecognized gains and losses in each year in excess of the higher of the following limits:
Contributions(i) 10% of the present value of the total actuarial obligation of defined benefits; and
(ii) 10% of the fair value of the plan's assets.
The portion in excess of the limits is amortized on an annual basis, with the amortization amount determined by dividing its amount by the average remaining service time estimated for the plan participants.
Amounts recognized in the statements of operations are as follows:
2007 | ||
Cost of current service | 3.1 | |
Cost of interest | 13.2 | |
Expected asset yield | (15.5) | |
Amortization of actuarial losses | 0.2 | |
Employees' contributions | (1.0) | |
Total expenses (income) for the year | ||
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Changes in net liabilities for post-retirement benefits are as follows:
2007 | ||
Net liabilities at the beginning of the year | (6.8) | |
Expenses (income) for the year | 0.1 | |
Actual Company contributions during the year | 1.6 | |
Actual benefits paid during the year | 0.8 | |
Adjustment to present value of obligations and other adjustments | (2.7) | |
Net liabilities at the end of the year | (7.0) | |
The main actuarial assumptions used were (percentage per year):
2007 | ||
Discount rate to present value of actuarial obligation | 10.2 | |
Expected long-term yield rate of assets | 10.2 | |
Projected average salary growth rate | 6.1 | |
Inflation rate (long term) | 4.0 | |
Medical service growth rate | 7.1 |
Biometric assumptions used:
(*) For Life Insurance benefit, the mortality table used was CSO-80.
Studies performed by the actuarial consultants to PETROS by Copesul and Petroflex at December 31,FFMB, Towers Perrin, identified positive actuarial impacts on the Plan as from 2005, amountedwith the ensuing reduction in post-retirement liabilities relating to retirement benefits. The negative impact of R$ 1.1 and R$ 2.2 (2004 – R$ 0.3 and R$ 2.0), respectively.0.2, in 2007 was recorded as income under "Other operating income".
29 Raw Material Purchase Commitments
The Company has contracts for consumptionthe purchase of electric energy by its industrial plants located in the States of Alagoas, Bahia and Rio Grande do Sul. The minimum annual commitment under these contracts amounts to R$ 102.3.248.5.
F-87
The Company purchases ethylene and propylene from Copesul for its units in the Southern Petrochemical Complex, under a contract that expires in 2014. The minimum annual purchase commitment corresponds to 268,200 metric tonsTable of ethylene and 262,200 metric tons of propylene. Based upon the market prices at December 31, 2005, this commitment was R$ 1,171.6 (unaudited). If the Company does not acquire the minimum volume, it must pay 40% of the current price of the amount not purchased. Based on 40% of prices charged as of December 31, 2005, the amount was R$ 468.6 (unaudited).
Braskem S.A. and its SubsidiariesContents
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Braskem purchases naphtha under contracts establishing a minimum annual purchase volume equivalent to R$ 4,559.55,771.3 (unaudited), based on market prices as of December 31, 2005.2007.
30 Subsequent eventsEvents
(a) Law 11,638
Law 11,638, published in the Official Daily Government Newspaper (DOU) of December 28, 2007, modified several provisions of the Brazilian Corporate Law, effective January 1, 2008.
The major amendments include the following matters which, in the opinion of management, may change the presentation of the financial statements and the criteria for determining the financial position and the results of Braskem and its subsidiaries as from the year ending December 31, 2008:
. The Statement of Changes in Financial Position (DOAR) will be discontinued and replaced with the Statement of Cash Flows (DFC). For publicly-held companies, the Statement of Added Value (DVA) will be mandatory. Braskem already discloses DFC in its quarterly and annual reports, as well as DVA in its annual reports, both as supplementary information.
. Intangible assets and rights will be segregated from tangible assets. Permanent assets will be composed of investments; plant, property and equipment; intangible assets, and deferred charges. Intangible assets will include acquired goodwill.
. A new line item has been created under shareholders' equity: 'market value adjustments". Market value adjustments to shareholders' equity, although not included in net income for the year under the accrual basis of accounting, will comprise counter entries to increases or decreases in the value ascribed to assets and liabilities, as a result of their valuation at market levels and the exchange variation of corporate investments abroad (this new rule will be analyzed by CVM in 2008).
Deferred charges will be comprised only of pre-operating expenses and restructuring expenditures that effectively contribute to increasing the profitability of the corporation in more than one fiscal year and are not merely reductions in costs or increases in operating efficiency.
. Tax incentives will no longer be classified as capital reserves, but as part of net income for the year. Based on a resolution of management, the Annual Shareholders' Meeting may appropriate a portion of profits corresponding to these incentives to a Tax Incentive Reserve, recorded as part of revenue reserves, and which may be excluded from the calculation basis of mandatory dividends. Since the end of 2006, Braskem has adopted this classification for these incentives not required to be accounted for in capital reserves.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
. The law also changed the valuation criteria of assets and liabilities, in particular:
(a) Acquisition• Assets and liabilities arising from long-term transactions, as well as from material short-term transactions, will be required to be adjusted to present value, in accordance with International Financial Reporting Standards. The enforcement of commonthis provision is subject to rules to be issued by CVM in 2008;
• "Available for sale" securities or "trading" securities will be required to be recorded at market value; and
• All other financial instruments will be required to be recorded at restated or adjusted cost, in accordance with their likely realization value, if lower.
. In the event of a merger, amalgamation or demerger transaction between unrelated parties or involving an effective transfer of control, the assets and liabilities of the merged or split-off entity will be recorded at their market value.
. Interests of debentures and participations of employees and management, even in the form of financial instruments, and of assistance or pension plan institutions or funds for employees, which are not expenses, will be included in the statement of operations for the year.
. Corporations will not be allowed to record revaluation reserves. The new law allows corporations to either maintain existing balances and realize such balances in accordance with the current standards or reverse the balances until the end of 2008.
Management is reviewing the effects of the above mentioned changes on its shareholders' equity and results for the year of 2008. It will also take into consideration the guidance and definitions to be issued by the regulators. At this time, management believes that it is not possible to ascertain the effects of such amendments on the results and shareholders' equity for the year ended December 31, 2007.
(b) 2nd Share Repurchase Program
On February 19, 2008 the board of directors of the Company approved the acquisition of up to 19,862,411 class A preferred shares issued by the Company, to be held in treasury and subsequently sold or canceled, without decreasing the Company's share capital.
F-89
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
The Share Repurchase Program was approved the Extraordinary General Meeting held on March 6, 2008 with the proposal to cancel all the shares held in treasury the program will last for twelve months.
On March 6, 2008, the Company announced the cancellation of 16,595,000 Class A Preferred shares that were held in treasury with a book value of R$ 244.5 million.
As from that date, Braskem no longer holds shares in treasury. However, 580,331 common shares and 290,165 class A preferred shares are still held by Braskem Participações S.A., one of the Company's subsidiaries.
(c) Transfer of Petrochemical Assets from Ultra
On February 27, 2008, Ultrapar, in accordance with the agreement entered into among Braskem, Petrobras and Ultrapar in April 4, 2006,2007 (Note 1(c)(xi)), completed the transfer of the petrochemical assets of the Ipiranga Group to Braskem signedand Petrobras. These assets represent an agreement to increase its interest in PolitenoIpiranga Química. Ipiranga Química owns 100% of the total voting share capital of IPQ, which owns 39.2% of the total voting capital of Copesul.
As a result of this transfer of assets, Braskem became owner of 60% of Ipiranga Química, directly, 60% of IPQ, indirectly, and 62.7% of Copesul, directly and indirectly. The remaining 40% of Ipiranga Química was transferred to Petrobras.
The completion of this transaction allows the implementation of the Investment Agreement entered into with Petrobras in November 2007 (Note 1(c)(xv)). Under this agreement, Petrobras and Petroquisa will transfer to Braskem:
. 40.0%of the voting and total capital of Ipiranga Química;
.. 40.0%of the voting and total capital of Paulínia; and
.. up to 100% of the total and voting share capital of Triunfo, at the option of Petrobras and 96.2%Petroquisa.
(d) Sale of Petroflex's
In March 2008, as all precedent conditions set forth in the sale agreement had been complied with, the sale of Petroflex was recognized at the final amount of R$ 252.1. The financial settlement of the total share capital.transaction and transfer of shares took place on April 1, 2008 (Note 1(c)(xiv).
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Pursuant to the agreement, changes in Petroflex working capital and net debt may give rise to an adjustment in the acquisition price.
A portionThe Company and its subsidiaries, as participants in the corporate restructuring process, may be affected by economic and/or corporate aspects as a result of the purchase price for these shares in an aggregate amountoutcome of this process.
At March 31, 2008, thereal-equivalent market value of U$111.3 million was paid on April 6, 2006. The remainder of the purchase price will be calculatedPetroflex, based on an “earn-out” formula that will take into account Politeno’s operating performance, measured by fluctuations in polyethylene and ethylene margins in the Brazilian petrochemical market during 18 months following the execution date of this agreement.
(b) Repurchaseprice of shares program
On May 4, 2006, the board of directors authorized a repurchase of shares program, under which the Company may repurchase up to 13,896,133 class A preferred shares and up to 1,400,495 common shares. The Company is authorized to purchase these shares at market prices atlisted on the São Paulo Stock Exchange, until October 31, 2006. Repurchased shares may be heldwas R$ 192.8. Petroflex was delisted in treasury and may be subsequently resold or cancelled.May 2, 2008.
(e) Petroquímica Paulínia
(c) Merger of Polialden
The Extraordinary General meeting, held on May 31, 2006, approvedOn April 25, 2008, the legal merger of Polialden into Braskem.
(d) Adoption of new accounting practices
Beginning January 1, 2006, in accordance with IBRACON Technical Interpretation 01/2006, we recorded all programmed maintenance shutdown expenses in property,industrial plant and equipment, as “Machinery, equipment and facilities”. Such expenses occur at scheduled intervals from one to six years and are depreciated to production cost until the beginning of the next maintenance shutdown. In addition,jointly-controlled subsidiary Petroquímica Paulínia started operations. The unit, located at the retrospective effectscity of depreciation withPaulínia, State of São Paulo, has a production capacity of 350 thousand/ton per year of polypropylene.
(f) Petrobras Transaction
On May 30, 2008 the adoptionfirst phase of this interpretation will be recognizedthe Petrobras Transaction (note 1(c)(xv)), was approved by the shareholders of Braskem and Grust Holdings S.A., a wholly-owned subsidiary of Petroquisa that, directly and indirectly, owns the interests in shareholders’ equity. Accordingly, for periods ending after January 1, 2006, we will reclassifyCopesul, Ipiranga Química, Ipiranga Petroquímica, and Paulínia. Petrobras and Petroquisa own, directly and indirectly, 23.1% of the amountCompany’s total share capital, including 30.0% of R$356.1 million from deferred charges to property, plantthe Company’s voting share capital, and equipment,Braskem owns, directly and recognizeindirectly 99.2% of the amountoutstanding share capital of R$164.9 million in shareholders’ equity.Copesul, all of the outstanding share capital of Ipiranga Química and Ipiranga Petroquímica and all of the outstanding share capital of Paulínia.
F-91
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
31 Summary of PrincipalMain Differences Between Brazilian GAAP and U.S. GAAPU.S.GAAP
(a) Presentation of financial information
statements, consolidation basis and functional currency
As described in Note 2, the Company has elected to use the consolidated financial statements prepared in accordance with Brazilian GAAP and expressed in reaisgenerally accepted accounting principles (Brazilian GAAP) as its primary financial statements, for the purposes of filling and listing at Securities and Exchange Commission - SEC and New York Securities Exchange - NYSE, under the rules applicable at the U.S. Securities Act of 1934.
A summary of main differences between Brazilian GAAP and those generally accepted in United States (U.S. GAAP), applicable to the Company’s principal accounting policies that differ significantlyCompany, has been disclosed in this Note to the aforementioned financial statements.
F-92
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(i) Consolidation basis
Consolidation basis vary from Brazilian GAAP to U.S. GAAP, isfollowing provisions set forth below.in SFAS 94, APB 18 and FIN 46(R). The consolidated condensed balance sheet and statement of operations comprise assets, liabilities, operations and subsidiaries of the following entities:
Controlling interest - % | ||||||
2007 | 2006 | 2005 | ||||
Operating and Trading Companies | ||||||
Braskem América | 100.00 | 100.00 | 63.68 | |||
Braskem Argentina | 100.00 | 100.00 | 100.00 | |||
Braskem Distribuidora de Combustíveis | 100.00 | 100.00 | 100.00 | |||
Braskem Europa | 100.00 | 100.00 | - | |||
Braskem Importação e Exportação | 100.00 | 100.00 | 100.00 | |||
Braskem Inc. | 100.00 | 100.00 | 100.00 | |||
Braskem International Ltd. | - | - | 100.00 | |||
Braskem Overseas Inc. | - | 100.00 | 100.00 | |||
Braskem Participações | 100.00 | 100.00 | 100.00 | |||
Cayman | 100.00 | 100.00 | 100.00 | |||
CINAL | 100.00 | 100.00 | 86.82 | |||
Copesul | 62.70 | - | - | |||
CPP | - | 79.70 | 79.70 | |||
Ipiranga Química | 60.00 | - | - | |||
Ipiranga Petroquímica | 60.00 | - | - | |||
IPL - Investimentos Petroquímico Ltda. | 100.00 | |||||
Lantana Trading Company Inc. | 100.00 | 100.00 | 100.00 | |||
Polialden | - | - | 63.68 | |||
Politeno | - | 96.16 | - | |||
Politeno Empreendimentos | 99.99 | - | - | |||
Tegal | - | 95.83 | 90.79 | |||
Variable Interest Entities | ||||||
Parin Fund | 100.00 | 100.00 | 100.00 | |||
Sol Fund | 100.00 | 100.00 | 100.00 | |||
"Chemical I" Fund | - | 100.00 | 11.58 | |||
"Chemical II" Fund | - | 9.19 | 9.09 |
Places of our businesses have been disclosed in Note 3(g). Assets, liabilities and operations of IPL and Polialden were incorporated into Braskem in 2006 and CPP, Politeno and Tegal during 2007, instead of operations carried out by Braskem International Ltd. ceased in 2006.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(ii) Functional currency under U.S. GAAP
The Braskem S.A.Group headquarter has elected Brazilian Reais as both functional and its Subsidiariesreporting currencies for all companies presented herein.
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(b) Supplementary inflation restatement in 1996 and 1997 for U.S. GAAP
Under Brazilian GAAP, inflation accounting was discontinued effective January 1, 1996. Prior to that date, Brazilian GAAP statements included indexation adjustments which partially accounted for the effect of inflation on property, plant and equipment, investments, deferred charges (together denominated “permanent assets”"permanent assets") and shareholders’shareholders' equity, and reported the net charge or credit in the statement of operations.
However, under U.S. GAAP, according to SFAS 52, Brazil ceased to be treated as a highly inflationary economy only as from January 1, 1998.1998 requiring additional indexation to the Brazilian Reais. Accordingly, the financial information for purposes of U.S. GAAP should include additional inflation restatement adjustments for 1996 and 1997 made by applying the General Price Index increased by 9.3% in 1996 and 7.5% in 1997.
, respectively, once Brazilian Reais was not considered to be functional currency at that time under SFAS 52.
For purposes of the U.S. GAAP reconciliation, shareholders’shareholders' equity under U.S. GAAP was increased by R$ 721.8656.2 and R$ 761.7,693.2, at December 31,200531, 2007 and 2004,2006, respectively, due to the additional inflation restatement adjustments,remeasurement accounting, net of depreciation. These amounts generated increases in depreciation charges of R$ (39.9)(37.4), R$ (37.3)(28.6) and R$ (33.2)(39.9) in 2005, 20042007, 2006 and 20032005 respectively.
(c) Property, plant and equipment
(i) Capitalized interest
UnderSince January 2006 under Brazilian GAAP, priorthe Company adopted the same methodology to capitalize interest as those adopted under U.S. GAAP, except for positive exchange variations capitalized under Brazilian GAAP and taken to the income statement under U.S. GAAP. Therefore, as from January 1, 19972006, except for positive exchange variations, there wasare no accounting standard requiring capitalizationmore differences between Brazilian GAAP and U.S. GAAP in the reconciliation going forward, except for the amortization of the predecessor difference. The depreciation of interest as partcapitalized under U.S.GAAP before 2006 continues to be depreciated based on the economic useful life of the costunderlying asset.
F-94
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(ii) Impairment of the financial costs of borrowed funds, excluding foreign exchange losses, during construction of major facilities is recognized as part of the cost of the related assets.
(ii) Impairment
Long-Live Assets
Under Brazilian GAAP, companies are required to determine if operating income discounted cash flow is sufficient to absorb the depreciation or amortization of long-lived assets in order to assess potential asset impairment. In the event of such operating income discounted cash flow is insufficient to recover the depreciation, the assets, or groups of assets, are written down to recoverable values. In the event of a planned substitution of assets prior to the end of the original estimated useful life of the asset, depreciation of such asset is accelerated to ensure that the asset is depreciated according to the estimated net realizable values at the estimateda future date of substitution.
Under U.S. GAAP, Statement of Financial Accounting Standard (“SFAS”("SFAS") NºNo. 144, “Accounting"Accounting for the Impairment of Disposal of Long-Lived Assets”Assets", requires companies to evaluateevaluation of the carrying value of long-lived assets to be held and used, and for long-lived assets to be disposed off, when events andof, one of the changes in circumstances require such a review.stated in paragraph 8 of SFAS 144 occurs. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flow from identified asset groups, representing the lowest level for which identifiable cash flow are largely independent of the cash flows of other groups of assets, is less than their carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the assets or discounted cash flows generated by the assets.
There is no impairment recorded for U.S. GAAP purposes atas of December 31, 2005.2007 and 2006.
F-95
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(d) Deferred charges and other intangible assets
Brazilian GAAP permits deferral of expenses, major overhaul costs, pre-operating expenses incurred in the construction or expansion of a facility before the facility begins operations, research and development expenditure and other items listed in Note 14.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
13.
For purposes of the U.S. GAAP reconciliation, only costs relative to major overhauls meet the conditions established for deferral and, accordingly, all other Brazilian GAAP deferred costs, other than those reclassified to property, plant and equipment, and goodwill generated on common control transactions, which is eliminated, have been charged off to income.
For purposes of the U.S. GAAP reconciliation, deferredincome, including related annual amortization charges adjustments, netthat have been reverted under U.S. GAAP amounted toin the net amount of R$ 87.9,122.6, R$ (142.9)34.5 and R$ 7.582.1 in 2005, 20042007, 2006 and 2003,2005, respectively.
The reconciliation of the net adjustments to net income for all three years presented is set forth in the following table:
2007 | 2006 | 2005 | ||||
Charges written-down for those expenses | ||||||
deferred under Brazilian GAAP, including | ||||||
equity investees | ||||||
Pre-operating expenses | (1.0) | |||||
Organizational expenses | (6.1) | (35.2) | (33.7) | |||
Expenditures on restructuring | (1.7) | (6.7) | (4.3) | |||
Research and development | (0.8) | - | (0.7) | |||
Other | (5.4) | (25.5) | ||||
(14.0) | (67.4) | (39.7) | ||||
Reversal of amortization of amounts assigned | ||||||
to deferred charges under Brazilian GAAP, | ||||||
including equity investees | ||||||
Pre-operating expenses | 32.0 | 4.2 | 6.4 | |||
Organizational expenses | 25.2 | 54.1 | 67.1 | |||
Expenditures on restructuring | 54.6 | 35.7 | 43.4 | |||
Research and development | 19.5 | 6.3 | 4.2 | |||
Other | 5.3 | 1.6 | 0.7 | |||
136.6 | 101.9 | 121.8 | ||||
122.6 | 34.5 | 82.1 | ||||
F-96
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Under U.S. GAAP all research and development costs are expensed as incurred and recorded in the statement of operations within general and administrative expense whereas certain of such costs are capitalized deferred charges under Brazilian GAAP. Expenditure on research and development totaled R$ 47.2,76.5, R$ 59.244.3 and R$ 35.5,47.2 for the years ended December 31, 2005, 20042007, 2006 and 2003,2005, respectively.
A reconciliation of the net adjustments to net income for all three years presented is set forth in the following table:
2005 | 2004 | 2003 | |||||||
Expense of deferred charges under U.S. GAAP | |||||||||
Pre-operating expenses | (1.0 | ) | (13.6 | ) | (0.2 | ) | |||
Organization and implementation expenses | (33.7 | ) | (116.3 | ) | (29.9 | ) | |||
Expenditures for structured operations | (4.3 | ) | (86.8 | ) | (33.3 | ) | |||
Research and development | (0.7 | ) | (13.1 | ) | (0.1 | ) | |||
Other | — | (6.6 | ) | (6.6 | ) | ||||
(39.7 | ) | (236.4 | ) | (70.1 | ) | ||||
Reversal of amortization of deferred charges under Brazilian GAAP | |||||||||
Pre-operating expenses | 6.4 | 44.7 | 12.9 | ||||||
Organization and implementation expenses | 67.1 | 11.4 | 20.8 | ||||||
Expenditures for structures operations | 49.2 | 33.8 | 10.3 | ||||||
Research and development | 4.2 | 6.0 | 8.6 | ||||||
Goodwill | — | — | 5.1 | ||||||
Other | 0.7 | (2.4 | ) | 19.9 | |||||
127.6 | 93.5 | 77.6 | |||||||
87.9 | (142.9 | ) | 7.5 | ||||||
(e) Business combinations, purchase price allocation and goodwill
As mentioned in Note 1(c), the Company acquired, through its agent "Ultrapar", 60.0% of the common and total shares of Ipiranga Química and Ipiranga Petroquímica and related investment in Copesul - known as "Petrochemical Assets" under the "Share Purchase Agreement" signed among Braskem, Petrobras and Ultrapar on March 18, 2007 for which the effective date of acquisition is April 18, 2007, for which a Form F-4 has been filed by Ultrapar in the U.S. Securities and Exchange Commission - SEC following rules applicable to such relevant business combination.
Additionally, minority interests were subsequently purchased during the year, for which the purchase accounting method was applied. The total purchase price for the acquisition of Ipiranga (Química e Petroquímica) and Copesul, without any contingent consideration on its computation, amounted to approximately R$ 2.4 billion, as demonstrated herein.
On May 14, 2008, Braskem publicly announced an amendment made to the "Share Purchase Agreement" by assembling clauses increasing the participation of Braskem in net assets of Ipiranga, Copesul as well as Petroquímica Paulínia to 100%, by issuing additional shares to Petrobras, as a result of the incorporation of the remaining minorities interest held by Petrobras in such investees as of December 31, 2007, known as "Petrobras Petrochemical Asstes", within Brazilian Petrochemical industry restructuring.
The acquisition of such additional shares occurred as of May 30, 2008 and the incorporation of such companies into Braskem operations are expected to be concluded during the second semester of 2008.
F-97
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(i) Purchase Price Allocation
Under Brazilian GAAP, goodwill arises fromthe Ipiranga transaction, resulting in the acquisition of an effective 60% participation in IQ and IPQ held via Ultrapar, was accounted for under historical cost, with the difference between the amountconsideration paid and the Brazilian GAAPhistorical book value (normally alsobeing recorded as goodwill. This resulted in the tax basis)consolidation of IQ, IPQ and Copesul as from April 2007.
Under USGAAP, although we did not obtain legal ownership of the net assets acquired. Goodwill is generally justified onIQ and IPQ shares, however, we concluded that IQ, IPQ and Copesul are VIEs in accordance with FIN 46R, and through the difference betweenUltrapar agency agreement we concluded that we had the book value and the market value of assets acquired and/or based on expectation of future profitability and is amortized over the remaining useful livesmajority of the assets or up to 10 years, respectively. Negative goodwill arisesrisks and benefits of those entities. Therefore, under Brazilian GAAP when the book value of assets acquired exceeds the purchase consideration. Negative goodwill is amortized in up to over 10 years after the related investment other than non-temporary has been legally merged. Goodwill in a subsidiary subsequently merged into its parent is reclassified to deferred charges, or property, plant and equipment.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
Under U.S. GAAP fair values are assigned to acquired assetswe also, consolidated IQ, IPQ and liabilities in business combinations, including intangible assets. The residualCopesul uner FIN46R, as from the date of consideration paid overthe agreement, April 18, 2007, using the fair value of the assets and liabilities is recorded as goodwill. Upon the adoptionacquired.
The allocation of SFAS Nº 142, “Goodwill and Other Intangible Assets”, as from January 1, 2002 goodwill is no longer amortized but is instead assigned to an entity’s reporting units and tested for impairment at least annually. Goodwill is not recorded on transactions between partiespurchase price under common control; instead the difference between consideration and book valueU.S. GAAP was:
Company | % acquired | In R$ millions | ||
Ipiranga Química S.A. | 60.0 | 121.0 | ||
Ipiranga Petroquímica S.A. | 60.0 | 562.8 | ||
Copesul | 17.68 | 866.7 | ||
Total | 1,550.5 | |||
F-98
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
The fair values of the nettotal assets less liabilities of the companies acquired were as follows:
IQ | IPQ | Copesul | ||||
Cash and cash equivalents | 7.5 | 24.1 | 239.6 | |||
Other current assets | 104.9 | 754.7 | 1,267.1 | |||
Long-term assets | 83.6 | 673.5 | 3,520.9 | |||
Current liabilities | (18.6) | (910.9) | (828.4) | |||
Long-term liabilities | (90.1) | (569.6) | (303.9) | |||
Fair value of net assets | 87.3 | (28.2) | 3,895.3 | |||
Pre-existing book value (1) | 436.7 | |||||
Fair value of the consideration paid | 121.0 | 562.8 | 866.7 | |||
Fair value of non-controlling interest | 80.6 | 375.2 | 2,591.9 | |||
Goodwill | 114.3 | 966.2 |
(1) We previously held a 29,19% interest in Copesul, which was accounted under the equity method under Brazilian and U.S. GAAP.
As part of the acquisition, the Company also acquired long term customers contracts, which are intangible assets of definite useful life. The acquisition cost at April 18, 2007 amounted to R$172.0 and the expected residual value at the end of those contracts is recordedzero. The weighted average useful life of those contracts are twelve years.
In the related acquisition of 60% in IQ and IPQ, indirectly Braskem has acquired also an additional participation of 17.68% from Copesul according the previous participation from IPQ in Copesul of 29.46% .
In the last quarter of 2007, Copesul repurchased all minority interests other than those relating to Petrobras for R$1,417.7 million and issued debt in the same amount. This resulted in an increase of 15.56% in our Copesul participation which was accounted for as a capital distribution or contribution. Understep acquisition under U.S. GAAP,GAAP. After this transaction our participation in Copesul was 62.7% and remaining minorities, representing a 37.3% participation held by Petrobras, was outstanding. This transaction resulted in the elimination of 46.97% of the total minorities of Copesul previously outstanding, in the amount of R$ 1,269.0 and generated goodwill generated after July 1, 2001 is not being amortized in 2001 and no goodwill amortization is recorded as from 2002.of R$ 148.7.
F-99
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(ii) Goodwill
(i) Goodwill
The differencesDifferences in relation to Brazilian GAAP arise principallyhave mainly arisen from (i) non-recognition of goodwill arising from transactions between parties under common control under U.S. GAAP (Note 31(g)); (ii) valuation of assets and liabilities acquired at their fair value at the date of acquisition; and (iii) difference between goodwill calculatedacquisition, aforementioned, generating a reduction in the statement of operations under U.S. GAAP by the amortization derived from the fair value accounting method; and (iii) reversal of Brazilian GAAP amortization expense related to the goodwill, for which under U.S. GAAP a impairment test is required annually instead of amortization.
2007 | 2006 | |||
US GAAP business combination accounting (*) | 229.3 | 262.9 | ||
Reversal of Brazilian GAAP goodwill amortization(**) | 401.7 | 28.7 | ||
Net adjustment to the shareholders’ equity | 631.0 | 291.6 | ||
(*) It includes recurring adjustments for the differences described above - Note 31(g) as well as fair value adjustments for net assets acquired up to December 31, 2007 net of accumulated depreciation and amortization.
(**) It includes differences in Brazilian GAAP.
TheseGAAP goodwill balances, can be summarized as follows:
2005 | 2004 | |||||
US GAAP Goodwill balance (*) | 450.5 | 829.5 | ||||
US GAAP Fair Market Value adjustment | 299.5 | 328.2 | ||||
Reversal of Brazilian GAAP business combinations effect (**) | (805.2 | ) | (1.248.4 | ) | ||
(55.2 | ) | (90.7 | ) | |||
net of accumulated amortization of goodwill and net of negative goodwill.
For Brazilian GAAP purposes, the balance of goodwill at December 31, 2005 was2007 amounts to R$ 873.6 (2004 – 1,018.7, net of the amount of the2,404.8 (2006 - R$ 801.2 reclassified to property, plant and equipment and deferred charges)820.2), which is being amortized to income over a period of up to 10 years for items reclassified to deferred charges, or the remaining useful lives of the underlying assets, for the items reclassified to property, plant and equipment. Negative goodwill at December 31, 2005 was2007 amounts to R$ 87.9 (2004 –25.2 (2006 - R$ 93.2)30.4) .
Under U.S. GAAP, the net balancechanges on goodwill balances totaling R$ 1,688.6 as of goodwill at December 31, 2005 was R$ 450.5 (2004 – R$ 829.5). 2007 are as follows:
F-100
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Petrochemicals | Business | Ipiranga | ||||||||||||
Polyolefins | Vinyls | Development | Others | Química | Petroquímica | Copesul | ||||||||
December 31, 2006 | 416.9 | 3.0 | 17.4 | 13.2 | ||||||||||
Business combination | - | - | - | 9.0 | 114.3 | 966.2 | 148.7 | |||||||
Impairment | - | - | - | |||||||||||
December 31, 2007 | 416.9 | 3.0 | 17.4 | 22.2 | 114.3 | 966.2 | 148.7 | |||||||
For purposes of U.S. GAAP reconciliation, goodwill and negative goodwill amortization under Brazilian GAAP have been reversed and amounted to R$ 106.2 in 2007, R$ 57.8 in 2006 and R$ 152.5 in 2005, R$ 152.7 in 20042005.
(iii) Impairment of goodwill and R$ 256.0 in 2003.
(ii) Impairment
intangibles for business combinations
For purposes of U.S. GAAP, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is to identify a potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The estimates of fair value of a reporting unit, are determined using a discounted cash flow analysis. A discounted cash flow analysis requires one to make various judgmental assumptions including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on the Company’sCompany's budget and business plans. Discount rate assumptions are based on an assessment of the risk inherent in the respective reporting units. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.
F-101
Braskem S.A. and its SubsidiariesTable of Contents
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
The second step of the goodwill impairment test compares the implied fair value of the reporting unit’sunit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’sunit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.
Under Brazilian GAAP, goodwill is analyzed in relation to its future recovery based on total estimated future profitability and discounted cash flows are not used.flows. No impairment has been recorded for Brazilian GAAP purposes.
The Company has been testing for impairment on goodwill balances for which no balances should have been impaired for the year-ended as of December 31, 2007 and 2006.
The Company performed its annual impairment review for goodwill and recorded a charge for purposes of reconciliation of R$ 373.8 at December 31, 2005 aswithin Operating Income in the condensed consolidated statement of operations. This impairment charge reflects the impact of the decrease in market conditions of its investment in Politeno, includedPoliteno.
(f) Equity earnings for interests in the column “U.S. GAAP” in the segment footnote (Note 31(u)).
(f) Effects ofinvestees and respectively U.S. GAAP adjustments on equity investees
Under BR GAAP the equity investees Cetrel, CopesulPetroflex and PetroflexPetroquímica Paulínia are proportionally consolidated according to Instruction CVM 247/96. Under U.S. GAAP such equity investees are accounted for under the equity method.
For purposes of the U.S. GAAP reconciliation, the effects in the statement of operations of U.S. GAAP adjustments on equity investees amounted to R$ (46.5)(5.8), R$ (92.2)(56.8) and R$ (44.8)(46.5) in 2005, 20042007, 2006 and 2003,2005, respectively.
In addition, due to the adoption of SFAS no. 158 "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an Amendment of FASB Statements No. 87, 88, 106, and 132(R)" (Note 31(i)), the Company recognized the effects from its investees Petroflex and Copesul through comprehensive income, in the amount of R$ 10.9 and R$ 2.1, respectively, as of December 31, 2006.
F-102
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(g) Transactions giving rise to distributions
to and contribution from shareholders under
according to U.S. GAAP
Transactions between parties under common control gave raise to goodwill under Brazilian GAAP which is treated as capital distributions and contributions under U.S. GAAP:
2007 | 2006 | |||
Acquisition of ESAE and related transactions (i) | (363.2) | (363.2) | ||
OPP PP transaction (ii) | (1,814.6) | (1,814.6) | ||
Contributions from shareholders (iii) | 406.5 | 406.5 | ||
(1,771.3) | (1,771.3) | |||
2005 | 2004 | |||||
Acquisition of ESAE and related transactions | (363.2 | ) | (363.2 | ) | ||
OPP PP transactions | (1,814.6 | ) | (1,814.6 | ) | ||
Contributions from shareholders | 400.6 | 400.6 | ||||
Total | (1,777.2 | ) | (1,777.2 | ) | ||
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(i) Acquisition of ESAE and Related Transactions
Under Brazilian GAAP, the acquisition of ESAE was accounted for at book value. Under U.S. GAAP, the acquisition would be accounted for using the purchase method with the assets acquired and the liabilities assumed from third parties recorded at fair value. The portions of net assets that were already held by the Odebrecht Group would be maintained at their existing book values, and the excess of the proportional amount of the purchase price over these book values would be considered a distribution to the Odebrecht Group in the amount of R$363.2.
Purchase | Value of | Capital | ||||||
Investment acquired | price | investments | Goodwill | distribution | ||||
30.99% of Politeno | 739.4 | 141.9 | 373.8 | 223.7 | ||||
42.64% of Polialden | 658.4 | 157.3 | 387.8 | 113.3 | ||||
Subtotal (100% - Braskem Participações) | 1,397.8 | 299.2 | 761.6 | 337.0 | ||||
100% of Proppet | 51.1 | 10.6 | 14.3 | 26.2 | ||||
1,448.9 | 309.8 | 775.9 | 363.2 | |||||
F-103
Investment Acquired | Purchase Price | Value of Investments | Goodwill | Capital Distribution | ||||
30.99% of Politeno | 739.4 | 141.9 | 373.8 | 223.7 | ||||
42.64% of Polialden | 658.4 | 157.3 | 387.8 | 113.3 | ||||
Subtotal (100% of Braskem Participações) | 1,397.8 | 299.2 | 761.6 | 337.0 | ||||
100% of Proppet | 51.1 | 10.6 | 14.3 | 26.2 | ||||
1,448.9 | 309.8 | 775.9 | 363.2 | |||||
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Under U.S. GAAP, the total payment of R$ 1,448.9 made in the acquisition of ESAE and related transactions is divided into payments made to third parties and payments made to companies under common control are as follows:
Common control transactions | Third party transactions | ||||||||||||
Payment made | Book value | Capital distribution | Purchase price | Fair value of net assets | Goodwill | ||||||||
100% of Braskem Participações | 381.1 | 44.1 | 337.0 | 1,016.7 | 255.1 | 761.6 | |||||||
100% of Proppet | 39.1 | 12.8 | 26.2 | 12.0 | (2.3 | ) | 14.3 | ||||||
420.2 | 56.9 | 363.2 | 1,028.7 | 252.8 | 775.9 | ||||||||
Common control transactions | Third party transactions | |||||||||||
Payment | Capital | Purchase | Net assets | |||||||||
made | Book value | distribution | price | at fair value | Goodwill | |||||||
100% Braskem Part. | 381.1 | 44.1 | 337.0 | 1,016.7 | 255.1 | 761.6 | ||||||
100% Proppet | 39.1 | 12.8 | 26.2 | 12.0 | (2.3) | 14.3 | ||||||
Total | 420.2 | 56.9 | 363.2 | 1,028.7 | 252.8 | 775.9 | ||||||
Nova Camaçari acquired Braskem Participações through the acquisition of the entire share capital of ESAE and Intercapital and the acquisition of an 11.76% direct interest in Conepar. Nova Camaçari acquired Intercapital for total consideration of R$ 445.0, of which R$ 381.0 was paid to members of the Odebrecht Group and the remaining R$ 64.0 was paid to members of the Mariani Group (Pronor Petroquímica S.A. and Companhia Brasileira de Poliolefinas). The net assets acquired from the Odebrecht Group were valued at a carryover basis of R$ 12.8, while the net assets acquired from the Mariani Group were valued at fair value of R$ 16.1.
(i)(ii) OPP PPPreferred Shares Transaction
Under Brazilian GAAP, since the terms of the exchange of Braskem and OPP PPpreferred shares were based on the appraised economic value of each company, the transaction was accounted for on that basis.
Under U.S. GAAP, the common control transaction would be recorded at the book value of OPP PP’sPP's consolidated net assets as of July 25, 2001. On that date the difference between consideration paid and the net liabilities of OPP PP under U.S. GAAP was R$1,814.6 and the issuance of Braskem shares to the Odebrecht Group would, therefore, be considered a distribution in that amount.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
The fair value of the stock issued by the Company for the acquisition of OPP PP was R$ 1,268.4 on August 16, 2002. At that time OPP PP had a negative carryover book basis of R$ 546.2 under U.S. GAAP, resulting in a capital distribution of R$ 1,814.6 under U.S. GAAP. The Company adjusted the Brazilian GAAP shareholders’shareholders' equity to reflect the U.S. GAAP capital distribution of R$ 1,814.6 and made corresponding adjustments to deferred charges, property, plant and equipment and goodwill recorded in investments.
F-104
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
At December 31, 2005,2007, the residual balances within deferred charges of R$ 513.6268.9 (2006 - R$ 395.1) was represented by cost of R$ 875.4994.3 and accumulated amortization of R$ 361.8.725.4.
(ii)(iii) Contributions from shareholders
Under Brazilian GAAP, the acquisition of 46.4% of minority interests of Trikem, as described in Note 1(b(iii)), was undertaken through exchange of shares, and accounted for on that basis. Under U.S. GAAP, the difference between the book and the fair value of the shares issued was recorded as additional paid in capital. Accordingly, during 2004, this transaction generated a contribution from shareholders amounting to R$ 339.4.
Also, during 2004, the Company acquired minority interests of Polialden utilizing shares held in treasury, as described in Note 1(b(vi)).treasury. Under U.S. GAAP, the difference between the book value and the market value of the shares amounting to R$ 46.5 was recorded as additional paid in capital.
As mentioned in Note 1 (vii), the Company acquired minority interests representing 32.6% of the total share capital of Polialden, by the issuance of 7,878,725 class A preferred shares. Under Brazilian GAAP, the Class A preferred shares were issued based upon the book value. Under U.S. GAAP, the difference raised between the book and the fair-value of these shares issued was recorded as an additional paid in capital. This transaction generated a contribution to shareholders amounting to R$ 5.9 at that time.
(h) Guarantees
The fair value of guarantees is initially determined by consideration of data in observable markets and comparable transactions and the utilization ofby using probability-weighted discounted net cash flow models.
The Company has directly guaranteedendorsed debt obligations under financing agreements withof third parties related to an equity affiliate.affiliates. At December 31, 2005,2007, the Company had directly guaranteedendorsed guarantees on financing agreements of the affiliate entities, Petroflex and Petroquímica Paulínia for R$ 16.7 relating to guarantees of certain obligations8.6 (2006 - R$ 6.4) and liabilities of Petroflex Indústria e Comércio S.A.R$ 339.7 (2006 - R$ 339.7), respectively. This represents the maximum potential amount of future (undiscounted) payments that the companyCompany could be required to make under the guarantees. In addition the Company has some commitments regarding purchase agreements as stated in the Note 29.
TheChanges that occurred in fair value of the guarantees that have been issued or modifiedsuch collaterals since the company’s adoptionimplementation of FASB Interpretation NºNo. 45, onas of January 1, 2003, is not material. are considered to be immaterial.
F-105
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
As of December 31, 2005, the2007, recognition of liabilities recorded for these obligations were not material.are neither required nor contingent.
(i) Pension plan
In determining the pension and other post-retirement benefit obligations for Brazilian GAAP purposes, Brazilian Accounting Standard NPC 26 is effective for financial statements beginning with the year ended December 31, 2001. As permitted by NPC 26, the transitional obligation, which is the difference between a plan’splan's net assets and the projected benefit obligation at that date, was fully recognized as a direct charge to retained earnings. After January, 2002 under U.S. GAAP, SFAS NºNo. 87, “Employer’s"Employer's Accounting for Pensions”Pensions", is effective for fiscal years beginning after 1988. As from such date, when an initial transition obligation determined based on an actuarial valuation is recognized, actuarial gains and losses, as well as unexpected variations in plan assets and the projected benefit obligation and the effects of amendments, settlements and other events, would be recorded in accordance with these standards and therefore result in deferral differences. Through 1997, these amounts were treated as non-monetary and were indexed for inflation. U.S. GAAP also requires recognition of an additional minimum liability. Unrecognized actuarial gains and losses are amortized either over the estimated future service period of employees or over the estimated remaining period until the plan final settlement, whichever the less.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
Although the calculation of the sufficiency funded status ishas been the same since December 31, 2001, differences arise on (i) actuarial gains and losses as there is initially no actuarial gain or loss atas of December 31, 2001, (ii) recognition of the initial transition obligation and (iii) the minimum liability under U.S. GAAP.
Based onSFAS No. 158 "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an Amendment of FASB Statements No. 87, 88, 106, and 132(R)"requires an employer to recognize the reportoverfunded or underfunded status of a defined benefit pension and post-retirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. SFAS 158 also requires an employer to measure the funded status of a plan as of the Company’s independent actuaries,date of its year-end statement of financial position, with limited exceptions. We are required to initially recognize the funded status of our defined benefit pension and post-retirement plans and to provide the required disclosures as of December 31, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year end statement of financial position is effective for us for our fiscal year ending December 31, 2008.
F-106
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
The summary of the sufficiency of funds and amounts recorded in the U.S. GAAP condensed balance sheet as at December 31, 20052007 and 2004 and2006 as well as at the condensed statement of operations for 2007, 2006 and 2005 2004 and 2003 for ourregarding pension obligations to retireesliabilities in accordance with SFAS NºNo. 132, “Employer’s"Employer's Disclosures About Pensions and Other Post-Retirement Benefits”Benefits - revised", as amended,for Braskem, IQ, IPQ and Copesul are as follows:
Pension Accounting
2005 | 2004 | |||||
Change in benefit obligation | ||||||
Net projected benefit obligation at beginning of year | (336.2 | ) | (305.2 | ) | ||
Service cost | (3.7 | ) | (7.5 | ) | ||
Interest cost | (19.0 | ) | (33.3 | ) | ||
Curtailment | 11.5 | — | ||||
Actuarial loss | (79.3 | ) | (11.5 | ) | ||
Gross benefits paid | 11.2 | 21.3 | ||||
Net projected benefit at end of year | (415.5 | ) | (336.2 | ) | ||
Accumulated benefit obligation at end of year | 415.5 | 324.7 | ||||
Change in plan assets | ||||||
Fair value of plan assets at beginning of year | 289.5 | 235.2 | ||||
Actual return on plan assets | 76.8 | 66.6 | ||||
Employer contributions | 3.0 | 5.4 | ||||
Employee contributions | 2.0 | 3.6 | ||||
Gross benefits paid | (11.2 | ) | (21.3 | ) | ||
Fair value of plan assets at end of year | 360.1 | 289.5 | ||||
Prepaid pension cost | ||||||
Unfunded status at end of year | (55.3 | ) | (46.7 | ) | ||
Unrecognized net actuarial gain | 65.2 | 84.5 | ||||
Prepaid pension cost | 9.9 | 37.8 | ||||
Additional minimum pension liability | ||||||
Prepaid pension cost | 9.9 | 37.8 | ||||
Additional amount recognized in shareholders equity | (65.2 | ) | (73.0 | ) | ||
Minimum pension liability | (55.3 | ) | (35.2 | ) | ||
Weighted-average assumptions as of December 31 (%) | ||||||
Discount rate | 11.0 | 11.0 | ||||
Expected return on plan assets | 11.0 | 11.0 | ||||
Rate of compensation increase | 0 | 7.0 | ||||
Projected annual inflation rate (added to the above percentages) | 5.0 | 5.0 |
2007 | 2006 | ||||
(i) Change in Projected Benefit Obligations - PBO | |||||
Benefit obligation at the beginning of year | (459.4) | (415.5) | |||
Service Cost | (8.1) | ||||
Interest Cost | (81.9) | (46.9) | |||
Actuarial (gain) loss | (124.7) | ||||
Effects from business combination relating to consolidation | |||||
of IQ, IPQ and Copesul | (551.8) | ||||
Benefits paid | 65.1 | 3.0 | |||
Projected Benefit Obligation at the end of year | (1,160.8) | (459.4) | |||
(ii) | Change in plan assets | ||||
Fair value of plan assets at the beginning of year | 406.5 | 360.1 | |||
Gain on plan assets | 241.4 | 46.4 | |||
Employer contribution | 9.9 | - | |||
Employee contribution | - | - | |||
Effects from business combination relating to | |||||
consolidation of IQ, IPQ and Copesul | 554.9 | - | |||
Benefits paid from plan assets | (64.2) | - | |||
Fair value of plan assets at the end of year | 1,148.5 | 406.5 | |||
(iii) | Funded status = (ii) - (i) | (12.4) | (52.8) | ||
Prior service cost | 14.2 | - | |||
Unrecognized actuarial loss (gain) | (12.7) | 4.3 | |||
Accrued pension cost | (10.9) | (48.5) | |||
Accrued pension cost | (10.9) | (48.5) | |||
Accumulated other comprehensive income (loss) | (1.5) | (4.3) | |||
Minimum pension liability | (12.4) | (52.8) | |||
As Braskem, as well as IQ, IPQ and Copesul, had already recognized the liability for the unfunded status, unrecognized loss has been accounted for as a debit to a separate account within shareholders' equity by the initial application of SFAS 158 which had neither impacted assets/liabilities nor shareholders' equity.
F-107
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
The charge in the statementTable of operations is comprised as follows:
2005 | 2004 | 2003 | |||||||
Components of net periodic benefit cost (credit) | |||||||||
Service cost | (3.7 | ) | 7.5 | 4.6 | |||||
Interest cost | (19.0 | ) | 33.3 | 14.1 | |||||
Expected return on assets | 16.0 | (25.9 | ) | (11.5 | ) | ||||
Amortization of unrecognized actuarial losses | (22.4 | ) | 5.1 | (2.6 | ) | ||||
Employee contributions | (2.0 | ) | (3.6 | ) | (2.7 | ) | |||
Total net periodic benefit cost (credit) | (31.1 | ) | 16.4 | 1.9 | |||||
Contents
Braskem S.A. and Its Subsidiaries | ||||
Notes to the Consolidated Financial Statements | ||||
at December 31, 2007, 2006 and 2005 | ||||
All amounts in millions of reais, unless otherwise indicated | ||||
| ||||
| ||||
| ||||
| ||||
| ||||
|
In addition, the pension plan for which each company are entitled to participate is not considered to be a multi-employer plan.
Pension charges to income statement, known as net periodic pension cost, may be expressed as follows:
2007 | 2006 | 2005 | |||||
(iv) | Pension costs (gain) | ||||||
Service cost | 8.1 | - | 3.7 | ||||
Interest cost | 95.2 | 46.9 | 36.9 | ||||
Expected return on plan assets | (80.3) | (40.7) | (29.9) | ||||
Amortization of prior service cost | 2.0 | 52.2 | 22.4 | ||||
Employee contributions | (4.6) | - | (2.0) | ||||
Net periodic pension cost | 20.4 | 58.4 | 31.1 | ||||
(v) | Actuarial assumptions | ||||||
Discount rate for determining projected benefit obligations | 11.3 | 11.3 | 11.3 | ||||
Expected long-term rate of return on plan assets | 11.3 | 11.3 | 11.3 | ||||
Rate of compensation increase | 0.0 | 0.0 | 0.0 | ||||
Projected annual inflation rate (included in the above | |||||||
percentages) | 5.0 | 5.0 | 5.0 |
In June 2005, the Company communicated to its employees the permanent suspension of the Braskem defined benefit plan effective on June 30, 2005.
As a result, the Company recorded a curtailment gain of R$ 11.5 million which was recorded as a reduction of the unrecognized actuarial losses. Settlement requires approval of the Secretariat for Complementary Pension and unrecognized actuarial losses are being amortized since July 2005, over the expected period to final approval which is shorter than the remaining service life of the active employees.
F-108
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Plan assets
The weighted-average assets, as percentages of total assets, for these plans as of December 31, 2007 are as follows:
Range of allocation in - % | ||||
2007 | 2006 | |||
Fixed income securities | 55.0 to 74.0 | 55.0 to 74.0 | ||
Equity securities | 20.0 to 30.0 | 20.0 to 30.0 | ||
Loans | 3.0 to 6.0 | 3.0 to 6.0 | ||
Real estate | 2.5 to 4.5 | 2.5 to 4.5 |
Defined contribution plan
For the year-ended as of December 31, 2007 contributions by the Company to this defined contribution plan have amounted to R$ 5.9 (2006 - R$ 7.8; 2005 - R$ 4.6) . The Company expects to contribute R$ 6.1 for the year to be ended December 31, 2008.
(j) Earnings per share
Under Brazilian GAAP, net income or loss per share is calculated based on the number of shares outstanding at the balance sheet date retroactively restated for the 20-for-one250 for one share reverse split in October 2003March 2005 for all periods. Information is disclosed per lot of one thousand shares, because generally this is the minimum number of shares that can be traded on the Brazilian stock exchanges.
share.
Under U.S. GAAP, because the preferred and common shares have different voting and liquidation rights, basic and diluted earnings per share have been calculated using the “two-class”"two-class" method, pursuant to SFAS NºNo. 128 “Earnings- Appendix C - paragraph 155, "Earnings per Share”Share", which provides computation, presentation and disclosure requirements for earnings per share.
The two-class method is an earnings allocation formula that determines earnings per share for preferred and common shares according to the dividends to be paid as required by the Company’sCompany's by-laws and participation rights in undistributed earnings.
F-109
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Basic earnings per common share are computed by dividing net income by the weighted-average number of common and preferred shares outstanding during the year.
Braskem S.A. and its Subsidiaries
NotesReferences earnings per share amounts have been restated to give retroactive effect, for all periods presented, to the Consolidated Financial Statements—(Continued)May 2005 share reverse split transaction.
All type and classes of shares are equally entitled to receive a minimum dividend amount equal to 6% of its book value prevailing at the latest year-end financial statements.
On May 31, 2006 the shareholders of the Company approved the conversion of 2,632,043 class A preferred shares into common shares (Note 20(a)).
On May 31, 2006 the shareholders of the Company approved the conversion of 2,632,043 class A preferred shares into common shares and on April 2, 2007 the Company approved the conversion of 486,530 class A preferred shares into common shares (Note 20(a)). In accordance with EITF Topic No. D-42“The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock” the amount of R$ 3.3 and R$ 8.6 was subtracted from net earnings available to common shareholders in the calculation of earnings per share for the year ended December 31, 2005, 20042007 and 2003
All amounts in millions ofreais, unless otherwise indicated
2006, respectively.
The table below presents the determination of U.S. GAAP net income available to common and preferred shareholders and weighted average common and preferred shares outstanding used to calculate basic and diluted earnings per share for each of the years presented under U.S. GAAP.
All references to the number of preferred and common shares and per share amounts have been restated to give retroactive effect to the May 2005 share reverse split for all periods presented.
F-110
December 31, 2005 | ||||||||||
Common Share | Class A Preferred Shares | Class B Preferred Shares | Total | |||||||
Basic numerator – undiluted | ||||||||||
Minimum 6% dividend | 68.1 | 135.5 | 0.5 | 204.1 | ||||||
Undistributed earnings allocation | 178.1 | 354.9 | — | 533.0 | ||||||
Total undistributed earnings | 246.2 | 490.4 | 0.5 | 737.1 | ||||||
Weighted average numbers of shares | ||||||||||
Basic | 120.9 | 240.9 | 0.8 | 362.6 | ||||||
Diluted | 142.1 | 290.5 | — | 432.6 | ||||||
Basic earnings per thousand outstanding shares – (whole reais) - R$ | 2.04 | 2.04 | 0.63 | |||||||
Effects of conversion | (0.10 | ) | (0.10 | ) | ||||||
Diluted earnings per thousand shares – (whole reais) - R$ | 1.94 | 1.94 | ||||||||
December 31, 2004 | ||||||||||
Common Share | Class A Preferred Shares | Class B Preferred Shares | Total | |||||||
Basic numerator – undiluted | ||||||||||
Minimum 6% dividend | 68.2 | 135.5 | 0.5 | 204.2 | ||||||
Undistributed earnings allocation | 228.7 | 454.9 | — | 683.6 | ||||||
Total undistributed earnings | 296.9 | 590.4 | 0.5 | 887.8 | ||||||
Weighted average numbers of shares | ||||||||||
Basic | 107.4 | 208.7 | 0.9 | 317.0 | ||||||
Diluted | 126.5 | 263.4 | — | 389.9 | ||||||
Basic earnings per thousand outstanding shares – (whole reais)—R$ | 2.77 | 2.83 | 0.56 | |||||||
Effects of conversion | (0.23 | ) | (0.29 | ) | ||||||
Diluted earnings per thousand shares – (whole reais)—R$ | 2.54 | 2.54 | ||||||||
Braskem S.A. and its SubsidiariesTable of Contents
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
December 31, 2007 | ||||||||
Class A | Class B | |||||||
Common | Preferred | Preferred | ||||||
Share | Shares | Shares | Total | |||||
Basic numerator – undiluted | ||||||||
Minimum 6% dividend | 86.8 | 191.1 | 0.6 | 278.5 | ||||
Induced conversion of Class A preferred shares into | 3.3 | 3.3 | ||||||
Common shares (Note 20 (a)) | ||||||||
Undistributed earnings allocation | 251.8 | 553.9 | 1.6 | 807.3 | ||||
Total undistributed earnings | 338.6 | 748.3 | 2.2 | 1,089.1 | ||||
Weighted average numbers of shares | ||||||||
Basic | 122.4 | 269.3 | 0.8 | 392.5 | ||||
Diluted | 132.3 | 294.5 | 426.8 | |||||
Basic earnings per thousand outstanding shares – | ||||||||
(whole reais) - R$ | 2.76 | 2.79 | 2.75 | |||||
Effects of conversion | (0.08 ) | (0.11) | ||||||
Diluted earnings per thousand shares – | ||||||||
(whole reais) - R$ | 2.68 | 2.68 | ||||||
December 31, 2006 | ||||||||
Class A | Class B | |||||||
Common | Preferred | Preferred | ||||||
Share | Shares | Shares | Total | |||||
Basic numerator – undiluted | ||||||||
Minimum 6% dividend | 15.5 | 137.0 | 0.5 | 153.0 | ||||
Induced conversion of Class A preferred shares into | ||||||||
Common shares (Note 20 (a)) | - | 8.6 | - | 8.6 | ||||
Total undistributed earnings | 15.5 | 145.6 | 0.5 | 161.6 | ||||
Weighted average numbers of shares | ||||||||
Basic and diluted | 122.4 | 248.3 | 0.8 | 371.5 | ||||
Basic and diluted earnings per thousand outstanding | ||||||||
shares – (whole reais) – R$ | 0.13 | 0.59 | 0.63 | |||||
F-111
Notes to the Consolidated Financial Statements—(Continued)Table of Contents
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
December 31, 2005 | ||||||||
Class A | Class B | |||||||
Common | Preferred | Preferred | ||||||
Share | Shares | Shares | Total | |||||
Basic numerator – undiluted | ||||||||
Minimum 6% dividend | 68.2 | 135.6 | 0.5 | 204.3 | ||||
Undistributed earnings allocation | 179.6 | 357.3 | - | 536.9 | ||||
Total undistributed earnings | 247.8 | 492.9 | 0.5 | 741.2 | ||||
Weighted average numbers of shares | ||||||||
Basic | 120.9 | 240.4 | 0.8 | 362.1 | ||||
Diluted | 142.1 | 290.0 | - | 432.1 | ||||
Basic earnings per thousand outstanding shares – | ||||||||
(whole reais) - R$ | 2.05 | 2.05 | 0.63 | |||||
Effects of conversion | (0.10) | (0.10) | ||||||
Diluted earnings per thousand shares – | ||||||||
(whole reais) - R$ | 1.95 | 1.95 | ||||||
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
December 31, 2003 | ||||||||||
Common Share | Class A Preferred Shares | Class B Preferred Shares | Total | |||||||
Basic numerator – undiluted | ||||||||||
Minimum 6% dividend | 42.0 | 70.9 | 0.4 | 113.3 | ||||||
Undistributed earnings allocation | 98.5 | 166.3 | — | 264.8 | ||||||
Total undistributed earnings | 140.5 | 237.2 | 0.4 | 378.1 | ||||||
Weighted average numbers of shares | ||||||||||
Basic | 99.9 | 173.1 | 0.9 | 273.9 | ||||||
Diluted | 117.1 | 276.9 | — | 394.0 | ||||||
Basic earnings per thousand outstanding shares – (whole reais)—R$ | 1.41 | 1.37 | 0.44 | |||||||
Effects of conversion | (0.21 | ) | (0.17 | ) | ||||||
Diluted earnings per thousand shares – (whole reais)—R$ | 1.20 | 1.20 | ||||||||
(k) Comprehensive income
Under Brazilian GAAP, the concept of comprehensive income is not recognized.
adopted.
Under U.S. GAAP, SFAS NºNo. 130, “Reporting"Reporting Comprehensive Income”Income", requires the disclosure of comprehensive income. Comprehensive income is comprised ofby net income and other comprehensive income that includeincludes charges or credits directly to equity which are not the result of transactions with owners. For Braskem and its investees, the components of comprehensive income are itsrelated to the net income or loss and theadded/subtracted by changes in minimum pension liability (Note 31(z)31(x)(c)(iii))).
(l) Capital issuanceraising costs
Under BR GAAP, costs ofincurred on issuance of equity securities areissued through December 31, 2005, were accounted as deferred charges in the balance sheet.
As required by CVM “Ofício-Circular” 01/2006, the costs of issuance of equity securities issued as from 2006, will be accounted as non recurrent expenses in the operational results. No capital issuance costs were incurred in 2005, 2006 and 2007.
Under U.S. GAAP, according to SEC Accounting Bulletin Topic 5— “Miscellaneous Accounting”, specific incremental costs directly attributable to a proposed or actualpublic stock offering of securities may properly be deferred and chargednetted off against the gross proceeds ofcapital issued. For the offering. Atyear ended December 31, 2004, the Company had incurred in R$ 58.1 million of capital issuance costs, charged against the gross proceeds of the offering.offering by decreasing shareholders' equity at that time in the same amount. As of December 31, 2007 the remaining balance, net of amortization, to be adjusted for U.S. GAAP purposes, in shareholders' equity, amounts to R$ 40.7 (2006 - R$46.5).
F-112
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(m) Income taxes
Under Brazilian GAAP, according to CVM Deliberation 273/98 and CVM Instruction Nº 371/02, the deferred income tax asset represents the estimated amount to be recovered.
In addition, under Brazilian GAAP no deferred tax asset is recognized relating to temporary timing differences or income tax losses which are expected to be realized after a period of ten years from the balance sheet date.
Under U.S. GAAP, deferred taxes are accrued on all temporary tax differences. Deferred tax assets and liabilities are classified as current or long-term based on the classification of the asset or liability underlying the temporary difference. Deferred income tax assets and liabilities in the same tax jurisdiction are netted rather than presented gross.
In addition, underAccording to SFAS 109, Brazilian GAAP no deferred tax assetnominal rate is recognized relating to temporary timing differences or income tax losses which are expected to be realized after a period of ten years from the balance
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
sheet date. Underapplied for U.S. GAAP reporting purposes, however there is no limit to the period in which deferredirrevocable tax assetscredits may be realized and the valuation allowance recognition for Brazilian GAAP purposes at December 31, 20052007 in the amount of R$ 20.5 (2004 –2.8 (2006 - R$ 26.8) was11.9) has been reversed for U.S. GAAP purposes.
For purposes ofThe adjustment for deferred taxes are disclosed in the U.S. GAAP reconciliation the adjustment for deferred taxes relates to the U.S. GAAP adjustments. Additional income tax (charges) in the reconciliation benefits relating to other U.S. GAAP adjustments were recognized in the statement of operations under U.S. GAAP in the amount of R$ 39.9,94.6, R$ 48.8(123.2) and R$ (20.6)39.9 in 2005, 20042007, 2006 and 2003,2005, respectively.
There are neither accrued interests nor penalties during 2007 in the condensed statement of operations since it is more likely than not that Braskem and subsidiaries will not have any adjustment to its tax returns filed to various tax authorities.
Each year the company files income tax returns in the various national taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the taxing authorities. Positions challenged by the taxing authorities may be settled or appealed by the company. With few exceptions, the Company and subsidiaries are no longer subject to Brazilian federal, state and local, nor non-Brazilian income tax examinations by various tax authorities for years before December 31, 2002.
Uncertainties in income taxes are recognized in the company's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes" (SFAS 109). In 2006, the FASB issued FASB Interpretation No. 48 - FIN 48, which clarifies the application of SFAS 109 by defining criteria that an individual income tax position must meet for any part of the benefit of that position to be recognized in an enterprise's financial statements and provides guidance on measurement, derecognition, classification, accounting for interest and penalties, accounting in interim periods, disclosure, and transition.
F-113
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
In accordance with the transition provisions, the company adopted FIN 48 effective January 1, 2007, for which there are neither unrecognized tax benefits to be disclosed under this rule nor interests and penalties accounted for by the Company.
Interest and penalties raised on tax uncertain position are recognized within income statement whenever tax benefits are considered to be “more likely than not” realizable for settling/netting them under tax and accounting rules.
(n) TaxIncome tax incentives
Under Brazilian GAAP, the various tax incentives of the Company (in the form of tax reduction or exemption for defined periods) aremay be accounted for directly in aas capital reserve account in shareholders’ equity and the period of accomplishment is limited to 10 years.
within shareholders' equity.
For U.S. GAAP reconciliation purposes, the amount of those incentives has been credited to the statement of operations instead of to a capital reserve.reserve, in the amount of R$ 49.5, R$11.9 and R$52.0, in 2007, 2006 and 2005 respectively.
(o) Revenue recognition
Under Brazilian GAAP, it is acceptable to recordThe Company has been recognizing sales revenues either at the date of shipment on signing a sales contract or at the date thatwhenever the product is delivered to and accepted by the customer, although the prevalent practice under Brazilian GAAP is to record sales at the date of shipment. In 2003 Braskem changed the practice to the acceptance date, resulting in a reduction of R$ 3.9 in operating profit in 2003, which is being reversed for purposes of reconciliation.
Under U.S. GAAP, and in accordance with SEC Staff Accounting Bulletin NºNo. 101 and 104, sales are normally recorded when legal title passes to the buyer. In addition, multiple element service contracts are recognized only when certain conditions are met. Accordingly, for U.S. GAAP reconciliation purposes, the Company has deferred the gain on multiple element contract with its jointly – controlled companyinvestee Petroquímica Paulínia, amounting to R$ 3.6(18.1) at December 31, 2005.2006 (2005 - R$ 3.6), with no effect in 2007.
F-114
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(p) Consolidation of securitization funds
variable interest entities
Under Brazilian GAAP, until the year ended 2003, in respect of the accounting treatment for the Braskem’sBraskem trade receivable securitization program, the transfer of receivables to the fund was treated as a sale of receivables and the discount on the sale was immediately recorded in the statement of operations. In August 2004, CVM issued CVM Instruction 408 providing for the inclusion of Special Purpose Entities in the consolidated financial statement of publicly –- held companies and therefore those entities have been consolidated in 2004 and 2005.
Under U.S. GAAP, SFAS 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" requires fair value accounting method on such assets transferred to special purposes entities, as well as consolidation of securitized financial assets in accordance with FASB Interpretation NºNo. 46 “Consolidation"Consolidation of Variable Interest Entities (revised December 2003)”", trade receivable securitization fundsas follows:
Parin Fund | SOL Fund | |||||||
2007 | 2006 | 2007 | 2006 | |||||
Net assets | 458.4 | 537.9 | 258.8 | 395.2 | ||||
Net income | (94.4) | 25.5 | 30.4 | 14.0 | ||||
In March 2006, the FASB issued SFAS 156, "Accounting for Servicing Financial Assets", which amends FASB Statements No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This Statement resolves issues addressed in Statement 140 regarding recognition for all servicing financial asset or liability and its measurement methods. The Company did not have a significant impact on its financial position, results of operations or cash flows by the implementation of SFAS 156.
F-115
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(q) Long-term share incentive plan
SFAS Statement 123 (R) "Share Based Payment", requires the measuring and recording of the cost of employee services in exchange for awards of equity instruments based on the fair value of those awards (with limited exceptions). Awards granted shall be classified as liability awards. That cost will be recognized over the period during which the employee is required to provide the service in exchange for the award. No compensation cost should be recognized for equity instruments for which employees do not render the requisite service. SFAS 123 (R) requires entities to initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. The grant date fair value and the fair value of each reporting period of employee share options are variableestimated using the Black-Scholes option-pricing model. SFAS 123 (R) is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. As described in further details below, the Company has granted a long-term share incentive plan (the "Plan") to certain employees, which have acquired investment certificates at prices below market at the time of the issuance. The market value of the options granted will be recognized for U.S. GAAP purposes as expense over the period in which the services are rendered. The fair value of the options classified as liability award will be reassessed each reporting date. The award is classified as liabilities because the employees have the right to receive cash.
Braskem's Plan entitles officers and employees involved in strategic plans of the Company to buy investment certificates, up to pre-defined maximum quantities. The investment certificates bought by the participants are named alpha. The costs to employees of the certificates are equivalent to the average value of one Class A Preferred Share negotiated at Bovespa from the months of October through March of previous year to the purchase.
For each "alpha" acquired by participant, the Company grants one "beta" certificate, which is legally equal to that "alpha" purchased. In addition, each beneficiary of the plan is entitled to receive "gama" certificates in each year, corresponding to the dividends and interest entitiesin own capital paid by the Company to preferred shares. "Gama" certificates which were not collected by participant during each year are transformed into "alpha" certificates at the following year.
Alpha and gama certificates represent the right to receive the fair value of a Class A Preferred at vesting.
F-116
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Braskem Board of Directors approved the maximum amount of 285,180 alpha certificates to be offered to participants. The certificates are generally offered to the participants in April of each year. Following the offer, the participants generally have 30 days to acquire via payment the certificates. Only certificates bought by the participants are considered granted once certificates offered and not paid do not generate any benefit to the participant. The amount deposited by the employees was initially recognized as a liability for both Brazilian and U.S. GAAP and totaled R$ 4.6 as of December 31, 2007 (2006 - R$ 1.7) .
Under Brazilian GAAP, liability is updated based on the average value of one Class A Preferred Share negotiated at Bovespa from the months of October through March, annually, and outstanding quantities of certificates.
According to the Plan, 20% of the balance of alpha and beta certificates vests after 5 years of continuous service and the remaining balance vests at the rate of 10% per year after the 6th year. After the 10th year, beta certificates not redeemed are transformed to alpha certificates and the employee has no further incentive for that grant. Gama certificates vests and are paid to the employees when dividends and interest on own capital is paid to the Company's shareholders. Gama certificate provide the employee with a cash flow similar to one preferred share and are valued as such for the purposes of the amounts initially deposited. The beta certificate is considered to generate an incentive similar to a share option scheme, employees may be awarded shares if they remain employees for a number of years.
Under U.S. GAAP, the Company accounts for alpha and beta certificates in accordance with FASB 123 (R) since 2006. The beta certificate is a considered a liability award, compensation cost has been consolidatedrecognized as the fair value of beta certificate at each reporting date. The fair value for these options was estimated at the date of grant using a Black-Scholes-Merton option pricing model with the following weighted-average assumptions:
2007 | 2006 | |||
Statistical and financial-economic variables | 2nd grant | 1st grant | ||
Risk-free interest rate, net of inflation effect - % | 6.79 | 8.42 | ||
Dividend yield - % | 6.00 | 6.00 | ||
Volatility at Brazilian capital markets - % | 57.09 | 54.10 | ||
Exercise price - in R$ | 15.03 | 18.14 | ||
Stock market price at year end - in R$ | 13.80 | 14.85 | ||
Expected life of the option - in years | 9.1 | 9.3 |
F-117
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
A summary of certificate (alpha plus beta) activity under the Plan as of December 31, and changes during the year then ended is presented below:
Weighted average | ||||||||
unit exercise price | Alpha and Beta certificates | |||||||
(units) | ||||||||
2007 | 2006 | 2007 | 2006 | |||||
Outstanding as of January 1 | 18.14 | - | 95,719 | - | ||||
Granted | 15.03 | 18.14 | 189,461 | 97,372 | ||||
Exercised | - | - | - | - | ||||
Expired/cancelled | - | - | - | (1,653) | ||||
Outstanding as of December 31 | 16.22 | 18.14 | 285,180 | 95,719 | ||||
Redeemable as of December 31 | - | - | - | - | ||||
Compensation cost - millions of R$ | 0.6 | 0.5 | ||||||
The weighted average grant fair values of the beta certificates was R$15.03 and R$18.14 per beta certificate at the time of grant in all periods presented. 2007 and 2006, respectively. Beta certificates have an intrinsic value equal to the value of a preferred share which is approximately the exercise price disclosed above. Under Brazilian GAAP, as of December 31, 2007, the liability recorded in the statement of operations related to the compensation cost of outstanding certificates amounted to R$ 0.6 (2006 - R$ 0.5) .
Under U.S. GAAP, expense related to beta certificates will be recorded based on the term that the participant are expected to provide service to the Company, limited to the contractual life of the Plan, considering computation by using Black-Scholes-Merton pricing model, as well.
For the year ended December 31, 2003, financial expenses related2007, under U.S. GAAP, the Company recorded a reversal of compensation cost, as computed under Brazilian GAAP, in the amount of R$ 0.6 (2006- addition to the salecompensation cost of trade receivables to securitization funds totaled R$(0.6) 0.5) .
F-118
Braskem S.A. and its SubsidiariesTable of Contents
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(q)(r) Proportional consolidation of
jointly-controlled entities
Under Brazilian GAAP, jointly-controlled entities must be consolidated using the proportional consolidation method. Proportional consolidation requires that the share of the assets, liabilities, income and expenses be combined on a line-by-line basis with similar items in the Company’sCompany's financial statements.
Under U.S. GAAP, jointly-controlled entities are recorded under the equity method, except that joint ventures for which the principal financialwhere investment of such holders are registered as equity investment and operational decisionspro-rated net income are jointly controlled byconsidered as equity earnings in affiliates, within statement of operations, all of them prepared in accordance with U.S. GAAP. For the entities equity holderspurposes of this footnote all joint-ventures are permitted to be proportionally consolidated for U.S. GAAP reconciliation purposes. The pro-rated accountsconsolidated.
For purposes of our jointly-controlled investees have not been proportionally consolidated in thepresentation of condensed U.S. GAAP balance sheet and statementsstatement of operations, except for thosethe Company has reverted total assets of Politeno and Petroquímica Paulinia which meetsjointly-controlled entities in the amount of R$ 1,252.8 at December 31, 2007 (2006 - R$ 867.4) .
Earnings in equity affiliate under U.S. GAAP, joint venture requirements.
recorded in the statement of operations, of such proportionally consolidated companies under Brazilian GAAP, amounts to R$ 12.1, R$ 12.9 and R$ 176.3, in 2007, 2006 and 2005, respectively.
The following table presents summarized assets and liabilities of Politeno and Petroquímica Paulínia that are proportionally consolidated in the balance sheet in accordance with U.S. GAAPGAAP:
Politeno | Petroquímica Paulinia | |||||
2005 | 2004 | 2005 | ||||
Total current assets | 110.3 | 115.5 | 4.5 | |||
Property, plant and equipment | 103.7 | 107.3 | 34.9 | |||
Total assets | 272.5 | 275.2 | 39.4 | |||
Total current liabilities | 55.3 | 51.8 | — | |||
Total long-term liabilities | 22.9 | 17.5 | 34.9 |
Petroquímica Paulínia | ||||
2006 | 2005 | |||
Total current assets | 61.5 | 4.5 | ||
Property, plant and equipment | 67.3 | 34.9 | ||
Total assets | 128.8 | 39.4 | ||
Total current liabilities | 2.3 | |||
Total long-term liabilities | 50.4 | 34.9 |
The following table shows summarized income and expenses and cash flow of Politeno and Petroquímica Paulinia that are proportionally consolidated in the statement of operations in accordance with U.S. GAAP:
F-119
For the Year Ended December 31, | |||||||||||
Politeno | Petroquímica Paulinia | ||||||||||
2005 | 2004 | 2003 | 2005 | ||||||||
Statement of operations | |||||||||||
Net sales | 397.3 | 379.2 | 315.8 | — | |||||||
Operating income (loss) | 29.1 | 43.3 | 35.0 | — | |||||||
Net income | 11.9 | 33.0 | 30.6 | — | |||||||
Cash flows | |||||||||||
Net cash provided by operating activities | 31.3 | 18.0 | 34.0 | — | |||||||
Net cash used in investing activities | (7.3 | ) | (7.7 | ) | (3.1 | ) | — | ||||
Net cash used by financing activities | (23.8 | ) | (13.6 | ) | (29.7 | ) | 4.5 |
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(r) ClassificationTable of statement of operations line itemsContents
Under Brazilian GAAP, in addition to the issues noted above, the classification of certain income and expense items is presented differently from U.S. GAAP. We have restated our statement of operations under Brazilian GAAP to present a condensed statement of operations in accordance with U.S. GAAP (Note 31(z)(ii)). The reclassifications are summarized as follows:
Braskem S.A. and Its Subsidiaries |
All amounts in |
Politeno | Petroquímica | |||||
Paulínia | ||||||
2005 | 2006 | 2005 | ||||
Net sales | 397.3 | |||||
Operating income (loss) | 29.1 | (2.0) | ||||
Net income | 11.9 | (2.0) | ||||
Net cash provided by operating activities | 31.3 | 1.8 | ||||
Net cash used in investing activities | (7.3) | (34.3) | ||||
Net cash used by financing activities | (23.8) | 86.6 | 4.5 |
(s) Classification of balance sheet line items
Dividends
Under Brazilian GAAP, the classification of certain balance sheet items is presented differently from U.S. GAAP. We have restated our consolidated balance sheet under Brazilian GAAP to present a condensed consolidated balance sheet in accordance with U.S. GAAP (Note 31(z)(i)). The reclassifications are summarized as follows:
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(t) Dividends
Under Brazilian GAAP, the Company’sCompany's executive officers proposed a dividend distribution from earnings, which has been recorded. Under U.S. GAAP, the amount of dividends exceeding the minimum mandatory dividend is not deemed declared before the distribution is approved by the shareholders. For purposes of reconciliation, the Company has excluded the amount which exceeded the minimum mandatory dividend amounting to R$ 55.7149.4 at December 31, 2005.
2007 (2006 - R$ 18.5) .
Under Braskem’sBraskem's by laws, interest onearned in own capital may be declared and paid up upon authorization of the Board of Directors.Directors but is only considered declared when approved by the shareholders.
Embedded derivatives
Brazilian GAAP does not prescribe the accounting for embedded derivatives.
Under U.S. GAAP, SFAS nº 133, as amended and interpreted, "Accounting for Derivative Instruments and Hedging Activities", requires that embedded derivative instruments shall be separated from the host contract and accounted for as a derivative instrument if and only if all of the following criteria are met: (a) The economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract; (b) the contract that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur; and (c) a separate instrument with the same terms as the embedded derivative instrument would be a derivative instrument subject to the requirements of SFAS no. 133 .
F-120
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
For U.S.GAAP purposes the Company has bifurcated the embedded derivatives of sales contracts. For purposes of reconciliation, the fair value of embedded derivatives amounted to R$3.5 in the year ended December 31, 2007. During the previous years, the amounts were considered immaterial.
(t) Classification of statement of
operations line items
Under Brazilian GAAP, in addition to the issues noted above, the classifications of certain income and expense items are presented differently from U.S. GAAP. We have restated our statement of operations under Brazilian GAAP to present a condensed statement of operations in accordance with U.S. GAAP (Note 31(x)(c)(ii)). The reclassifications are summarized as follows:
(i) Under Brazilian GAAP discounts granted are classified as financial expenses. Under U.S. GAAP are classified as deductions of sales;
(ii) Under Brazilian GAAP, gains and losses on the disposal or impairment of permanent assets are classified as nonoperating income (expense). Under U.S. GAAP, gains and losses on the disposal or impairment of property, plant and equipment are classified as an adjustment to operating income;
(iii) Under Brazilian GAAP, foreign exchange gains and losses arisen from assets and liabilities may be netted off within interest income or expense. Under U.S. GAAP such foreign exchange gains and losses are recorded as interest income and expense, separately;
(iv) Under Brazilian GAAP, shipping costs are deducted from gross revenues and handling costs are recorded as selling expenses, whereas under U.S. GAAP such costs are included in cost of sales;
(v) Under Brazilian GAAP recovery of indirect taxes on net interest income was recorded under other operating income, whereas under U.S. GAAP, such recoveries are recorded under the same line item as the taxes were initially recorded (interest income, net). As a result R$ 110.7 and R$ 112.4 have been reclassified from other operating income to interest expenses during 2007 and 2006, respectively;
(vi) Under Brazilian GAAP production of dimetiltereftalato - (DMT - basic petrochemicals) has been discontinued as from May 16, 2007, for which a valuation allowance in the amount of R$ 22.6 was provisioned as "non-operating expense" based on the difference between the fair market value and respective book value of such assets, consistent with SFAS 144, for which under U.S. GAAP it was classified as an operating expense.
F-121
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(u) Classification of balance sheet line items
Under Brazilian GAAP, the classification of certain balance sheet items is presented differently from U.S. GAAP. We have restated our consolidated balance sheet under Brazilian GAAP to present a condensed consolidated balance sheet in accordance with U.S. GAAP (Note 31(x)(c)(i)). The reclassifications are summarized as follows:
(i) Under U.S. GAAP, certain deferred charges were reclassified to property, plant and equipment and other, directly to expense, and goodwill on legally merged companies within deferred charges are reclassified to goodwill accordingly to their nature;
(ii) Under Brazilian GAAP advances to suppliers of raw materials and maintenance material are classified as inventories, such advances are classified as advances to suppliers under U.S. GAAP;
(iii) Under Brazilian GAAP, restricted cash equivalents are recorded based on the liquidity of the asset whereas under U.S. GAAP restricted assets are classified based on the classification of the related liability that has caused the restriction;
(iv) Under Brazilian GAAP, according to "Normas e Procedimentos de Contabilidade Nº 20"-"Cash flow statement" cash and cash equivalents consist principally of highly liquid cash deposits and marketable securities, but there is no requirement that there is insignificant potential changes in value because of interest rate change nor is there a maximum 90 day original period to maturity. Under U.S. GAAP, the Company's minority owned independently controlled investment funds are considered to be subject to potential risk of change in value due to changes in interest rates or have underlying securities with original maturities greater than 90 days. Therefore, under U.S. GAAP, such funds were classified under short term investments trading securities in the balance sheet. At December 31, 2007, the balance of such funds was R$ 1,375.8 (2006 - R$ 789.8). Taking into account these reclassifications, the net cash provided by operating activities in the statements of cash flows under U.S. GAAP at December 31, 2007, 2006 and 2005 would be R$ 1,614.6, R$ 883.4 and R$ 1,368.1, respectively
(v) Under Brazilian GAAP, according to "Normas e Procedimentos de ContabilidadeNo. 20"-"Cash flow statement" additions to deferred charges are recorded under investing activites. Under U.S. GAAP such costs are recorded under operating activites;
(vi) Under Brazilian GAAP discounted trade receivables are classified as trade accounts receivable, such items are classified as short-term debt under U.S. GAAP;
F-122
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(vii) Under Brazilian GAAP fair market value of derivative financial instruments are classified as a reduction to the underlying debt. Under U.S. GAAP they are classified as fair market value of derivative of financial instruments; and
(viii) Under Brazilian GAAP, pursuant to CVM Deliberation 489/05, the Company states judicial deposits net of the corresponding contingent liabilities. According to U.S. GAAP, these deposits were fully stated as long-term receivables.
(ix) Braskem entered into a Share Purchase Agreement under which the Company has agreed to sell all its shares in Petroflex which has been classified as an Investment held for sale at the book value of the net investment of R$136.7, to Lanxess Deutschland GmbH for an aggregate price of R$ 252.1. On April 1, 2008, this transaction was completed, as described in Note 30(d). Under U.S. GAAP investment held at Petroflex as of December 31, 2007 was not classified as held for sale and the related balance has been demonstrated within “Equity investment in affiliates”.
(v) Segment reporting
Under Brazilian GAAP, there is no obligation to present disaggregated information with respect to the business segments of an enterprise.
Under U.S. GAAP, SFAS Nº 131, “Disclosures"Disclosures About Segments of an Enterprise and Related Information”Information", requires that public enterprises disclose certain information about segments on the basis that top management uses to allocate resources among segments and evaluate their performance.
F-123
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Braskem has the following business segments:
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
• | Basic Petrochemicals-comprising basic petrochemical production activities and supply of electricity, steam and compressed air to second generation producers. This segment is dependent on Petrobras for supply of raw material. |
• | Polyolefins-comprising activities related to the production of polyethylene and polypropylene. |
• | Vinyls-comprising activities related to the production of PVC, caustic soda and chlorine. One client represents 11.8%, 11.1% and 10.2% of Vinyl's revenues for the years ended December 31, 2007, 2006 and 2005, respectively. |
• | Business Development-comprising activities related to the production of other second generation petrochemical products. One client represents 12.1%, 23.3% and 22.6% of Business Development revenues for the years ended December 31, 2007, 2006 and 2005, respectively. |
• | Copesul- comprising basic petrochemical production activities and supply of electricity, steam and compressed air to second generation producers. This segment depends on Petrobrás for supply of raw material. Business acquired and consolidated only as from April 18, 2007. |
• | Ipiranga- comprising activities related to the production of polyethylene and polypropylene of IQ and IPQ. Business acquired and consolidated only as from April 18, 2007. |
The Company evaluates and manages segment performance based on information generated from its statutory accounting records maintained in accordance with accounting practices adopted in Brazil and reflected in its consolidated financial statements. However, management evaluates jointly controlled companies under the equity method as the Company does not control these companies. Certain equity investments are not allocated to any segment. Additionally, operating income figures presented in business segment information does not include financial expenses, financial income and investment in associated companies.
F-124
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Information on total assets for each segment assets as at December 31, 20052007 and 2004,2006 under Brazilian GAAP, is as follows:
2007 | 2006 | |||
Basic Petrochemicals | 5,016.3 | 5,426.6 | ||
Polyolefins | 3,420.3 | 4,200.6 | ||
Vinyls | 2,113.8 | 2,294.9 | ||
Business Development | 513.5 | 573.3 | ||
Copesul | 4,055.3 | - | ||
Ipiranga Petroquímica | 1,573.1 | - | ||
Ipiranga Química | 188.7 | - | ||
Other | 4,011.0 | 3,808.9 | ||
Total assets | 20,892.0 | 16,304.3 | ||
December 31 | ||||
2005 | 2004 | |||
Basic Petrochemicals | 5,458.9 | 6,398.7 | ||
Polyolefins | 2,827.9 | 3,266.3 | ||
Vinyls | 2,116.8 | 2,282.4 | ||
Business Development | 547.8 | 584.8 | ||
Other | 4,639.4 | 2,518.2 | ||
Total assets | 15,590.8 | 15,050.4 | ||
Allocation of investments byInvestments in affiliates in each business segment was not significantwere immaterial in the periods presented.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
Information on segment results for 2005, 2004 and 2003 isCompany's sales may be demonstrated as follows:
2005 | |||||||||||||||||||||||||||||||||
Business Segments | Total Segments | Eliminations and Adjustments | Braskem consolidated before CVM 247(*) | CVM 247 | Braskem consolidated | U.S. GAAP Differences | U.S. GAAP | ||||||||||||||||||||||||||
Vinyls | Polyolefins | Basic Petrochemicals | Business Development | ||||||||||||||||||||||||||||||
Net sales revenue | 1,794.1 | 3,919.0 | 7,226.7 | 569.0 | 13,508.8 | (1,894.2 | ) | 11,614.6 | 1,460.5 | 13,075.1 | (1,067.3 | ) | 12,007.8 | ||||||||||||||||||||
Cost of sales | (1,271.9 | ) | (3,182.8 | ) | (6,138.5 | ) | (552.9 | ) | (11.146.1 | ) | 1,827.6 | (9,318.5 | ) | (1,043.2 | ) | (10,361.7 | ) | 702.9 | (9,658.8 | ) | |||||||||||||
Gross profit | 522.2 | 736.2 | 1,088.2 | 16.1 | 2,362.7 | (66.6 | ) | 2,296.1 | 417.3 | 2,713.4 | (364.4 | ) | 2,349.0 | ||||||||||||||||||||
Operating expenses (income) | |||||||||||||||||||||||||||||||||
Selling and general administrative | 89.2 | 229.0 | 250.3 | 18.2 | 586.7 | 89.7 | 676.4 | 110.7 | 787.1 | (5.5 | ) | 781.6 | |||||||||||||||||||||
Depreciation and amortization | 0.8 | 6.9 | — | 0.3 | 8.0 | 342.2 | 350.2 | 5.4 | 355.6 | (283.7 | ) | 71.9 | |||||||||||||||||||||
Impairment | — | — | — | — | — | — | — | — | — | 373.8 | 373.8 | ||||||||||||||||||||||
Other, net | (6.6 | ) | (53.0 | ) | (57.1 | ) | (9.2 | ) | (125.9 | ) | 56.1 | (69.8 | ) | 47.0 | (22.8 | ) | 13.3 | (9.5 | ) | ||||||||||||||
83.4 | 182.9 | 193.2 | 9.3 | 468.8 | 488.0 | 956.8 | 163.1 | 1,119.9 | 97.9 | 1,217.8 | |||||||||||||||||||||||
Operating income | 438.8 | 553.3 | 895.0 | 6.8 | 1,893.9 | (554.6 | ) | 1,339.3 | 254.2 | 1,593.5 | (462.3 | ) | 1,131.2 | ||||||||||||||||||||
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
2004 | |||||||||||||||||||||||||||||||||
Business Segments | Total | Eliminations | Braskem consolidated before CVM 247(*) | CVM 247 | Braskem | U.S. GAAP | U.S. GAAP | ||||||||||||||||||||||||||
Vinyls | Polyolefins | Basic Petrochemicals | Business Development | ||||||||||||||||||||||||||||||
Net sales revenue | 1,858.8 | 3,489.4 | 6,480.0 | 620.8 | 12,449.0 | (1,404.8 | ) | 11,044.2 | 1,345.3 | 12,389.5 | (745.4 | ) | 11,644.1 | ||||||||||||||||||||
Cost of sales | (1,157.1 | ) | (2,523.0 | ) | (5,330.1 | ) | (564.9 | ) | (9,575.1 | ) | 1,269.4 | (8,305.7 | ) | (917,3 | ) | (9,223.0 | ) | 283.0 | (8,940.0 | ) | |||||||||||||
Gross profit | 701.7 | 966.4 | 1,149.9 | 55.9 | 2,873.9 | (135.4 | ) | 2,738.5 | 428.0 | 3,166.5 | (462.4 | ) | 2,704.1 | ||||||||||||||||||||
Operating expenses (income) | |||||||||||||||||||||||||||||||||
Selling and general administrative | 80.1 | 199.1 | 213.8 | 24.9 | 517.9 | 62.8 | 580.7 | 96.3 | 677.0 | 173.7 | 850.7 | ||||||||||||||||||||||
Depreciation and amortization | 0.6 | 5.9 | 2.6 | 0.7 | 9.8 | 344.0 | 353.8 | 5.9 | 359.7 | (296.0 | ) | 63.7 | |||||||||||||||||||||
Other, net | (14.9 | ) | (6.3 | ) | (22.2 | ) | (2.6 | ) | (46.0 | ) | 10.8 | (35.2 | ) | (7.8 | ) | (43.0 | ) | 15.8 | (27.2 | ) | |||||||||||||
65.8 | 198.7 | 194.2 | 23.0 | 481.7 | 417.6 | 899.3 | 94.4 | 993.7 | (106.5 | ) | 887.2 | ||||||||||||||||||||||
Operating income | 635.9 | 767.7 | 955.7 | 32.9 | 2,392.2 | (553.0 | ) | 1,839.2 | 333.6 | 2,172.8 | (355.9 | ) | 1,816.9 | ||||||||||||||||||||
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
2003 | |||||||||||||||||||||||||||||||||
Business Segments | Total Segments | Eliminations and adjustments | Braskem consolidated before CVM 247(*) | CVM 247 | Braskem consolidated | U.S. GAAP Differences | U.S. GAAP | ||||||||||||||||||||||||||
Vinyls | Polyolefins | Basic Petrochemicals | Business Development | ||||||||||||||||||||||||||||||
Net sales | 1,371.8 | 3,386.8 | 4,765.3 | 455.3 | 9,979.2 | (788.3 | ) | 9,190.9 | 1,109.3 | 10,300.2 | (845.4 | ) | 9,454.8 | ||||||||||||||||||||
Cost of sales | (1,007.0 | ) | (2,719.7 | ) | (4,111.5 | ) | (416.8 | ) | (8,255.0 | ) | 913.4 | (7,341.6 | ) | (883.0 | ) | (8,224.6 | ) | 562.1 | (7,662.5 | ) | |||||||||||||
Gross profit | 364.8 | 667.1 | 653.8 | 38.5 | 1,724.2 | 125.1 | 1,849.3 | 226.3 | 2,075.6 | (283.3 | ) | 1,792.3 | |||||||||||||||||||||
Operating expenses (income) | |||||||||||||||||||||||||||||||||
Selling and general | 54.8 | 139.3 | 196.0 | 19.2 | 409.3 | (7.8 | ) | 401.5 | 86.9 | 488.4 | 25.0 | 513.4 | |||||||||||||||||||||
Depreciation and | — | 0.9 | 9.0 | 0.5 | 10.4 | 177.8 | 188.2 | 5.3 | 193.5 | (179.7 | ) | 13.8 | |||||||||||||||||||||
Other, net | (3.7 | ) | (2.6 | ) | (51.1 | ) | (10.0 | ) | (67.4 | ) | 16.2 | (51.2 | ) | (4.3 | ) | (55.5 | ) | 3.7 | (51.8 | ) | |||||||||||||
51.1 | 137.6 | 153.9 | 9.7 | 352.3 | 186.2 | 538.5 | 87.9 | 626.4 | (151.0 | ) | 475.4 | ||||||||||||||||||||||
Operating income | 313.7 | 529.5 | 499.9 | 28.8 | 1,371.9 | (61.1 | ) | 1,310.8 | 138.4 | 1,449.2 | (132.3 | ) | 1,316.9 | ||||||||||||||||||||
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
Years Ended December 31 | ||||||
2005 | 2004 | 2003 | ||||
Domestic sales | 10,348.0 | 9,949.3 | 7,700.0 | |||
Exports from Brazil | 2,727.1 | 2,440.2 | 2,600.2 | |||
Total net sales | 13,075.1 | 12,389.5 | 10,300.2 | |||
2007 | 2006 | 2005 | ||||
Domestic sales | 13,472.0 | 9,671.7 | 10,348.0 | |||
Exports from Brazil | 4,207.4 | 3,321.0 | 2,727.1 | |||
Total net sales | 17,679.4 | 12,992.7 | 13,075.1 | |||
Information on the geographical composition of the Company’sCompany's sales, under Brazilian GAAP, is as follows:
2007 | 2006 | 2005 | ||||
Destination of exports from Brazil | ||||||
Americas | 2,878.2 | 2,059.0 | 1,827.2 | |||
Asia and Pacific | 206.9 | 431.7 | 327.3 | |||
Europe | 1,122.3 | 830.3 | 572.6 | |||
Other | - | - | - | |||
Total exports | 4,207.4 | 3,321.0 | 2,727.1 | |||
Domestic sales | 13,472.0 | 9,671.7 | 10,348.0 | |||
Total net sales | 17,679.4 | 12,992.7 | 13,075.1 | |||
F-125
Years Ended December 31 | ||||||
2005 | 2004 | 2003 | ||||
Destination of exports from Brazil | ||||||
Americas | 1,827.2 | 1,586.1 | 1,404.1 | |||
Far East | 327.3 | 292.8 | 572.0 | |||
Europe | 572.6 | 536.8 | 520.0 | |||
Other | — | 24.5 | 104.1 | |||
Total exports | 2,727.1 | 2,440.2 | 2,600.2 | |||
Domestic sales | 10,348.0 | 9,949.3 | 7,700.0 | |||
Total net sales | 13,075.1 | 12,389.5 | 10,300.2 | |||
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Information on segment results for 2007, 2006 and 2005 is as follows:
2007 | |||||||||||||||||||||||||||
Business segments | Eliminations and adjustments (*) | Braskem consolidated before CVM 247 (*) | CVM 247 | Braskem consolidated | U.S.GAAP differences | U.S.GAAP | |||||||||||||||||||||
Petrochemicals | Ipiranga | Copesul | Other | Total segments | |||||||||||||||||||||||
Vinyls | Polyolefins | Basic | Química | Petroquímica | |||||||||||||||||||||||
Net sales revenue | 1,789.4 | 5,669.1 | 7,220.7 | 392.6 | 1,551.4 | 5,516.1 | 489.7 | 22,629.0 | 5,617.4 | 17,011.6 | 667.8 | 17,679.4 | (392.0) | 17,287.4 | |||||||||||||
Cost of sales | (1,438.1) | (4,636.1) | (6,341.2) | (338.9) | (1,232.5) | (4,924.7) | (510.3) | (19,421.8) | (5,488.4) | (13,933.4) | (507.6) | (14,441.0) | 26.0 | (14,415.0) | |||||||||||||
- | |||||||||||||||||||||||||||
Gross profit | 351.3 | 1,033.0 | 879.5 | 53.7 | 318.9 | 591.4 | (20.6) | 3,207.2 | 129.0 | 3,078.2 | 160.2 | 3,238.4 | (366.0) | 2,872.4 | |||||||||||||
Operating expenses | |||||||||||||||||||||||||||
(income) | |||||||||||||||||||||||||||
Selling, general | |||||||||||||||||||||||||||
and administrative | 201.7 | 427.1 | 324.6 | 39.1 | 85.1 | 74.6 | 16.5 | 1,168.7 | 32.8 | 1,201.5 | 37.0 | 1,238.5 | 76.5 | 1,315.0 | |||||||||||||
Depreciation and | |||||||||||||||||||||||||||
amortization | 2.1 | 13.9 | 1.4 | 4.3 | 5.7 | 17.6 | - | 45.0 | 432.0 | 477.0 | 2.1 | 479.1 | (421.7) | 57.4 | |||||||||||||
Other, net | (25.9) | 14.4 | (15.9) | 0.7 | 25.9 | (10.1) | 22.8 | 12.0 | (142.3) | (130.3) | (1.2) | (131.5) | 50.0 | (81.5) | |||||||||||||
177.9 | 455.4 | 310.1 | 44.1 | 116.7 | 82.1 | 39.3 | 1,225.7 | 322.5 | 1,548.2 | 37.9 | 1,586.1 | (295.2) | 1,290.9 | ||||||||||||||
Operating income | 173.4 | 577.6 | 569.4 | 9.6 | 202.2 | 509.3 | (59.9) | 1,981.5 | 451.5 | 1,530.0 | 122.3 | 1,652.3 | (70.8) | 1,581.5 | |||||||||||||
(*) "CVM 247" refers to proportional consolidation under Brazilian GAAP (Note 4) and "Braskem consolidated before CVM 247" includes depreciation at R$ 728.7 within this cost of sales.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
2006 | |||||||||||||||||||||
Business segments | Total segments | Eliminations and adjustments (*) | Braskem consolidated before CVM 247 (*) | CVM 247 | Braskem consolidated | U.S. GAAP differences | U.S. GAAP | ||||||||||||||
Basic Petrochemicals | Business development | ||||||||||||||||||||
Vinyls | Polyolefins | ||||||||||||||||||||
Net sales revenue | 1,541.7 | 4,775.8 | 6,883.6 | 483.1 | 13,684.2 | (1,965.2) | 11,719.0 | 1,273.7 | 12,992.7 | (1,029.3) | 11,963.4 | ||||||||||
Cost of sales | (1,245.3) | (3,985.4) | (5,994.8) | (545.7) | (11,771.2) | 1,889.6 | (9,881.6) | (910.5) | (10,792.1) | 468.3 | (10,323.8) | ||||||||||
Gross profit | 296.4 | 790.4 | 888.8 | (62.6) | 1,913.0 | (75.6) | 1,837.4 | 363.2 | 2,200.6 | (561.0) | 1,639.6 | ||||||||||
Operating expenses | |||||||||||||||||||||
(income) | |||||||||||||||||||||
Selling, general and | |||||||||||||||||||||
administrative | 123.0 | 344.5 | 339.0 | 26.0 | 832.5 | 41.9 | 874.4 | 77.1 | 951.5 | 10.7 | 962.2 | ||||||||||
Depreciation and | |||||||||||||||||||||
amortization | 0.4 | 10.4 | 0.4 | 0.1 | 11.3 | 368.3 | 379.6 | 5.4 | 385.0 | (366.7) | 18.3 | ||||||||||
Other, net | (35.1) | (22.5) | 10.4 | (1.9) | (49.1) | (107.8) | (156.9) | (29.2) | (186.1) | (139.0) | (47.1) | ||||||||||
88.3 | 332.4 | 349.8 | 24.2 | 794.7 | 302.4 | 1,097.1 | 53.3 | 1,150.4 | (217.0) | 933.4 | |||||||||||
Operating income | 208.1 | 458.0 | 539.0 | (86.8) | 1,118.3 | (378.0) | 740.3 | 309.9 | 1,050.2 | (344.0) | 706.2 | ||||||||||
(*) "CVM 247" refers to proportional consolidation under Brazilian GAAP (Note 4) and "Braskem consolidated before CVM 247" includes depreciation at R$ 576.4 within this cost of sales.
F-127
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
2005 | |||||||||||||||||||||
Business segments | Total segments | Eliminations and adjustments (*) | Braskem consolidated before CVM 247 (*) | CVM 247 | Braskem consolidated | U.S. GAAP differences | U.S. GAAP | ||||||||||||||
Basic Petrochemicals | Business development | ||||||||||||||||||||
Vinyls | Polyolefins | ||||||||||||||||||||
Net sales revenue | 1,794.1 | 3,919.0 | 7,226.7 | 569.0 | 13,508.8 | (1,894.2) | 11,614.6 | 1,460.5 | 13,075.1 | (1,067.3) | 12,007.8 | ||||||||||
Cost of sales | (1,271.9) | (3,182.8) | (6,138.5) | (552.9) | (11,146.1) | 1,827.6 | (9,318.5) | (1,043.2) | (10,361.7) | 709.1 | (9,652.6) | ||||||||||
Gross profit | 522.2 | 736.2 | 1,088.2 | 16.1 | 2,362.7 | (66.6) | 2,296.1 | 417.3 | 2,713.4 | (358.2) | 2,355.2 | ||||||||||
Operating expenses | |||||||||||||||||||||
(income) | |||||||||||||||||||||
Selling, general and | |||||||||||||||||||||
administrative | 89.2 | 229.0 | 250.3 | 18.2 | 586.7 | 89.7 | 676.4 | 110.7 | 787.1 | (5.5) | 781.6 | ||||||||||
Depreciation and | |||||||||||||||||||||
amortization | 0.8 | 6.9 | - | 0.3 | 8.0 | 342.2 | 350.2 | 5.4 | 355.6 | (283.7) | 71.9 | ||||||||||
Impairment | - | - | - | - | - | - | - | - | - | 373.8 | 373.8 | ||||||||||
Other, net | (6.6) | (53.0) | (57.1) | (9.2) | (125.9) | 56.1 | (69.8) | 47.0 | (22.8) | 13.3 | (9.5) | ||||||||||
83.4 | 182.9 | 193.2 | 9.3 | 468.8 | 488.0 | 956.8 | 163.1 | 1,119.9 | 97.9 | 1,217.8 | |||||||||||
Operating income | 438.8 | 553.3 | 895.0 | 6.8 | 1,893.9 | (554.6) | 1,339.3 | 254.2 | 1,593.5 | (456.1) | 1,137.4 | ||||||||||
(*) "CVM 247" refers to proportional consolidation under Brazilian GAAP (Note 4) and "Braskem consolidated before CVM 247" includes depreciation at R$ 409.9 within this cost of sales.
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Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(w) Recently issued accounting standards
In December 2004,September 2006, the FASB issued SFAS No. 123 (revised 2004), “Share-based payment”. SFAS No. 123R addresses the accounting for share-based payment transactions in157, "Fair Value Measurements," which an enterprise receives employee services in exchange for equity instruments of the enterprise or liabilities that are based on theformally defines fair value, of the enterprise’s equity instruments or that maycreates a standardized framework for measuring fair value in generally accepted accounting principles ("GAAP"), and expands fair value measurement disclosures. SFAS 157 will be settled by the issuance of such equity instruments. SFAS No. 123R requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement. The revised statement generally requires that an entity account for those transactions using the fair-value-based method, and eliminates an entity’s ability to account for share-based compensation transactions using the intrinsic value method of accounting, which was permitted under Statement No. 123, as originally issued. For the Company, SFAS No. 123R is effective for fiscal years beginning after JuneNovember 15, 2005. Currently,2007. The Company has been currently evaluating the Company is assessingimpact that the application of this statement and the related impactnew standard will have on its consolidated financial statements.
statements, as from January 1, 2008.
In November 2005,addition to the implementation of SFAS 157, paragraph 67 of Concepts Statement No.5 - "Recognition and Measurement in Financial Statements", issued by FASB, describes five measurement attributes used in financial statements under current financial accounting principles, for which some of them are detailed approached in Concepts Statement No. 7 (CON 7) "Using Cash Flow Information and Present Value in Accounting Measurements". In addition, SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard aforementioned describes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities method;
Level 2 - Observable markets are fair valued by using either present value or expected present value methods - deterministic model;
Level 3 - Mostly known as hybrid methodology since applies both deterministic and probabilistic models. Observable and unobservable variables are determined and computed by using either estimated cash flow or expected cash flow methods. Unobservable variables that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities are determined on probabilistically path basis.
In addition, in February 2008, the FASB issued FSP Nos.the FASB staff position (FSP) 157-2, which defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities except for items that are recognized on disclosed at fair value in the financial statements on a recurring basis to fiscal years begining after November 15, 2008.
Regarding SFAS 157, the Company applies "CON 7" for observable markets on fair valuing its financial assets and liabilities. Level 2 approaching model considers prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities on assumptions made with present value techniques. The Company has been evaluating the impact of such standard will have on its financial statements as from January 1, 2008.
F-129
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
In February, 2007, the FASB issued FAS 115-1 e FAS 124-1, “The meaning159 "The fair value option for financial assets and financial liabilities" including an amendment of other-than-temporary impairmentFASB Statement 115 "Accounting for certain investments in debt and its applicationequity securities", permits the company to choose to measure many financial instruments and certain investments” which sets the determination as to when an investment is considered impaired, whether that impairment is temporary, and the measurement of an impairment loss.other items at fair value. The Company is currently evaluating the impact that the application of this new standard will have on its financial statements.
In October 2005, the FASB issued FAS Nº 13-1, “Accounting for rental costs incurred during a construction period” which addresses the accounting for rental costs associated with operating leases that are incurred during a construction period. The Company is currently evaluating the impact that the application of this new standard will have on its financial statements.
In June 2005,December 2007, the FASB issued SFAS Nº 154, “Accounting ChangesNo. 141 (revised 2007), "Business Combinations". The SFAS 141 - Revised 2007 to converge USGAAP to IFRS, therefore several changes were made regarding accounting treatment for business combinations. The major changes provided by this Statement are related to accounting for business combinations costs, which can no longer be considered as part of the total consideration paid; accounting for all assets acquired, liabilities assumed and Error Corrections”non-controlling interests of the acquired entity at fair value, at full amounts of their fair values, and not on the percentage of the shares acquired; measurement and recognition of contractual contingencies as of the acquisition date, and provides also guidance on the subsequent accounting treatment for these situations; recognition of contingent consideration as part of the goodwill computation on the date of acquisition, and not after the contingent is resolved, and defines also the concept of bargain purchase, in which setsthe fair value of the acquired assets, assumed liabilities and noncontrolling interest of the acquired company are higher than the total consideration paid, and defines this bargain purchases shall be recognized as a gain on income from operations when they arise, and not to be allocated to the eligible assets. This Statement is effective as of the beginning of an entity's fiscal year that begins after December 15, 2008, for which earlier adoption is forbidden. The Company has been evaluating future possible impact on eventual future business combination under SFAS 141 - Revised 2007.
F-130
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling interests in Consolidated Financial Statements - an amendment of ARB No. 51", which was also issued to converge USGAAP to IFRS. The major changes provided by this Statement are related to the classification of noncontrolling interest as part of the equity, an not as a liability or a mezzanine section between liabilities and equity, as well as the classification of the noncontrolling interest on income of operations, which now should be shown as income attributable to noncontrolling interest, and should not anymore be recognized as an expense or gain to arrive at net income from operations; this Statement also provides guidance on the deconsolidation of subsidiary, in order to measure the gain or loss on this deconsolidation using the fair value of any noncontrolling equity investment rather than the carrying amount of the retained investment. This Statement is effective as of the beginning of an entity's fiscal year that begins after December 15, 2008, and the entity cannot apply it before that date. The Company has been evaluating future possible impact on eventual future business combination under SFAS 160.
In March 2008, the FASB issued SFAS No. 161, "Disclosure about Derivative Instruments and Hedging Activities - an amendment of SFAS 133". This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. This Statement is effective as of the beginning of an entity's fiscal year that begins after December 15, 2008, with early adoption encouraged. The Company has been evaluating future possible impact on reporting under SFAS 161.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of a change inGenerally Accepted Accounting Principles". SFAS 162 provides entities to be responsible for selecting its accounting principles or errors.for the preparation of financial statements that are presented in conformity with GAAP. This Statement will be effective 60 days following the approval by the Public Company Accounting Oversight Board - PCAOB. The Company does not expect FASB Nº 154 to have a significant impact on its financial position, results of operations or cash flows.
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
In March 2005, the FASB issued FSP FIN 46(R)-5, “Consolidation of Variable Interests Entities” to address whether a reporting enterprise should consider whether it holds an implicit variable interest in a variable interest entity (VIE) or potential VIE when specific conditions exist. The Company does not expect FASB FSP FIN 46(R)-5 to have a significant impact on its financial position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation Nº 47, “Accounting for Conditional Asset Retirement Obligations” which clarifies that the term conditional asset retirement obligations as used in FASB 143, Accounting for Asset Retirement Obligation, refers to a legal obligations to perform an asset retirement activity in which the timing or the method of settlement are conditional on a future event that may or may not be within the control of the entity. The Company does not expect FASB Interpretation Nº 47 to have a significant impact on its financial position, results of operations or cash flows.
In February 2006, the FASB issued FAS 155, “Accounting for certain hybrid financial instruments”, which amends FASB Statements Nº 133, Accounting for Derivative Instruments and Hedging Activities, and FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement or solves issues addressed in Statement 133 Implementation Issue Nº D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets”. The Company is currently evaluating the impact thatfrom the application of this new standard will have on its financial statements.standard.
F-131
In March 2006, the FASB issued FAS 156, “Accounting for Servicing Financial Assets”, which amends FASB Statements Nº 140 “Accounting for Transfers and ServicingTable of Financial Assets and Extinguishments of Liabilities”. This Statement or solves issues addressed in Statement Nº 140 regarding recognition for all servicing financial asset or liability and its measurement methods. The Company is currently evaluating the impact that the application of this new standard will have on its financial statements.Contents
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(x) Reconciliation of principal differences betweenfrom Brazilian GAAP andto U.S. GAAP
(a) Statement of Operations - net income balances
Ref. | ||||||||
Note 31 | 2007 | 2006 | 2005 | |||||
Net income under Brazilian GAAP | 556.3 | 101.3 | 625.8 | |||||
Depreciation of additional indexation of | ||||||||
permanent assets for 1996 and 1997 | (b) | (37.4) | (28.6) | (39.9) | ||||
Capitalized interest | (c) | 35.3 | - | 50.3 | ||||
Amortization of capitalized interest | (c) | (34.8) | (38.7) | (38.3) | ||||
Deferred charges, net | (d) | 42.2 | 34.5 | 82.1 | ||||
Business Combination adjustments | (e) | 406.2 | 330.6 | 35.5 | ||||
Pension plan | (i) | 3.2 | (58.4) | (27.7) | ||||
Tax incentives | (n) | 49.5 | 11.9 | 52.0 | ||||
Revenue recognition | (o) | - | (18.1) | (3.6) | ||||
Amortization of capital raising costs | (l) | 5.8 | 5.8 | 5.8 | ||||
Effects of U.S. GAAP adjustments on investees | (f) | (5.8) | (56.8) | (46.5) | ||||
Long-term share incentive plan | (q) | 0.6 | 0.5 | - | ||||
Embedded Derivatives | (3.5) | - | - | |||||
Other | 4.2 | - | - | |||||
Deferred income tax on adjustments above | (m) | 94.6 | (123.2) | 39.9 | ||||
Minorities interest on adjustments above | (27.3) | 0.8 | 1.7 | |||||
Net income under U.S. GAAP - as reported | 1,089.1 | 161.6 | 737.1 | |||||
Change in accounting principle - | ||||||||
maintenance costs | - | - | 4.1 | |||||
Net income under U.S. GAAP - as adjusted | 1,089.1 | 161.6 | 741.2 | |||||
F-132
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
(b) Balance Sheet - shareholders' equity balances
Ref. | ||||||
Note 31 | 2007 | 2006 | ||||
Shareholders' equity under Brazilian GAAP | 5,757.0 | 4,311.9 | ||||
Additional indexation of permanent assets for | ||||||
1996 and 1997 | (b) | 1,135.8 | 1,135.8 | |||
Depreciation of additional indexation of permanent | ||||||
assets for 1996 and 1997 | (b) | (479.6) | (442.6) | |||
Capitalized interest, net | (c) | 571.6 | 536.3 | |||
Amortization of capitalized interest | (c) | (404.5) | (369.6) | |||
Deferred charges, net | (d) | (455.6) | (408.3) | |||
Business combination adjustments | (e) | 631.0 | 291.6 | |||
Distributions to shareholders | (g) | (1,771.3) | (1,771.3) | |||
Capital raising costs | (l) | (40.7) | (46.5) | |||
Pension plan | (i) | 3.3 | (12.1) | |||
U.S. GAAP adjustments on investees | (f) | (11.0) | (225.5) | |||
Treasury Shares | 12.4 | 10.4 | ||||
Reversal of proposed dividend | (s) | 149.4 | 18.5 | |||
Revenue recognition | (o) | - | (2.2) | |||
Long-term share incentive plan | (q) | 1.1 | 0.5 | |||
Embedded Derivatives | (3.5) | |||||
Other | 2.9 | |||||
Deferred income tax adjustments | (m) | (166.3) | (185.7) | |||
Minorities interest on adjustments above | 99.9 | 125.6 | ||||
Shareholders' equity under U.S. GAAP | 5,031.9 | 2,966.8 | ||||
F-133
Net incomeTable of Contents
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Years Ended December 31 | ||||||||||||
Reference | 2005 | 2004 | 2003 | |||||||||
Net income under Brazilian GAAP | 625.8 | 687.1 | 215.1 | |||||||||
Depreciation of additional indexation of permanent assets for 1996 and 1997 | 31 | (b) | (39.9 | ) | (37.3 | ) | (33.2 | ) | ||||
Capitalized interest | 31 | (c) | 50.3 | 34.1 | 34.7 | |||||||
Amortization of capitalized interest | 31 | (c) | (38.3 | ) | (38.1 | ) | (38.9 | ) | ||||
Deferred charges, net | 31 | (d) | 87.9 | (142.9 | ) | 7.5 | ||||||
Business combination and goodwill adjustments | 31 | (e) | 35.5 | 382.5 | 260.1 | |||||||
Pension plan | 31 | (i) | (27.7 | ) | (20.2 | ) | (2.2 | ) | ||||
Tax incentives | 31 | (n) | 52.0 | 63.7 | 28.8 | |||||||
Revenue recognition | 31 | (o) | (3.6 | ) | — | 3.9 | ||||||
Consolidation of variable interest entities | 31 | (p) | — | — | (0.6 | ) | ||||||
Effects of U.S. GAAP adjustments on equity Investees | 31 | (f) | (46.5 | ) | (92.2 | ) | (44.8 | ) | ||||
Deferred income tax on adjustments above | 31 | (m) | 39.9 | 48.8 | (20.6 | ) | ||||||
Minority interest on adjustments above | 1.7 | 2.3 | (31.7 | ) | ||||||||
Net income under U.S. GAAP | 737.1 | 887.8 | 378.1 | |||||||||
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
Shareholders’ Equity
December 31 | |||||||||
Reference | 2005 | 2004 | |||||||
Shareholders’ equity under Brazilian GAAP | 4,535.8 | 4,183.7 | |||||||
Additional indexation of permanent assets for 1996 and 1997 | 31 | (b) | 1,135.8 | 1,135.8 | |||||
Depreciation of additional indexation of permanent assets for 1996 and 1997 | 31 | (b) | (414.0 | ) | (374.1 | ) | |||
Capitalized interest, net | 31 | (c) | 536.3 | 486.0 | |||||
Amortization of capitalized interest | 31 | (c) | (330.9 | ) | (292.6 | ) | |||
Deferred charges, net | 31 | (d) | (437.0 | ) | (524.9 | ) | |||
Business combination adjustments | 31 | (e) | (55.2 | ) | (90.7 | ) | |||
Distributions to shareholders | 31 | (g) | (1,777.2 | ) | (1,777.2 | ) | |||
Capital issuance costs | 31 | (l) | (58.1 | ) | (58.1 | ) | |||
Pension plan | 31 | (i) | (14.6 | ) | 5.5 | ||||
Consolidation of variable interest entities | 31 | (p) | 0.7 | 0.7 | |||||
Equity investees | 31 | (f) | (182.8 | ) | (136.3 | ) | |||
Treasury Shares | 10.4 | 10.4 | |||||||
Revenue recognition | 31 | (o) | (3.6 | ) | — | ||||
Reversal of proposed dividends | 31 | (t) | 55.7 | — | |||||
Deferred income tax adjustments | 31 | (m) | (62.5 | ) | (102.4 | ) | |||
Minority interest on adjustments above | 124.8 | 123.1 | |||||||
Shareholders’ equity under U.S. GAAP | 3,063.6 | 2, 588.9 | |||||||
(z)(c) U.S. GAAP condensed financial information
Based on the reconciling items and discussion above, Braskem’sthe Company consolidated balance sheet, statement of operations and statement of changes in shareholders’shareholders' equity under U.S. GAAP have been recast inprepared as a condensed format as follows:
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(i) Condensed balance sheet under U.S. GAAP
Assets | 2007 | 2006 | ||
Current assets | ||||
Cash and cash equivalents | 1,024.6 | 667.2 | ||
Marketable securities | 923.5 | 1,174.0 | ||
Trade accounts receivable, net | 2,348.7 | 1,598.6 | ||
Taxes recoverable | 619.0 | 383.0 | ||
Inventories | 2,220.4 | 1,504.3 | ||
Dividends receivable | 12.6 | 4.9 | ||
Prepaid expenses | 70.5 | 79.5 | ||
Advances to suppliers | 83.0 | 125.0 | ||
Fair Market Value of derivatives investments | 114.6 | - | ||
Other receivables | 75.9 | 46.4 | ||
7,492.8 | 5,582.9 | |||
Equity investment in affiliates | 371.1 | 554.1 | ||
Goodwill | 1,688.6 | 450.5 | ||
Property, plant and equipment | 11,880.0 | 6,636.8 | ||
Non-current assets | ||||
Receivables from related parties | 49.7 | 40.9 | ||
Prepaid expenses | 61.3 | 99.0 | ||
Inventories, net | 22.8 | 22.9 | ||
Intangible assets | 171.7 | 175.1 | ||
Indirect taxes recoverable | 1,175.0 | 912.3 | ||
Deferred income tax | 161.0 | 143.4 | ||
Restricted deposits for legal proceedings | 103.0 | 206.5 | ||
Other receivables | 196.1 | 66.3 | ||
1,940.6 | 1,666.4 | |||
Total assets | 23,373.1 | 14,890.7 | ||
F-134
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
Liabilities and shareholders' equity | 2007 | 2006 | ||
Current liabilities | ||||
Suppliers | 2,589.2 | 3,080.4 | ||
Payroll and related charges | 257.2 | 128.6 | ||
Taxes on income payable | 274.1 | 0.7 | ||
Other taxes payable | 121.2 | 101.2 | ||
Derivatives payable | 87.3 | 98.2 | ||
Short-term debt, including current portion of long-term debt | 2,080.6 | 418.1 | ||
Interest payable | 52.5 | 271.3 | ||
Debentures | 111.6 | 958.6 | ||
Advances from customers | 21.7 | 12.1 | ||
Dividends payable | 49.4 | 22.0 | ||
Business combination to be settled off | 881.0 | - | ||
Other | 121.4 | 425.3 | ||
6,647.2 | 5,516.5 | |||
Non-current liabilities | ||||
Long-term debt | 6,084.6 | 3,799.0 | ||
Debentures | 800.0 | 950.0 | ||
Derivatives payable | 43.7 | 31.7 | ||
Taxes and contributions payable | 1,148.9 | 1,418.0 | ||
Deferred income tax | 1,312.6 | - | ||
Other | 243.9 | 179.2 | ||
9,633.7 | 6,377.9 | |||
Minorities interest | 2,060.3 | 29.5 | ||
Shareholders' equity | 5,031.9 | 2,966.8 | ||
Total liabilities and shareholder's equity | 23,373.1 | 14,890.7 | ||
F-135
Condensed balance sheet under U.S. GAAPTable of Contents
Braskem S.A. and Its Subsidiaries |
Notes to the Consolidated Financial Statements |
at December 31, 2007, 2006 and 2005 |
All amounts in millions of reais, unless otherwise indicated |
2005 | 2004 | |||
Assets | ||||
Current assets | ||||
Cash and cash equivalents | 531.8 | 496.4 | ||
Short-term investments | 1,682.5 | 849.5 | ||
Trade accounts receivable, net | 1,425.3 | 1,595.8 | ||
Taxes recoverable | 303.8 | 472.6 | ||
Inventories | 1,336.2 | 1,355.4 | ||
Dividends receivable | 6.2 | 40.2 | ||
Prepaid expenses | 44.3 | 52.3 | ||
Advances to suppliers | 87.1 | 54.1 | ||
Other receivables | 56.4 | 114.1 | ||
5,473.6 | 5,030.4 | |||
Investments | 489.2 | 393.3 | ||
Goodwill, net | 450.5 | 829.5 | ||
Property, plant and equipment | 5,688.1 | 5,193.9 | ||
Other noncurrent assets | ||||
Receivables from related parties | 61.0 | 34.3 | ||
Long term investments | — | 59.1 | ||
Prepaid expenses | 112.5 | 122.2 | ||
Inventories, net | 75.8 | 50.4 | ||
Intangible assets | 20.3 | 29.5 | ||
Deferred charges, net | 359.6 | 342.8 | ||
Other taxes recoverable | 527.3 | 222.4 | ||
Deferred income tax | 306.1 | 294.5 | ||
Restricted deposits for legal proceedings | 161.9 | 187.2 | ||
Other receivables | 53.3 | 31.5 | ||
1,677.8 | 1,373.9 | |||
Total assets | 13,779.2 | 12,821.0 | ||
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
2005 | 2004 | |||
Liabilities and shareholders’ equity | ||||
Current liabilities | ||||
Suppliers | 2,659.3 | 2,167.9 | ||
Payroll and related charges | 108.0 | 77.6 | ||
Taxes on income payable | 55.2 | 68.3 | ||
Other taxes payable | 140.0 | 141.8 | ||
Fair market value of derivative financial instruments | 39.4 | — | ||
Short-term debt, including current portion of long-term debit | 497.4 | 1,282.7 | ||
Interest payable on short-term debt and debentures | 117.1 | 264.6 | ||
Debentures | — | 5.0 | ||
Quotas subject to mandatory redemption | 201.6 | — | ||
Related parties | 6.5 | — | ||
Advances from customers | 35.5 | 23.2 | ||
Dividend payable | 237.7 | 185.8 | ||
Other | 35.4 | 142.1 | ||
4,133.1 | 4,359.0 | |||
Long-term liabilities | ||||
Long-term debt | 2,778.0 | 2,616.7 | ||
Debentures | 1,599.3 | 1,167.9 | ||
Fair market value of derivative financial instruments | 8.1 | — | ||
Quotas subject to mandatory redemption | 404.1 | 201.8 | ||
Related parties | — | 145.8 | ||
Minimum pension liability | 55.3 | 35.2 | ||
Taxes and contributions payable | 1,451.2 | 1,332.3 | ||
Other | 135.3 | 120.8 | ||
6,431.3 | 5,620.5 | |||
Minority interest | 151.2 | 252.6 | ||
Shareholders’ equity | 3,063.6 | 2,588.9 | ||
Total liabilities and shareholder’s equity | 13,779.2 | 12,821.0 | ||
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
All amounts in millions ofreais, unless otherwise indicated
(ii) Condensed statement of operations under U.S. GAAP
2007 | 2006 | 2005 | ||||
Gross sales | 21,640.6 | 15,045.5 | 15,341.0 | |||
Value-added taxes, discounts and returns | (4,353.2) | (3,082.1) | (3,333.2) | |||
Net sales | 17,287.4 | 11,963.4 | 12,007.8 | |||
Cost of sales | (14,415.0) | (10,323.8) | (9,652.6) | |||
Gross profit | 2,872.4 | 1,639.6 | 2,355.2 | |||
Operating income (expenses) | ||||||
Selling, general and administrative | (1,315.0) | (962.2) | (781.6) | |||
Depreciation and amortization | (57.4) | (18.3) | (71.9) | |||
Other, net | 81.5 | 47.1 | (364.3) | |||
Operating income | 1,581.5 | 706.2 | 1,137.4 | |||
Interest income/(expense) | ||||||
Interest income | 652.3 | 232.6 | (46.5) | |||
Interest expenses | (788.8) | (916.0) | (565.8) | |||
Other | - | 17.3 | (24.4) | |||
Income before income tax, earnings in equity | ||||||
affiliates and minorities interest | 1,445.0 | 40.1 | 500.7 | |||
Income tax benefit (expense) | ||||||
Current | (183.0) | (3.9) | (24.0) | |||
Deferred | (19.4) | (21.9) | 17.3 | |||
Income before earnings in equity | ||||||
affiliates and minority interest | 1,242.6 | 14.3 | 494.0 | |||
Earnings in equity affiliates | 81.4 | 147.3 | 179.5 | |||
Minorities interest | (234.9) | - | 67.7 | |||
(153.5) | 147.3 | 247.2 | ||||
Net income for the year | 1,089.1 | 161.6 | 741.2 | |||
F-136
2005 | 2004 | 2003 | |||||||
Gross sales | 15,341.0 | 14,780.0 | 11,487.0 | ||||||
Value -added and other taxes, discounts and returns | (3,333.2 | ) | (3,135.9 | ) | (2,032.2 | ) | |||
Net sales revenue | 12,007.8 | 11,644.1 | 9,454.8 | ||||||
Cost of sales | (9,658.8 | ) | (8,940.0 | ) | (7,662.5 | ) | |||
Gross profit | 2,349.0 | 2,704.1 | 1,792.3 | ||||||
Operating income (expenses) | |||||||||
Selling, general and administrative | (781.6 | ) | (850.7 | ) | (513.4 | ) | |||
Depreciation and amortization | (71.9 | ) | (63.7 | ) | (13.8 | ) | |||
Impairment of goodwill | (373.8 | ) | — | — | |||||
Other, net | 9.5 | 27.2 | 51.8 | ||||||
Operating income | 1,131.2 | 1,816.9 | 1, 316.9 | ||||||
Non-operating income (expenses) | |||||||||
Financial income | (46.5 | ) | (62.3 | ) | 58.7 | ||||
Financial expenses | (565.8 | ) | (1,110.2 | ) | (697.4 | ) | |||
Other | (24.4 | ) | (24.3 | ) | 27.8 | ||||
Income before income tax, equity in results of associated companiesand minority interest | 494.5 | 620.1 | 706.0 | ||||||
Income tax benefit (expense) | |||||||||
Current | (24.0 | ) | (66.2 | ) | (42.9 | ) | |||
Deferred | 17.4 | 185.1 | (120.9 | ) | |||||
Income before equity in results of associated companies and minority interest | 487.9 | 739.0 | 542.2 | ||||||
Equity in earnings of associated companies | 181.5 | 171.1 | 36.7 | ||||||
Minority interest | 67.7 | (22.3 | ) | (200.8 | ) | ||||
Net income for the year | 737.1 | 887.8 | 378.1 | ||||||
Braskem S.A. and its Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005, 2004 and 2003
(iii)Braskem S.A. and Its Subsidiaries Notes to the Consolidated Financial Statements at December 31, 2007, 2006 and 2005 All amounts in millions of reais, unless otherwise indicated reaisCondensed, unless otherwise indicatedchanges
(iii) Condensed changes in shareholders’shareholders' equity under U.S. GAAP
2005 | 2004 | |||||
At beginning of the year | 2,588.9 | 7.8 | ||||
Net income | 737.1 | 887.8 | ||||
Changes in minimum pension liability | 7.6 | 35.5 | ||||
Total comprehensive income | 744.7 | 923.3 | ||||
Capital increase | — | 1,515.5 | ||||
Capital issuance costs | — | (58.1 | ) | |||
Contribution from (distribution to) shareholders | — | 385.4 | ||||
Exchange of treasury shares | — | 18.6 | ||||
Dividends and interest in own capital | (270.0 | ) | (203.6 | ) | ||
At end of the year | 3,063.6 | 2,588.9 | ||||
2007 | 2006 | 2005 | ||||||||||||||||
Other | Other | Other | ||||||||||||||||
equity | Total | equity | Total | equity | Total | |||||||||||||
OCI | accounts | Equity | OCI | accounts | Equity | OCI | accounts | Equity | ||||||||||
At beginning of the year - as original presented | 1,748.1 | 1,218.7 | 2,966.8 | 1,512.6 | 1,405.8 | 2,918.4 | 763.8 | 1,825.1 | 2,588.9 | |||||||||
Change in accounting principle – maintenance | ||||||||||||||||||
cost adoption of SFAS 158 | - | - | - | 73.9 | - | 73.9 | - | (149.3) | (149.3) | |||||||||
At beginning of the year - as adjusted | 1,748.1 | 1,218.7 | 2,966.8 | 1,586.5 | 1,405.8 | 2,992.3 | 763.8 | 1,675.8 | 2,439.6 | |||||||||
Comprehensive income of the year | 1,089.1 | - | 1,089.1 | 161.6 | - | 161.6 | 741.2 | - | 741.2 | |||||||||
Change in minimum pension liability | - | - | - | - | - | - | 7.6 | - | 7.6 | |||||||||
Total comprehensive income | 2,837.2 | 1,218.7 | 4,055.9 | 1,748.1 | 1,405.8 | 3,153.9 | 1,512.6 | 1,675.8 | 3,188.4 | |||||||||
Capital increase | - | 1,130.7 | 1,130.7 | - | 105.3 | 105.3 | - | - | - | |||||||||
Distribution shareholders | - | - | - | - | 5.9 | 5.9 | - | - | - | |||||||||
Repurchase of treasury shares | - | - | - | - | (224.3) | (224.3) | - | - | - | |||||||||
Dividends and interest in own capital | - | (154.7) | (154.7) | - | (74.0) | (74.0) | - | (270.0) | (270.0) | |||||||||
At end of the year | 2,837.2 | 2,194.7 | 5,031.9 | 1,748.1 | 1,218.7 | 2,966.8 | 1,512.6 | 1,405.8 | 2,918.4 | |||||||||
* * *F-137
ReportTable of Independent AuditorsContents
To the Board of Directors and Shareholders
Copesul—Companhia Petroquímica do Sul and Subsidiaries
Report of Independent Registered Public Accounting Firm | ||
To the Board of Directors and Shareholders Copesul — Companhia Petroquímica do Sul and Subsidiaries | ||
1 | We have audited the accompanying consolidated balance sheets of |
2 | We conducted our audits in accordance with |
F-138
Copesul — Companhia Petroquímica do Sul and Subsidiaries | ||
3 | In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of |
4 | Accounting practices adopted in Brazil vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note |
| ||
PricewaterhouseCoopers | Porto Alegre, Brazil | |
Auditores Independentes |
|
F-139
All amounts in millions of reais
2005 | 2004 | |||||
Assets | ||||||
Current assets | ||||||
Cash and banks (Note 4) | 113 | 175 | ||||
Trade accounts receivable | ||||||
Third parties (Note 5) | 149 | 190 | ||||
Related parties | 49 | 29 | ||||
Export drafts—billed (Note 16) | (18 | ) | (170 | ) | ||
Credits ceded to receivables securitization fund (FIDC) | (13 | ) | (23 | ) | ||
Swap receivables (Note 6) | 53 | 1 | ||||
Marketable securities (Note 7) | 13 | 69 | ||||
Inventories (Note 8) | 495 | 427 | ||||
Taxes and charges recoverable (Note 9) | 43 | 38 | ||||
Prepaid expenses (Note 10) | 14 | 13 | ||||
Other accounts receivable | 9 | 5 | ||||
907 | 754 | |||||
Long-term assets | ||||||
Marketable securities (Note 7) | 1 | 12 | ||||
Related parties (Note 5) | 146 | |||||
Taxes and charges recoverable (Note 9) | 133 | 115 | ||||
Judicial deposits (Note 11) | 8 | 7 | ||||
Prepaid expenses (Note 10) | 6 | 5 | ||||
Loans to third parties | 6 | 9 | ||||
Claims receivable and other | 1 | 1 | ||||
155 | 295 | |||||
Permanent assets | ||||||
Investments | 9 | 11 | ||||
Property, plant and equipment (Note 12) | 1,106 | 1,138 | ||||
Deferred charges (Note 13) | 11 | 10 | ||||
1,126 | 1,159 | |||||
Total assets | 2,188 | 2,208 | ||||
COPESUL—Companhia Petroquímica do Sul
Consolidated Balance Sheets at December 31 (continued)
All amounts in millions of reais
2005 | 2004 | |||
Liabilities and shareholders’ equity | ||||
Current liabilities | ||||
Suppliers | ||||
Third parties (Note 14) | 154 | 146 | ||
Related parties (Note 18) | 2 | 2 | ||
Loans and financing (Note 15) | 288 | 213 | ||
Export drafts—to be invoiced (Note 16) | 1 | 21 | ||
Taxes and charges payable | 42 | 35 | ||
Social and labor contributions and charges | 49 | 53 | ||
Proposed dividends (Note 21) | 68 | 118 | ||
Interest on own capital (Note 21(f)) | 21 | 19 | ||
Income tax and social contribution (Note 19) | 9 | 33 | ||
Provision for programmed maintenance (Note 17) | 16 | 55 | ||
Swap and options payable (Note 6) | 5 | 8 | ||
Advances from customers | 13 | 11 | ||
Profit sharing and other | 27 | 26 | ||
695 | 740 | |||
Long-term liabilities | ||||
Loans and financing (Note 15) | 84 | 143 | ||
Export drafts—to be invoiced (Note 16) | 91 | 103 | ||
Provision for programmed maintenance (Note 17) | 52 | 44 | ||
Deferred contributions and taxes (Note 19) | 1 | 3 | ||
Provision for contingencies (Note 20) | 11 | 9 | ||
Actuarial liability—PETROS (Note 26) | 7 | 5 | ||
246 | 307 | |||
Shareholders’ equity (Note 21) | ||||
Capital | 750 | 700 | ||
Capital reserve | 341 | 248 | ||
Revaluation reserve | 109 | 144 | ||
Revenue reserve | 47 | 69 | ||
1,247 | 1,161 | |||
Total liabilities and shareholders’ equity | 2,188 | 2,208 | ||
2006 | 2005 | 2006 | 2005 | |||||||||||||||
Assets | Liabilities and shareholders' equity | |||||||||||||||||
Current assets | Current liabilities | |||||||||||||||||
Cash and banks (Note 4) | 201 | 113 | Suppliers | |||||||||||||||
Trade accounts receivable | Third parties (Note 14) | 290 | 154 | |||||||||||||||
Third parties (Note 5) | 195 | 149 | Related parties (Note 27) | 63 | 2 | |||||||||||||
Related parties (Note 27) | 59 | 49 | Loans and financing (Note 15) | 50 | 288 | |||||||||||||
Export drafts — billed (Note 16) | (1 | ) | (18 | ) | Export drafts - to be invoiced (Note 16) | 39 | 1 | |||||||||||
Credits ceded to receivables securitization fund (FIDC) (Note 7) | (13 | ) | Taxes and charges payable (Note 17) | 45 | 42 | |||||||||||||
Swap receivables (Note 6) | 64 | 53 | Social and labor contributions and charges | 45 | 49 | |||||||||||||
Marketable securities (Note 7) | 38 | 13 | Proposed dividends (Note 19 (d) (iii)) | 185 | 68 | |||||||||||||
Inventories (Note 8) | 571 | 495 | Interest on own capital (Note 19 (d) (iii)) | 17 | 21 | |||||||||||||
Taxes and charges recoverable (Note 9) | 115 | 43 | Income tax and social contribution (Note 18) | 44 | 9 | |||||||||||||
Prepaid expenses (Note 10) | 14 | 14 | Provision for programmed manintenance (Note 19 (e) (i)) | 16 | ||||||||||||||
Other accounts receivable | 5 | 9 | Swap and options payable (Note 6) | 23 | 5 | |||||||||||||
Advances from customers | 5 | 13 | ||||||||||||||||
1,261 | 907 | Profit sharing and other | 35 | 27 | ||||||||||||||
Non-current assets | 841 | 695 | ||||||||||||||||
Long-term assets | Non-current liabilities | |||||||||||||||||
Marketable securities (Note 7) | 1 | 1 | Long-term liabilities | |||||||||||||||
Taxes and charges recoverable (Note 9) | 137 | 133 | Loans and financing (Note 15) | 107 | 84 | |||||||||||||
Judicial deposits (Note 11) | 9 | 8 | Export drafts - to be invoiced (Note 16) | 139 | 91 | |||||||||||||
Prepaid expenses (Note 10) | 4 | 6 | Provision for programmed maintenance (Note 19 (e) (i)) | 52 | ||||||||||||||
Loans to third parties | 3 | 6 | Deferred contributions and taxes (Note 18) | 37 | 1 | |||||||||||||
Claims receivable and other | 2 | 1 | Provision for contingencies (Note 24) | 34 | 11 | |||||||||||||
Actuarial liability - PETROS (Note 25) | 9 | 7 | ||||||||||||||||
156 | 155 | 326 | 246 | |||||||||||||||
Permanent assets | Shareholders’ equity (Note 19) | |||||||||||||||||
Investments | 10 | 9 | Capital | 850 | 750 | |||||||||||||
Property, plant and equipment (Note 12) | 1,030 | 1,106 | Capital reserve | 296 | 341 | |||||||||||||
Deferred charges (Note 13) | 10 | 11 | Revaluation reserve | 75 | 109 | |||||||||||||
Revenue reserve | 79 | 47 | ||||||||||||||||
1,050 | 1,126 | 1,300 | 1,247 | |||||||||||||||
Total assets | 2,467 | 2,188 | Total liabilities and shareholders’ equity | 2,467 | 2,188 | |||||||||||||
F-140
Years Ended December 31
In millions of reais, unless otherwise indicated
2005 | 2004 | 2003 | |||||||
Gross sales | |||||||||
Sale of petrochemical products and utilities | |||||||||
Local market | 6,527 | 6,267 | 4,794 | ||||||
Foreign market | 765 | 774 | 630 | ||||||
Sale of services and resale of goods | 56 | 112 | 29 | ||||||
7,348 | 7,153 | 5,453 | |||||||
Taxes and contributions on sales | |||||||||
ICMS | (1,041 | ) | (1,051 | ) | (865 | ) | |||
PIS, COFINS, CIDE and other | (691 | ) | (661 | ) | (362 | ) | |||
(1,732 | ) | (1,712 | ) | (1,227 | ) | ||||
Net sales and services | 5,616 | 5,441 | 4,226 | ||||||
Cost of products, utilities and services | (4,610 | ) | (4,418 | ) | (3,773 | ) | |||
Gross profit | 1,006 | 1,023 | 453 | ||||||
Operating (expenses) income | |||||||||
Selling | (125 | ) | (136 | ) | (115 | ) | |||
General and administrative | (43 | ) | (41 | ) | (28 | ) | |||
Management fees | (2 | ) | (2 | ) | (1 | ) | |||
Financial expenses, net (Note 22) | (142 | ) | (163 | ) | (161 | ) | |||
Other operating income (expenses), net (Note 23) | 22 | 42 | (9 | ) | |||||
(290 | ) | (300 | ) | (314 | ) | ||||
Operating profit | 716 | 723 | 139 | ||||||
Non-operating result, net | 6 | (1 | ) | (1 | ) | ||||
Income before income tax and social contribution | 722 | 722 | 138 | ||||||
Income tax and social contribution | (231 | ) | (242 | ) | (46 | ) | |||
Income before profit sharing | 491 | 480 | 92 | ||||||
Employees profit sharing | (22 | ) | (20 | ) | (10 | ) | |||
Management profit sharing | (1 | ) | (1 | ) | (1 | ) | |||
Income before reversal of interest on own capital | 468 | 459 | 81 | ||||||
Reversal of interest on own capital | 99 | 88 | 87 | ||||||
Net income for the year | 567 | 547 | 168 | ||||||
Earnings per share (in Brazilian Reais) (Note 21) | 3.77 | 3.64 | 1.12 | ||||||
2006 | 2005 | 2004 | ||||||||||
Gross sales | ||||||||||||
Sale of petrochemical products and utilities | ||||||||||||
Local market | 7,186 | 6,527 | 6,267 | |||||||||
Foreign market | 761 | 765 | 774 | |||||||||
Sale of services and resale of goods | 201 | 56 | 112 | |||||||||
8,148 | 7,348 | 7,153 | ||||||||||
Taxes and contributions on sales | ||||||||||||
ICMS | (982 | ) | (1,041 | ) | (1,051 | ) | ||||||
PIS, COFINS, CIDE and other | (790 | ) | (691 | ) | (661 | ) | ||||||
(1,772 | ) | (1,732 | ) | (1,712 | ) | |||||||
Net sales and services | 6,376 | 5,616 | 5,441 | |||||||||
Cost of products, utilities and services | (5,292 | ) | (4,610 | ) | (4,418 | ) | ||||||
Gross profit | 1,084 | 1,006 | 1,023 | |||||||||
Operating (expenses) income | ||||||||||||
Selling | (133 | ) | (125 | ) | (136 | ) | ||||||
General and administrative | (51 | ) | (43 | ) | (41 | ) | ||||||
Management fees | (3 | ) | (2 | ) | (2 | ) | ||||||
Other operating income (expenses), net (Note 21) | 20 | 22 | 42 | |||||||||
(167 | ) | (148 | ) | (137 | ) | |||||||
Operating profit before financial result | 917 | 858 | 886 | |||||||||
Financial result (Note 20) | ||||||||||||
Financial expenses | (463 | ) | (279 | ) | (670 | ) | ||||||
Financial income | 372 | 137 | 507 | |||||||||
(91 | ) | (142 | ) | (163 | ) | |||||||
Operating profit | 826 | 716 | 723 | |||||||||
Non-operating result, net | ||||||||||||
Non-operating income | (6 | ) | (4 | ) | 1 | |||||||
Non-operating expenses | 2 | 10 | (2 | ) | ||||||||
(4 | ) | 6 | (1 | ) | ||||||||
Income before income tax and social contribution | 822 | 722 | 722 | |||||||||
Income tax and social contribution (Note 18) | (270 | ) | (231 | ) | (242 | ) | ||||||
Income before profit sharing | 552 | 491 | 480 | |||||||||
Employees profit sharing | (24 | ) | (22 | ) | (20 | ) | ||||||
Management profit sharing | (3 | ) | (1 | ) | (1 | ) | ||||||
Income before reversal of interest on own capital | 525 | 468 | 459 | |||||||||
Reversal of interest on own capital (Note 19) | 90 | 99 | 88 | |||||||||
Net income for the year | 615 | 567 | 547 | |||||||||
Earnings per share (in Brazilian Reais) (Note 19) | 4.10 | 3.77 | 3.64 | |||||||||
F-141
In millions of reais
Capital reserve | Revenue reserve | |||||||||||||||||||||||
Retained earnings | ||||||||||||||||||||||||
Revaluation | (Acummulated | |||||||||||||||||||||||
Capital | Fiscal incentives | reserve | Legal | losses) | Total | |||||||||||||||||||
At December 31, 2003 | 610 | 247 | 179 | 42 | 1,078 | |||||||||||||||||||
Capitalization of capital reserve — fiscal incentives | ||||||||||||||||||||||||
FUNDOPEM | 90 | (90 | ) | |||||||||||||||||||||
Fiscal incentives | ||||||||||||||||||||||||
FUNDOPEM | 89 | 89 | ||||||||||||||||||||||
Program for Technological and Industrial Development (PDTI) | 2 | 2 | ||||||||||||||||||||||
Realization of revaluation reserve | ||||||||||||||||||||||||
Revaluation - 1983 | (3 | ) | 3 | |||||||||||||||||||||
Revaluation - 1989 | (32 | ) | 32 | |||||||||||||||||||||
Income tax and social contribution on realized revaluation reserve | (10 | ) | (10 | ) | ||||||||||||||||||||
Net income for the year | 547 | 547 | ||||||||||||||||||||||
Appropriation of net income | ||||||||||||||||||||||||
Legal reserve | 27 | (27 | ) | |||||||||||||||||||||
Proposed dividends — R$0.785 per share | (118 | ) | (118 | ) | ||||||||||||||||||||
Interim dividends — R$2.252 per share | (339 | ) | (339 | ) | ||||||||||||||||||||
Interest on own capital — R$0.587 per share | (88 | ) | (88 | ) | ||||||||||||||||||||
At December 31, 2004 | 700 | 248 | 144 | 69 | 1,161 | |||||||||||||||||||
Capitalization of revenue reserve | ||||||||||||||||||||||||
Legal Reserve | 50 | (50 | ) | |||||||||||||||||||||
Fiscal incentives | ||||||||||||||||||||||||
FUNDOPEM | 89 | 89 | ||||||||||||||||||||||
Program for Technological and Industrial Development (PDTI) | 4 | 4 | ||||||||||||||||||||||
Realization of revaluation reserve | ||||||||||||||||||||||||
Revaluation - 1983 | (3 | ) | 3 | |||||||||||||||||||||
Revaluation - 1989 | (32 | ) | 32 | |||||||||||||||||||||
Income tax and social contribution on realized revaluation reserve | (11 | ) | (11 | ) | ||||||||||||||||||||
Net income for the year | 567 | 567 | ||||||||||||||||||||||
Appropriation of net income | ||||||||||||||||||||||||
Legal reserve | 28 | (28 | ) | |||||||||||||||||||||
Proposed dividends — R$0.454 per share | (68 | ) | (68 | ) | ||||||||||||||||||||
Interim dividends — R$2.635 per share | (396 | ) | (396 | ) | ||||||||||||||||||||
Interest on own capital — R$0.660 per share | (99 | ) | (99 | ) | ||||||||||||||||||||
At December 31, 2005 | 750 | 341 | 109 | 47 | 1,247 | |||||||||||||||||||
F-142
Capital | Capital reserve | Revaluation reserve | Revenue reserve | Retained earnings (Accumulated losses) | Total | |||||||||||
Fiscal incentives | Legal | |||||||||||||||
At December 31, 2002 | 610 | 143 | 214 | 34 | (32 | ) | 969 | |||||||||
Fiscal incentives | ||||||||||||||||
FUNDOPEM | 104 | 104 | ||||||||||||||
Realization of revaluation reserve | ||||||||||||||||
Revaluation—1983 | (3 | ) | 3 | |||||||||||||
Revaluation—1989 | �� | (32 | ) | 32 | ||||||||||||
Income tax and social contribution on realized revaluation reserve | (10 | ) | (10 | ) | ||||||||||||
Net income for the year | 168 | 168 | ||||||||||||||
Appropriation of net income | ||||||||||||||||
Legal reserve | 8 | (8 | ) | |||||||||||||
Proposed dividends—R$ 0.056 per share | (9 | ) | (9 | ) | ||||||||||||
Interim dividends—R$ 0.380 per share | (57 | ) | (57 | ) | ||||||||||||
Interest on own capital—R$ 0.575 per share | (87 | ) | (87 | ) | ||||||||||||
At December 31, 2003 | 610 | 247 | 179 | 42 | 1,078 | |||||||||||
Capitalization of capital reserve—fiscal incentives | ||||||||||||||||
FUNDOPEM | 90 | (90 | ) | |||||||||||||
Fiscal incentives | ||||||||||||||||
FUNDOPEM | 89 | 89 | ||||||||||||||
Program for Technological and Industrial Development (PDTI) | 2 | 2 | ||||||||||||||
Realization of revaluation reserve | ||||||||||||||||
Revaluation—1983 | (3 | ) | 3 | |||||||||||||
Revaluation—1989 | (32 | ) | 32 | |||||||||||||
Income tax and social contribution on realized revaluation reserve | (10 | ) | (10 | ) | ||||||||||||
Net income for the year | 547 | 547 | ||||||||||||||
Appropriation of net income | ||||||||||||||||
Legal reserve | 27 | (27 | ) | |||||||||||||
Proposed dividends—R$ 0.785 per share | (118 | ) | (118 | ) | ||||||||||||
Interim dividends—R$ 2.252 per share | (339 | ) | (339 | ) | ||||||||||||
Interest on own capital—R$ 0.587 per share | (88 | ) | (88 | ) | ||||||||||||
At December 31, 2004 | 700 | 248 | 144 | 69 | 1,161 | |||||||||||
At December 31, 2004 Capitalization of revenue reserve: Legal Reserve Fiscal incentives FUNDOPEM Program for Technological and Industrial Development (PDTI) Realization of revaluation reserve Revaluation—1983 Revaluation—1989 Income tax and social contribution on realized revaluation reserve Net income for the year Appropriation of net income Legal reserve Proposed dividends—R$ 0.454 per share Interim dividends—R$ 2.635 per share Interest on own capital—R$ 0.660 per share At December 31, 2005 F-143COPESUL—Shareholders’Stockholders’ Equity (continued)
In millions of reais Capital Capital reserve Revaluation
reserve Revenue reserve Retained earnings
(Note 2) Total Fiscal incentives Legal 700 248 144 69 1,161 50 (50 ) 89 89 4 4 (3 ) 3 (32 ) 32 (11 ) (11 ) 567 567 28 (28 ) (68 ) (68 ) (396 ) (396 ) (99 ) (99 ) 750 341 109 47 1,247 Capital reserve Revenue reserve Revaluation Capital Fiscal incentives reserve Legal Retained earnings Total At December 31, 2005 750 341 109 47 1,247 Adjustment from previous years (Note 19 (e)) 38 38 Capitalization of capital reserve — FUNDOPEM 100 (100 ) Fiscal incentives FUNDOPEM 50 50 Program for Technological and Industrial Development (PDTI) 5 5 Realization of revaluation reserve Revaluation - 1983 (4 ) 4 Revaluation - 1989 (30 ) 30 Income tax and social contribution on realized revaluation reserve (8 ) (8 ) Net income for the year 615 615 Appropriation of net income Legal reserve 32 (32 ) Proposed dividends — R$1,229 per share (185 ) (185 ) Interim dividends — R$2.475 per share (372 ) (372 ) Interest on own capital — R$0.597 per share (90 ) (90 ) At December 31, 2006 850 296 75 79 1,300
In millions of reais
2006 | 2005 | 2004 | ||||||||||
Financial resources were provided by: | ||||||||||||
Operations | ||||||||||||
Net income for the year | 615 | 567 | 547 | |||||||||
Expenses (income) not affecting working capital | ||||||||||||
Depreciation and amortization | 234 | 202 | 206 | |||||||||
Provision for realization of investments at market value | (1 | ) | ||||||||||
Long-term taxes recoverable | (5 | ) | ||||||||||
Write off of non current assets prepaid expenses | 1 | |||||||||||
Provision for long-term programmed maintenance | 19 | 34 | ||||||||||
Provision for administrative, civil and labor contingencies | 24 | 4 | 3 | |||||||||
Provision for actuarial liability — PETROS | 2 | 2 | 2 | |||||||||
Interest on long-term amounts receivable | (1 | ) | (10 | ) | (47 | ) | ||||||
Interest on long-term financing | 6 | 3 | ||||||||||
Interest on income tax and social contribution on long-term liabilities | 2 | |||||||||||
Monetary and exchange variations on long-term items | ||||||||||||
Long-term liabilities | (5 | ) | (11 | ) | (2 | ) | ||||||
Long-term receivables | (5 | ) | (3 | ) | (23 | ) | ||||||
Disposals of property, plant and equipment and investments | 2 | 5 | ||||||||||
Income tax and social contribution | ||||||||||||
Long-term receivavles | (25 | ) | ||||||||||
Long-term liabilities | 10 | (2 | ) | (1 | ) | |||||||
Retained earnings revaluation reserve | (10 | ) | (11 | ) | (10 | ) | ||||||
837 | 769 | 712 | ||||||||||
Third parties | ||||||||||||
Decrease in long-term assets | ||||||||||||
Marketable securities | 1 | 11 | 12 | |||||||||
Related parties | 154 | 572 | ||||||||||
Taxes and charges recoverable | 50 | 6 | 3 | |||||||||
Prepaid expenses | 3 | 3 | 6 | |||||||||
Loans to third parties and other | 5 | 5 | 4 | |||||||||
Increase in long-term liabilities | ||||||||||||
Financial institutions | 47 | 77 | 121 | |||||||||
Export drafts to be invoiced | 138 | 114 | ||||||||||
Fiscal incentives of FUNDOPEM and Program for Technological and Industrial Development | 55 | 93 | 91 | |||||||||
299 | 349 | 923 | ||||||||||
Other | ||||||||||||
Effect on net working capital from the change in the accounting procedure and prior year adjustments | 1 | |||||||||||
Total funds provided | 1,137 | 1,118 | 1,635 | |||||||||
F-144
2005 | 2004 | 2003 | |||||||
Financial resources were provided by: | |||||||||
Operations | |||||||||
Net income for the year | 567 | 547 | 168 | ||||||
Expenses (income) not affecting working capital | |||||||||
Depreciation and amortization | 202 | 206 | 205 | ||||||
Write off of non current assets prepaid expenses | 1 | ||||||||
Swap difference receivable—long-term portion, net | 115 | ||||||||
Provision for long-term programmed maintenance | 19 | 34 | 29 | ||||||
Provision for administrative, civil and labor contingencies | 4 | 3 | 3 | ||||||
Provision for actuarial liability—PETROS | 2 | 2 | 2 | ||||||
Interest on long-term amounts receivable | (10 | ) | (47 | ) | (65 | ) | |||
Interest on long-term financing | 6 | 3 | |||||||
Monetary variations on long-term items | |||||||||
Long-term liabilities | (11 | ) | (2 | ) | (108 | ) | |||
Long-term receivables | (3 | ) | (23 | ) | 55 | ||||
Disposals of property, plant and equipment and investments | 5 | 3 | |||||||
Income tax and social contribution | |||||||||
Long-term liabilities | (2 | ) | (1 | ) | 1 | ||||
Retained earnings revaluation reserve | (11 | ) | (10 | ) | (10 | ) | |||
769 | 712 | 398 | |||||||
Third parties | |||||||||
Decrease in long-term assets | |||||||||
Marketable securities | 11 | 12 | |||||||
Related parties | 154 | 572 | 1,069 | ||||||
Taxes and charges recoverable | 6 | 3 | 29 | ||||||
Prepaid expenses | 3 | 6 | 4 | ||||||
Loans to third parties and other | 5 | 4 | 4 | ||||||
Increase in long-term liabilities | |||||||||
Financial institutions | 77 | 121 | 76 | ||||||
Export drafts to be invoiced | 114 | 514 | |||||||
Fiscal incentives of FUNDOPEM and Program for Technological and Industrial Development | 93 | 91 | 104 | ||||||
349 | 923 | 1,800 | |||||||
Other | |||||||||
Income taxes on foreign profits | (5 | ) | |||||||
(5 | ) | ||||||||
Total funds provided | 1,118 | 1,635 | 2,193 | ||||||
COPESUL—Companhia Petroquímica do Sul
Consolidated StatementsTable of Changes in Financial Position (continued)Contents
In millions of reais
2005 | 2004 | 2003 | |||||||
Financial resources were used for: | |||||||||
Long-term assets | |||||||||
Marketable securities | 23 | ||||||||
Related parties | 325 | 880 | |||||||
Taxes and charges recoverable | 21 | 19 | 2 | ||||||
Prepaid expenses | 5 | 4 | 3 | ||||||
Loans to third parties and other | 1 | 6 | 2 | ||||||
Permanent assets | |||||||||
Investments | 2 | ||||||||
Property, plant and equipment | 171 | 131 | 47 | ||||||
Deferred charges | 3 | 2 | 5 | ||||||
Transfer from long-term to current liabilities | |||||||||
Financial institutions | 64 | 195 | 218 | ||||||
Export drafts to be invoiced | 371 | 117 | |||||||
Provision for programmed maintenance | 11 | 43 | 20 | ||||||
Administrative, civil and labor contingencies | 2 | 1 | 1 | ||||||
Amortization of long-term liabilities | |||||||||
Financial institutions | 79 | 174 | |||||||
Export drafts to be invoiced | 133 | ||||||||
Distribution of net income | |||||||||
Proposed dividends | 68 | 118 | 9 | ||||||
Dividends distributed from retained earnings | 396 | 339 | 57 | ||||||
Interest on own capital | 99 | 88 | 87 | ||||||
Total funds used | 920 | 1,974 | 1,448 | ||||||
Increase (decrease) in working capital | 198 | (339 | ) | 745 | |||||
Current assets | |||||||||
At the end of the year | 907 | 754 | 1,387 | ||||||
At the beginning of the year | 754 | 1,387 | 1,305 | ||||||
153 | (633 | ) | 82 | ||||||
Current liabilities | |||||||||
At the end of the year | 695 | 740 | 1,034 | ||||||
At the beginning of the year | 740 | 1,034 | 1,697 | ||||||
(45 | ) | (294 | ) | (663 | ) | ||||
Increase (decrease) in working capital | 198 | (339 | ) | 745 | |||||
COPESUL — Companhia Petroquímica do Sul | ||
Consolidated Statements of Changes in Financial Position In millions of reais | (continued) |
2006 | 2005 | 2004 | ||||||||||
Financial resources were used for: | ||||||||||||
Long-term assets | ||||||||||||
Marketable securities | 23 | |||||||||||
Related parties | 325 | |||||||||||
Taxes and charges recoverable | 42 | 21 | 19 | |||||||||
Prepaid expenses | 1 | 5 | 4 | |||||||||
Loans to third parties and other | 2 | 1 | 6 | |||||||||
Permanent assets | ||||||||||||
Investments | 2 | |||||||||||
Property, plant and equipment | 126 | 171 | 131 | |||||||||
Deferred charges | 2 | 3 | 2 | |||||||||
Transfer from long-term to current liabilities | ||||||||||||
Financial institutions | 24 | 64 | 195 | |||||||||
Export drafts to be invoiced | 35 | 371 | ||||||||||
Provision for programmed maintenance | 11 | 43 | ||||||||||
Amortization of long-term liabilities | ||||||||||||
Financial institutions | 79 | 174 | ||||||||||
Export drafts to be invoiced | 49 | 133 | ||||||||||
Administrative, civil and labor contingencies | 1 | 2 | 1 | |||||||||
Distribution of net income | ||||||||||||
Proposed dividends | 185 | 68 | 118 | |||||||||
Prepaid dividends | 372 | 396 | 339 | |||||||||
Interest on own capital | 90 | 99 | 88 | |||||||||
Total funds used | 929 | 920 | 1,974 | |||||||||
Increase (decrease) in working capital | 208 | 198 | (339 | ) | ||||||||
Current assets | ||||||||||||
At the end of the year | 1,261 | 907 | 754 | |||||||||
At the beginning of the year | 907 | 754 | 1,387 | |||||||||
354 | 153 | (633 | ) | |||||||||
Current liabilities | ||||||||||||
At the end of the year | 841 | 695 | 740 | |||||||||
At the beginning of the year | 695 | 740 | 1,034 | |||||||||
146 | (45 | ) | (294 | ) | ||||||||
Increase (decrease) in working capital | 208 | 198 | (339 | ) | ||||||||
F-145
Years Ended December 31
In millions of reais
2005 | 2004 | 2003 | |||||||
(Reclassified) | |||||||||
Cash provided by operating activities | |||||||||
Net income for the year | 567 | 547 | 168 | ||||||
Expenses (income) not affecting cash | |||||||||
Depreciation and amortization | 202 | 206 | 205 | ||||||
Provision for programmed maintenance | (31 | ) | 36 | 17 | |||||
Provision for administrative, civil and labor contingencies | 4 | 3 | 2 | ||||||
Provision for actuarial liabilities—PETROS | 2 | 2 | 2 | ||||||
Interest and monetary and exchange variations on assets | |||||||||
Interest | 15 | 5 | (4 | ) | |||||
Monetary and exchange variations | 6 | (18 | ) | 56 | |||||
Loss on disposals of property, plant and equipment and other | 5 | 3 | |||||||
Net changes in swap receivable | (52 | ) | 9 | 305 | |||||
Net changes in swap and options difference payable | (3 | ) | (32 | ) | (11 | ) | |||
Loans, financing and export drafts | |||||||||
Interest | (1 | ) | (3 | ) | (111 | ) | |||
Monetary and exchange variations | (36 | ) | (21 | ) | (127 | ) | |||
Deferred income tax and social contribution | 10 | (30 | ) | 3 | |||||
Decrease (increase) in assets | |||||||||
Trade accounts receivable | 21 | 277 | (213 | ) | |||||
Trade notes linked to the FIDC | (10 | ) | 23 | ||||||
Inventories | (68 | ) | (144 | ) | 21 | ||||
Other accounts receivable | (36 | ) | 102 | 19 | |||||
Related parties | (25 | ) | (302 | ) | |||||
Increase (decrease) in liabilities: | |||||||||
Suppliers—third parties | 8 | 59 | (20 | ) | |||||
Other accounts payable | (28 | ) | 21 | 59 | |||||
Fiscal incentives of FUNDOPEM, income tax and Program for Technological and Industrial Development | 93 | 91 | 104 | ||||||
Net cash provided by operating activities | 668 | 1,108 | 176 | ||||||
Marketable securities | |||||||||
Purchases | (145 | ) | (997 | ) | |||||
Redemptions | 201 | 910 | |||||||
Loans to related parties | |||||||||
Issuances | (325 | ) | (880 | ) | |||||
Repayments | 130 | 522 | 1,007 | ||||||
Additions to investments | (2 | ) | |||||||
Additions to property, plant and equipment | (171 | ) | (131 | ) | (47 | ) | |||
Additions to deferred charges | (3 | ) | (2 | ) | (5 | ) | |||
Net cash provided by (used in) investing activities | 12 | (25 | ) | 75 | |||||
Loans, financing and export drafts | |||||||||
Issuances | 1,279 | 772 | 1,553 | ||||||
Repayments | (1,411 | ) | (1,707 | ) | (1,601 | ) | |||
Interest on own capital payable paid | (97 | ) | (83 | ) | (72 | ) | |||
Dividends paid | (513 | ) | (346 | ) | (123 | ) | |||
Net cash used in financing activities | (742 | ) | (1,364 | ) | (243 | ) | |||
Net change in cash | (62 | ) | (281 | ) | 8 | ||||
Initial cash balance | 175 | 456 | 448 | ||||||
Final cash balance | 113 | 175 | 456 | ||||||
Net change in cash | (62 | ) | (281 | ) | 8 | ||||
2006 | 2005 | 2004 | ||||||||||
Cash provided by operating activities | ||||||||||||
Net income for the year | 615 | 567 | 547 | |||||||||
Expenses (income) not affecting cash | ||||||||||||
Depreciation and amortization | 234 | 202 | 206 | |||||||||
Provision for programmed maintenance | (31 | ) | 36 | |||||||||
Provision for administrative, civil and labor contingencies | 23 | 4 | 3 | |||||||||
Provision for actuarial liabilities — PETROS | 2 | 2 | 2 | |||||||||
Provision for realization of investments at market value | (1 | ) | ||||||||||
Interest and monetary and exchange variations on assets | ||||||||||||
Interest | 5 | 15 | 5 | |||||||||
Monetary and exchange variations | (4 | ) | 6 | (18 | ) | |||||||
Disposals of property, plant and equipment and other investments | 2 | 5 | ||||||||||
Net changes in swap receivable | (11 | ) | (52 | ) | 9 | |||||||
Net changes in swap and options payable | 18 | (3 | ) | (32 | ) | |||||||
Loans, financing and export drafts | ||||||||||||
Interest | (11 | ) | (1 | ) | (3 | ) | ||||||
Monetary and exchange variations | (7 | ) | (36 | ) | (21 | ) | ||||||
Deferred income tax and social contribution | 4 | 10 | (30 | ) | ||||||||
Interest on provision for income tax and social contribution | 2 | |||||||||||
Decrease (increase) in assets | ||||||||||||
Trade accounts receivable | (57 | ) | 21 | 277 | ||||||||
Trade notes linked to the FIDC | (13 | ) | (10 | ) | 23 | |||||||
Inventories | (76 | ) | (68 | ) | (144 | ) | ||||||
Other accounts receivable | (92 | ) | (36 | ) | 102 | |||||||
Related parties | 61 | (25 | ) | |||||||||
Increase (decrease) in liabilities | ||||||||||||
Suppliers — third parties | 137 | 8 | 59 | |||||||||
Other accounts payable | 13 | (28 | ) | 21 | ||||||||
Fiscal incentives of FUNDOPEM, income tax and Program for Technological and Industrial Development | 55 | 93 | 91 | |||||||||
Net cash provided by operating activities | 899 | 668 | 1,108 | |||||||||
F-146
COPESUL — Companhia Petroquímica do Sul | ||
Consolidated Statements of Cash Flows In millions of reais | (continued) |
2006 | 2005 | 2004 | ||||||||||
Marketable securities | ||||||||||||
Purchases | (210 | ) | (145 | ) | (997 | ) | ||||||
Redemptions | 181 | 201 | 910 | |||||||||
Loans to related parties | ||||||||||||
Issuances | 5 | (325 | ) | |||||||||
Repayments | 130 | 522 | ||||||||||
Additions to investments | (2 | ) | ||||||||||
Additions to property, plant and equipment | (126 | ) | (171 | ) | (131 | ) | ||||||
Additions to deferred charges | (2 | ) | (3 | ) | (2 | ) | ||||||
Net cash provided by (used in) investing activities | (152 | ) | 12 | (25 | ) | |||||||
Loans, financing and export drafts | ||||||||||||
Issuances | 1,320 | 1,279 | 772 | |||||||||
Repayments | (1,447 | ) | (1,411 | ) | (1,707 | ) | ||||||
Interest on own capital payable paid | (94 | ) | (97 | ) | (83 | ) | ||||||
Dividends paid | (438 | ) | (513 | ) | (346 | ) | ||||||
Net cash used in financing activities | (659 | ) | (742 | ) | (1,364 | ) | ||||||
Net change in cash | 88 | (62 | ) | (281 | ) | |||||||
Initial cash balance | 113 | 175 | 456 | |||||||||
Final cash balance | 201 | 113 | 175 | |||||||||
Net change in cash | 88 | (62 | ) | (281 | ) | |||||||
F-147
at December 31, 20052006 and 2004
2005
All amounts in millions of reais, unless otherwise indicated
1 | Operations | |
The Company, headquartered in Triunfo, Rio Grande do Sul, is a publicly held corporation and main objectives are: a) manufacture, sale, import and export of chemical and petrochemical products and fuel; b) production and distribution of goods, as well as rendering services to companies of the Southern Petrochemical Complex and management of the logistic services pertinent to its waterway and terrestrial terminals; c) participation in other companies as quotaholder or shareholder. Its main shareholders are Braskem S.A., Ipiranga Petroquímica S.A. and Petrobras Química S.A. - PETROQUISA. | ||
The main suppliers of raw materials in the local market are PETROBRAS — Petróleo Brasileiro S.A. and Refinaria Alberto Pasqualini — REFAP S.A. and overseas, the companies Sonatrach SPA and Repsol YPF S.A. | ||
The Company’s main customers are located in the Petrochemical Complex in Triunfo, Rio Grande do Sul. Additionally, the Company’s sales of hydrocarbon solvents and fuels are made to both national and international market, and the latter being mainly to Mercosur (Southern Common Market) and the United States. | ||
2 | Presentation of financial statements | |
The financial statements for statutory and regulatory purposes were approved by the Company’s Board of Directors on January 30, 2007. | ||
The consolidated financial statements have been prepared and are being presented in accordance with accounting practices adopted in Brazil, which are based on Brazilian corporate legislation and standards and procedures of the Brazilian Securities Commission (CVM). The financial statements presented herein do not include the holding company’s stand-alone financial statements, are not intended for statutory purposes, and have been adjusted with respect to the financial statements for statutory purposes to include in Note 28 a reconciliation of net equity and net income between the amounts under accounting practices adopted in Brazil and generally accepted accounting principles in the United States of America as well as certain additional disclosure to facilitate its understanding by readers not familiar with accounting practices adopted in Brazil as described below. | ||
Due to the change of accounting practice, the provision for programmed maintenance, beginning on January 1, 2006, was totally reversed against retained earnings as required by Deliberation of the Brazilian Securities and Exchange Commission — CVM no. 489 of October 3, 2005 and Technical Interpretation — IT IBRACON no. 01/2006 and its effects are |
F-148
1 OperationsTable of Contents
The Company, headquartered in Triunfo, Rio Grande do Sul, is a publicly held corporation and main objectives are: a) manufacture, sale, import and export of chemical and petrochemical products and fuel; b) production and distribution of goods, as well as rendering services to companies of the Southern Petrochemical Complex and management of the logistic services pertinent to its waterway and terrestrial terminals; c) participation in other companies as quotaholder or shareholder. Its main shareholders are Braskem S.A., Ipiranga Petroquímica S.A. and Petrobras Química S.A.
The main suppliers of raw materials in the local market are PETROBRAS—Petróleo Brasileiro S.A. and Refinaria Alberto Pasqualini—REFAP S.A. (REFAP) and overseas, the companies Sonatrach SPA and Repsol YPF S.A., and most sales of products are made to companies located in the Southern Petrochemical Complex in Triunfo, State of Rio Grande do Sul, and to REFAP.
2 Presentation of financial statements
The consolidated financial statements have been prepared and are being presented in accordance with accounting practices adopted in Brazil, which are based on Brazilian corporate legislation and standards and procedures of the Brazilian Securities Commission (CVM).
The financial statements prepared by the Company for statutory purposes, which include the stand-alone financial statements of Copesul—Companhia Petroquímica do Sul S.A (holding company), were filed with the CVM in January 2006. The financial statements presented herein do not include the holding company’s stand-alone financial statements, are not intended for statutory purposes, and have been adjusted with respect to the financial statements for statutory purposes to include in Note 29 a reconciliation of net equity and net income between the amounts under accounting practices adopted in Brazil and generally accepted accounting principles in the United States of America as well as certain additional disclosure to facilities its understanding by readers not familiar with accounting practices adopted in Brazil as described below.
3 Significant accounting practices
(a) Consolidated financial statements
These consolidated statements include the wholly-owned subsidiaries Copesul International Trading, Inc. and CCI—Commercial Importadora S.A. and, as from 2004, the Fundo de Investimento Financeiro Multimercado Copesul, a mutual fund whose quotas are wholly-owned by the Company. In the consolidation process, intercompany balances, income, expenses and unrealized profits arising from intercompany transactions are eliminated, as well as the investment in the subsidiaries.
(b) Marketable securities and swap receivables and payables
These assets are recorded at cost plus accrued income up to the balance sheet date (accrual basis), adjusted to market value, when lower. Investment in quotas of mutual funds are valued at its market value at period-end with gain and losses recognized in the statement of income. As required by accounting standards specifically applicable to mutual funds, investments held by mutual funds, such as the “Fundo de Investimento Financeiro Multimercado Copesul” are valued at its market value at period-end with gain and losses recognized in the statement of income.
COPESUL—Companhia Petroquímica do Sul
Statements
at December 31, 20052006 and 2004
2005
All amounts in millions of reais, unless otherwise indicated
shown in Note 19 (e) (i). | ||
The preparation of financial statements in conformity with generally accepted accounting practices requires the use of estimates to account for certain assets and liabilities and other transactions. Therefore, the Company’s financial statements include estimates referring to the selection of useful lives of fixed assets, provisions for contingent liabilities and determination of income tax liabilities. Actual results may differ from such estimates. | ||
3 | Significant accounting practices | |
(a) | Consolidated financial statements | |
These consolidated statements include the wholly-owned subsidiaries Copesul International Trading, Inc., CCI — Comercial Importadora S.A. and the Fundo de Investimento Financeiro Multimercado Copesul, a mutual fund whose quotas are wholly-owned by the Company. In the consolidation process, intercompany balances, income, expenses and unrealized profits arising from intercompany transactions are eliminated, as well as the investment in the subsidiaries. | ||
(b) | Marketable securities and swap receivables and payables | |
Marketable securities are recorded at cost plus accrued income up to the balance sheet date (accrual basis), adjusted to market value, when lower. Investment in quotas of mutual funds are valued at its market value at period-end with gain and losses regognized in the statement of income. As required by accounting standards specifically applicable to mutual funds, investments held by mutual funds, such as the “Fundo de Investimento Financeiro Multimercado Copesul” are valued at its market value at period-end with gain and losses recognized in the statement of income. Derivatives financial instruments, which include swaps and options (Note 6) are recorded at fair value with realized and unrealized gains and losses recognized in income. | ||
(c) | Allowance for doubtful accounts | |
The Company has no allowance for doubtful accounts, since losses are not consider to be probable to occur in relation to accounts receivable. |
F-149
(c) Allowance for doubtful accountsTable of Contents
The Company has no allowance for doubtful accounts, since losses are not consider to be probable to occur in relation to accounts receivable.
(d) Inventories
Inventories are stated at average cost of acquisition or production, adjusted to market value, when lower.
(e) Investments
Investments are recorded at acquisition cost and adjusted to market value, when applicable.
(f) Property, plant and equipment
Property, plant and equipment are stated at cost, plus revaluation, less accumulated depreciation. Depreciation is calculated on the straight-line method in accordance with the estimated useful lives of assets, supported by an independent appraisal report, as shown in Note 12.
(g) Deferred charges
Deferred charges include pre-operating expenses related to expansion, projects for new products and systems and organizational restructuring expenditures, amortized at the rate of 20% p.a., as shown in Note 13.
(h) Rights and obligations
Rights are stated at cost or realization value, including, when applicable, interest and monetary restatements and exchange rate variations. Liabilities are recognized at their known or calculable values, including corresponding charges, monetary restatements and exchange rate variations when applicable.
(i) Provision for programmed maintenance
This provision represents the estimated costs of planned scheduled stoppages, including the general stoppage that occurs every six years. The stoppage of Plant 1 occurred in the first half of 2001 and the next one should be in 2007. With the start of the operations of Plant 2 in July 1999, the Company’s operations will no longer be totally shut down. The scheduled stoppage for Plant 2 took place in November of this year and the next one is planned for November 2001.
(j) Income tax and social contribution
Deferred income tax and social contribution on temporary differences were fully recognized at current rates, considering that its realization is probable.
Income tax and social contribution are provided based on taxable income determined in accordance with current tax legislation.
(k) Determination of results of operations
Income and expenses are determined on the accrual basis.
Statements 2005 F-150COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated(d) Inventories Inventories are stated at average cost of acquisition or production, adjusted to market value, when lower. (e) Investments Investments are recorded at acquisition cost and adjusted to market value, when applicable. (f) Property, plant and equipment Property, plant and equipment are stated at cost, plus revaluation, less accumulated depreciation. Depreciation is calculated on the straight-line method in accordance with the estimated useful lives of assets, supported by an independent appraisal report, as shown in Note 12. (g) Deferred charges Deferred charges include pre-operating expenses related to expansion, projects for new products and systems and organizational restructuring expenditures, amortized at the rate of 20% per year (p.a.), as shown in Note 13. (h) Rights and obligations Rights are stated at cost or realization value, including, when applicable, interest and monetary restatements and exchange rate variations. Liabilities are recognized at their known or calculable values, including corresponding charges, monetary restatements and exchange rate variations when applicable. (i) Provision for programmed maintenance Up to December 31, 2005, the Provision for Programmed maintenance was set up accruing in advance the estimated costs of scheduled maintenance stoppage, especially the general stoppage that occurs every six years. The most recent stoppage of Plant 1 occurred in the first half of 2001 and the next one should be in 2008. The most recent stoppage of Plant 2 took place in November 2005 and the next one is planned for November 2011. Due to the change of accounting practice, the provision for programmed maintenance, beginning on January 1, 2006, was totally reversed against retained earnings as established by Deliberation of the Brazilian Securities and Exchange Commission — CVM no. 489 of October 3, 2005 and Technical Interpretation — IT IBRACON no. 01/2006 and its effects are shown in Note 19 (e) (i).
(l) StatementTable of cash flowsContents
In accordance with IBRACON (“Instituto dos Auditores Independentes do Brasil”) Accounting Standards and Procedures (NPC) 20, the Company is presenting the consolidated statements of cash flows for the years ended December 31, 2005, 2004 and 2003. For purposes of the statements of cash flows, cash and banks comprises all cash in hand, amounts deposited in banks and securities, quotas in mutual funds and amounts invested in other debt securities which might be sold by the Company at any moment in exchange for cash.
4 Cash and banks
2005 | 2004 | |||
Cash and banks—checking account | 6 | 1 | ||
Marketable securities | ||||
Investments of Fundo de Investimento Financeiro | ||||
Multimercado Copesul | ||||
Bank Deposit Certificates | 43 | 87 | ||
Financial Brazilian Government Treasury Bills | 12 | 2 | ||
National Treasury Bills | 1 | |||
Mutual Fund Quotas | 13 | |||
Receivables investment Fund—FIDC | 9 | |||
Debentures and Other debt securities | 15 | |||
Bank Deposit Certificates | 13 | 2 | ||
Collection account | 4 | |||
Government securities | 78 | |||
Overnight deposits | 1 | 1 | ||
113 | 175 | |||
5 Trade accounts receivable—Third parties
2005 | 2004 | |||
Local customers | 103 | 86 | ||
Foreign customers | 46 | 104 | ||
149 | 190 | |||
6 Swap and options receivables and payables
The Company entered into operations involving options with respect to US dollars called ‘Box Options’ as commented below. Its purpose has been to invest cash resources at rates higher than other available investment options. The Company also entered into swap operations which were entered into by Fundo de Investimento Financeiro Multimercado Copesul, whose custodian and manager is Banco Santander Brasil S.A.
Amounts receivable | ||||
2005 | 2004 | |||
Swap receivables | 2 | 1 | ||
Swap with anticipatory breach clause | 1 | |||
Options—Box operations | 50 | |||
Total—current assets | 53 | 1 | ||
Statements 2005 Options payable Options—Box operations Swap payable Total—current liabilities Receivables Securitization Fund (FIDC) (*) Term deposit Total Current Long-term receivables F-151COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated Amounts payable 2005 2004 1 3 2 2 5 5 8 Box options are combined operations that involve both the purchase and the sale of options in US dollars for the same maturity at a certain price, so that, regardless of the future US dollar rate, the Company already knows the net result of such operations providing what the Company views as a fixed return over its investment. The value paid for the options, called premium, correspond to the amount invested by the Company and the sum redeemed will be the premium plus a pre-fixed rate of return.Swaps correspond to cross-currency interest rate swaps by which the Company pays a fixed interest rate and received a variable rate based on the Interbank Deposit Certificates—CDI rate.7 Marketable securities 2005 2004 13 26 1 55 14 81 (13 ) (69 ) 1 12 (*)On MarchAs from January 1, 2004,2006 and in accordance with IT IBRACON 01/2006 no provision is recognized for programmed maintenance. IT IBRACON 01/2006 establishes that “no provision is recognized for costs that need to be incurred to operate in the future. The only liabilities recognized in the balance sheet of an entity are those that exist at the balance sheet date.” As from January 1, 2006 amounts incurred in programmed maintenance are capitalized and amortized over the estimated period to the next programmed maintenance.(j) Income tax and social contribution Deferred income tax and social contribution on temporary differences were fully recognized at current rates, considering that its realization is probable. Income tax and social contribution are provided based on taxable income determined in accordance with current tax legislation. (k) Determination of results of operations Income and expenses are determined on the accrual basis. (l) Statement of cash flows In accordance with IBRACON (“Instituto dos Auditores Independentes do Brasil”) Accounting Standards and Procedures (NPC) 20, the Company raised funds throughis presenting the Copesul Receivables Securitization Fund (FIDC). The Fund is managed by Votorantim Assets and has net assetsconsolidated statements of R$ 76 atcash flows for the years ended December 31, 2006, 2005 (2004—R$ 130), comprising R$ 63 (2004—R$ 104)and 2004. For purposes of the statements of cash flows, cash and banks comprises all cash in seniorhand, amounts deposited in banks and securities, quotas in mutual funds and R$ 13 (2004—R$ 26) in subordinated quotas, all of which are held by the Company. Amortization of principal, which started in November 2004, will occur over a period of 22 months. Of the amount raised by the Fund, R$ 125 has beenamounts invested in billed and unbilled receivables originatedother debt securities which might be sold by the Company from DSM Elastômeros Brasil Ltda. and Petroquímica Triunfo S.A. and R$ 25at any moment in receivables from several other Copesul customers.exchange for cash.
8 InventoriesTable of Contents
Inventories are comprised as follows:
2005 | 2004 | |||
Raw materials | 267 | 284 | ||
Raw materials in transit | 90 | |||
Finished products | 46 | 62 | ||
Spare parts and other materials | 75 | 63 | ||
Chemical products | 8 | 11 | ||
Intermediary products | 9 | 7 | ||
495 | 427 | |||
Statements 2005 F-152COPESUL—SulSulStatements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated4 Cash and banks 2006 2005 Cash and banks — checking account 7 6 Marketable securities Investments of Fundo de Investimento Financeiro Multimercado Copesul Bank Deposit Certificates 88 43 Financial Brazilian Government Treasury Bills 13 12 National Treasury Bills 1 1 Mutual Fund quotas 12 13 Receivables investment Fund — FIDC 9 Debentures and other debt securities 43 15 Bank Deposit Certificates 13 Government securities Overnight and term deposits 37 1 201 113 5 Trade accounts receivable — Third parties 2006 2005 Local customers 121 103 Foreign customers 74 46 195 149
9 TaxesTable of Contents
6 | Swap and options receivables and payables | |
The Company entered into operations involving options with respect to US dollars called ‘Box Options’ as commented below. Its purpose has been to invest cash resources at rates higher than other available investment options. The Company also entered into swap operations which were entered into by Fundo de Investimento Financeiro Multimercado Copesul, whose custodian and manager is Banco Santander Brasil S.A. |
Amounts receivable | ||||||||
2006 | 2005 | |||||||
Swap receivables | 27 | 2 | ||||||
Swap with anticipatory breach clause | 1 | |||||||
Options — Box operations | 37 | 50 | ||||||
Total — current assets | 64 | 53 | ||||||
Amounts payable | ||||||||
2006 | 2005 | |||||||
Options payable | 1 | |||||||
Options — Box operations | 2 | |||||||
Swap payable | 23 | 2 | ||||||
Total — current liabilities | 23 | 5 | ||||||
Box options are combined operations that involve both the purchase and the sale of options in US dollars for the same maturity at a certain price, so that, regardless of the future US dollar rate, the Company knows in advance the net result of such operations providing what the Company views as a fixed return over its investment. The value paid for the options, called premium, correspond to the amount invested by the Company and the sum redeemed will be the premium plus a pre-fixed rate of return. | ||
Swaps correspond to cross-currency interest rate swaps by which the Company pays a fixed interest rate and receives a variable rate based on the Interbank Deposit Certificates — CDI rate. |
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7 | Marketable securities |
2006 | 2005 | |||||||
Receivables Securitization Fund (FIDC) (*) | 13 | |||||||
Term deposits | 39 | 1 | ||||||
Total | 39 | 14 | ||||||
Current | (38 | ) | (13 | ) | ||||
Long-term | 1 | 1 | ||||||
(*) | The ‘Fundo Copesul de Investimentos em Direitos Creditórios’ — FIDC (Copesul Receivables Securitization Fund) was closed with amortization of the last installment on August 21, 2006. |
8 | Inventories | |
Inventories are comprised as follows: |
2006 | 2005 | |||||||
Raw materials | 234 | 267 | ||||||
Raw materials in transit | 145 | 90 | ||||||
Finished products | 99 | 46 | ||||||
Spare parts and other materials | 73 | 75 | ||||||
Chemical products | 7 | 8 | ||||||
Intermediary products | 13 | 9 | ||||||
571 | 495 | |||||||
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Current | Long-term | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Withholding income tax on financial investments | 5 | |||||||
Prepaid income tax | 3 | |||||||
Tax on Net Income (ILL)(a) | 51 | 48 | ||||||
Additional State Income Tax (ADIRE)(b) | 32 | 33 | ||||||
Deferred income tax on tax loss—CITI(c) | 1 | |||||||
Deferred income tax on temporary additions(c) | 4 | 22 | 21 | 13 | ||||
Deferred social contribution on temporary additions(c) | 2 | 8 | 8 | 5 | ||||
Presumed PIS/COFINS credits | 1 | |||||||
PIS recoverable | 1 | |||||||
COFINS recoverable | 1 | 1 | 3 | |||||
COFINS on acquisition of property, plant and equipment | 1 | |||||||
ICMS recoverable | 20 | |||||||
ICMS on acquisition of property, plant and equipment(d) | 8 | 4 | 15 | 8 | ||||
IPI recoverable and other | 2 | 4 | 4 | |||||
43 | 38 | 133 | 115 | |||||
9 | Taxes and charges recoverable |
Current | Long-term | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Deferred taxes | ||||||||||||||||
Deferred income tax and social contribution on tax loss — CITI (c) | 1 | |||||||||||||||
Deferred income tax on temporary additions (c) | 1 | 4 | 11 | 21 | ||||||||||||
Deferred social contribution on temporary additions (c) | 1 | 2 | 4 | 8 | ||||||||||||
2 | 6 | 15 | 30 | |||||||||||||
Other taxes and charges recoverable | ||||||||||||||||
Withholding income tax on financial investments | 4 | |||||||||||||||
IRPJ and CSLL recoverable | 12 | 4 | ||||||||||||||
Tax on Net Income (ILL) (a) | 54 | 51 | ||||||||||||||
Additional State Income Tax (ADIR) (b) | 28 | 32 | ||||||||||||||
ICMS on acquisition of property, plant and equipment (d) | 8 | 7 | 9 | 15 | ||||||||||||
PIS recoverable | 1 | |||||||||||||||
PASEP recoverable (h) | 15 | 23 | ||||||||||||||
PIS on acquisition of property, plant and equipment (e) | 1 | |||||||||||||||
COFINS recoverable | 3 | |||||||||||||||
COFINS on acquisition of property, plant and equipment (e) | 2 | 1 | 2 | 1 | ||||||||||||
Prepaid ICMS (f) | 72 | 20 | ||||||||||||||
CSLL withheld — Law 10833 | 1 | |||||||||||||||
IPI recoverable (g) | 5 | 4 | ||||||||||||||
Other taxes and charges recoverable | 113 | 37 | 122 | 103 | ||||||||||||
115 | 43 | 137 | 133 | |||||||||||||
(a) | This refers to the tax credit of |
(b) | As of December 31, |
F-155
(c) | The Company recorded deferred |
COPESUL—Companhia Petroquímica do Sul
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005 and 2004
All amounts in millions of reais, unless otherwise indicated
2006 | 2005 | |||||||
% | % | |||||||
2006 | 17 | |||||||
2007 | 13 | 80 | ||||||
2008 | 3 | |||||||
2009 and after | 87 | |||||||
100.00 | 100.00 | |||||||
(d) | As from August 2000, the Company started recording the ICMS credits paid on acquisitions of property, plant and equipment, |
2006 | 2005 | |||||||
2006 | 8 | |||||||
2007 | 8 | 7 | ||||||
2008 | 6 | 6 | ||||||
2009 | 2 | 2 | ||||||
2010 | 1 | |||||||
17 | 23 | |||||||
Current | (8 | ) | (8 | ) | ||||
Long-term | 9 | 15 | ||||||
(e) | The Company recognizes PIS and COFINS recoverable credits on the acquisitions of property, plant and equipment, which will be realized in 24 and 48 months depending on the asset acquired as permitted by Law 10865/04 and Decree 5222/04. |
F-156
Year | 2005 | 2004 | ||||
2005 | 4 | |||||
2006 | 8 | 3 | ||||
2007 | 7 | 3 | ||||
2008 | 6 | 2 | ||||
2009 | 2 | |||||
23 | 12 | |||||
Current | (8 | ) | (4 | ) | ||
Long-term | 15 | 8 | ||||
10 Prepaid expensesTable of Contents
Prepaid expenses comprise:
Realization period | 2005 | 2004 | ||||||
Insurance | Up to Nov/2006 (2004—up to Nov/2005) | 10 | 10 | |||||
Chemical products (catalysts) | Up to Nov/2011 (2004—up to Feb/2009) | 10 | 7 | |||||
Debt issuance costs | (2004—up to Apr/2006) | 1 | ||||||
Total, net | 20 | 18 | ||||||
Current | (14 | ) | (13 | ) | ||||
Long-term | 6 | 5 | ||||||
The long-term portion refers to chemical products (catalysts) which are used as agents that promote a chemical reaction in the production of basic petrochemicals. Their average useful life and amortization period is 5 years.
Debt issuance costs correspond to fees charged on loans drawn down from the EXIMBANK (Export-Import Bank of the United States) and Credit Suisse Bank First Boston Limited. The recognition as expense of the amounts relating to the EXIMBANK contract in the amount of R$ 4 occurred up to August 2004, upon advance settlement of this contract, as described in Note 15, while the expenses with the contract with Credit Suisse Bank in the amount of R$ 1 was appropriated against the results up to March 2005, when there was an anticipated settlement of the contract.
11 Judicial deposits
2005 | 2004 | |||
Tax matters: | ||||
Income tax | 2 | 2 | ||
CIDE on technical assistance service | 3 | 3 | ||
Income tax on technical assistance service | 1 | 1 | ||
6 | 6 | |||
Labor, Civil and Administrative matters | 2 | 1 | ||
8 | 7 | |||
Statements 2005 F-157COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated(f) During 2006, the Company made an advance payment of amounts related to ICMS on future sales in the amount of 72 (2005 — R$ 20). The offset of the prepaid ICMS will be done in 6 equal payments, monthly and consecutives, adjusted by the ‘Unidade Padrão Fiscal do RS’ — UPF (Standard Fiscal Unit of RS) of 2007, beginning in January 2007. (g) The Company recognizes an IPI credit in the acquisitions of raw materials used in the production process. In order to use these credits, every quarter they are offset with federal taxes in accordance with Decree 4544/2002 and paragraph 4, article 16 of the Regulatory Instruction no 460/2004 of the Brazilian Revenue and Customs Secretariat. The long-term balance refers to the IPI Credit Bonus that was judicially gained and will be realized by the end of 2008. (h) During 2006 the Company recognized a PASEP judicial tax credit in the amount of R$ 45, seeking the right to carry out the payments in accordance with Complementary Law 8/70, using as a calculation basis the revenue of the sixth month previous to the occurrence of the taxable event, in light of Resolution no. 49/95 of the Federal Senate in a final decision. This credit was recognized in the income statement for the year in “Other net operating income” in the amount of R$ 14 and financial income of R$ 30. The Company expects to settle the remaining balance at December 31, 2006 as follows: PASEP credit with final favorable judgment and recognized in 2006 45 Credit amount to be offset in 2006 with PIS (8 ) PASEP balance at December 31, 2006 37 2007 15 2008 14 2009 8 37
The Company has judicial deposits and has recorded a provision for contingencies relating to income tax, in connection with lawsuits.
Since August 2002, the Company has questioned in court the income tax and the Economic Domain Intervention Contribution (CIDE) on the payment of technical assistance services, having made judicial deposits in their respect. The purpose of the deposits is to avoid double taxation with respect to the countries with which Brazil has tax treaties.
12 Property, plant and equipmentTable of Contents
Annual depreciation rates—% | Revalued and restated cost | Accumulated depreciation | 2005 | 2004 | |||||||
Net | Net | ||||||||||
Equipment and installations | |||||||||||
Operations | 10 | 1,999 | (1,375 | ) | 624 | 635 | |||||
Utilities | 10 | 910 | (794 | ) | 116 | 146 | |||||
Storage and transfers | 10 | 430 | (311 | ) | 119 | 141 | |||||
Other | 10 to 20 | 90 | (67 | ) | 23 | 25 | |||||
Buildings and construction | 4 | 55 | (22 | ) | 33 | 35 | |||||
Improvements | 4 | 22 | (11 | ) | 11 | 12 | |||||
Land | 37 | 37 | 37 | ||||||||
Construction in progress | 143 | 143 | 107 | ||||||||
3,686 | (2,580 | ) | 1,106 | 1,138 | |||||||
Certain items of fixed assets were given as guarantee for financing operations (Note 15).
Revaluations of property, plant and equipment made in 1983 and 1989, based on appraisal reports issued by specialized companies, produced the following effects on the balance sheet:
2005 | 2004 | ||||||||
Revaluation | Accumulated realization | Net | Net | ||||||
Equipment and installations | 1,339 | (1,277 | ) | 62 | 96 | ||||
Buildings and construction | 17 | (6 | ) | 11 | 12 | ||||
Improvements | 7 | (2 | ) | 5 | 5 | ||||
Land | 32 | (1 | ) | 31 | 31 | ||||
Total | 1,395 | (1,286 | ) | 109 | 144 | ||||
Revaluation reserve | 109 | 144 | |||||||
Realization of the revaluation reserve occur through depreciation and disposals of the revalued assets each year. The amounts realized are transferred directly to retained earnings, when the related income taxes and social contribution effects are also considered at the current rates.
The Company did not set up a provision for deferred income tax and deferred Social Contribution on the balance of the revaluation reserve, since CVM Deliberation 183/95 determines that such provision is only required on revaluations made as from July 1, 1995. The revaluation reserve is taxable when realized through
Statements 2005 F-158COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated10 Prepaid expenses Prepaid expenses comprise: Realization period 2006 2005 Insurance Up to Nov/2007 (2005 - up to Nov/2006) 10 10 Chemical products (catalysts) Up to Nov/2018 (2005 - up to Nov/2011) 8 10 Total, net 18 20 Current (14 ) (14 ) Long-term 4 6 The long-term portion refers to chemical products (catalysts) which are used as agents that promote a chemical reaction in the production of basic petrochemicals. Their average useful life and amortization period is 6 years. 11 Judicial deposits 2006 2005 Tax matters: Income tax 2 2 CIDE on technical assistance service 4 3 Income tax on technical assistance service 1 1 7 6 Labor, Civil and Administrative matters 2 2 9 8 The Company has judicial deposits and has recorded a provision for contingencies relating to income tax, in connection with lawsuits.
depreciation and disposals of items, and the related tax payable is recorded as a charge to Retained Earnings within shareholders’ equity. Considering current tax legislation, the revaluation reserve is subject to future taxation estimated at R$ 22 (2004—R$ 33).
13 Deferred chargesTable of Contents
Deferred charges comprise:
Annual amortization rates—% | 2005 | 2004 | |||||||||
Restated cost | Accumulated amortization | Net | Net | ||||||||
Development programs and other | 20 | 17 | (6 | ) | 11 | 10 | |||||
17 | (6 | ) | 11 | 10 | |||||||
14 Suppliers—Third parties
2005 | 2004 | |||
Local | 27 | 32 | ||
Foreign | 127 | 114 | ||
154 | 146 | |||
15 Loans and financing
Liabilities for loans and financing are as follows:
Annual charges (%) | 2005 | 2004 | ||||||
Foreign currency | ||||||||
Loans and financing (US$18 million; 2004—US$ 52 million) | Currency basket plus10.10 to 10.85 | 44 | 139 | |||||
Current | �� | (37 | ) | (65 | ) | |||
Long-term liabilities | 7 | 74 | ||||||
Local currency | ||||||||
Loans and financing | TJLP plus 4 to 5.5 and 11.25 to 12.50 | 49 | 36 | |||||
NCE and Resolution 2770 | 102.50 to 103 of CDII | 172 | ||||||
Financing (investments) | TJLP plus 1 to 3.5 | 50 | 50 | |||||
Copesul Receivables Securitization Fund | 106.5 of CDI | 57 | 131 | |||||
328 | 217 | |||||||
Current | (251 | ) | (148 | ) | ||||
Long-term liabilities | 77 | 69 | ||||||
Total financing | 372 | 356 | ||||||
Current | (288 | ) | (213 | ) | ||||
Long-term liabilities | 84 | 143 | ||||||
NCE—Export Credit Note
CDI—Interbank Deposit Certificate
TJLP—Long-Term Interest Rate
Statements 2005 F-159COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated12 Property, plant and equipment 2006 2005 Annual depreciation Revalued rates - and restated Accumulated % (*) cost (*) depreciation Net Net Equipment and installations Operations 10 2,001 (1,466 ) 535 624 Utilities 10 910 (831 ) 79 116 Storage and transfers 10 434 (335 ) 99 119 Maintenance — CVM Del. No. 489/05 (**) 21 92 (35 ) 57 Other (***) 10 to 20 89 (69 ) 20 23 Buildings and construction 4 56 (23 ) 33 33 Improvements 4 22 (11 ) 11 11 Land 37 37 37 Construction in progress 141 141 143 Other 18 18 3,800 (2,770 ) 1,030 1,106 (*) weighted average rate that reflects the depreciation expense (Note 2 (f)). (**) supported by appraisal reports issued by specialized companies. (***) information technology equipment, furniture and fixtures, among others are included in this account. Certain items of fixed assets were given as guarantee for financing operations (Note 15 (d)). (a) Revaluations Revaluations of property, plant and equipment made in 1983 and 1989, based on appraisal reports issued by specialized companies, produced the following effects on the balance sheet: 2006 2005 Accumulated Revaluation realization Net Net Equipment and installations 1,338 (1,310 ) 28 62 Buildings and construction 17 (6 ) 11 11 Improvements 7 (2 ) 5 5 Land 32 (1 ) 31 31 Total 1,394 (1,319 ) 75 109 Revaluation reserve 75 109
In April 2004, the subsidiary Copesul International Trading, Inc. established a “Euro-Medium Term Note Program” guaranteed by Copesul—
Realizations of the revaluation reserve occur through depreciation and disposals of the revalued assets each year. The amounts realized are transferred directly from revaluation reserve to retained earnings, considering the related effects of income tax and social contribution at the current rates. | ||
The Company did not set up a provision for deferred income tax and deferred social Contribution on the balance of the revaluation reserve, since CVM Deliberation 183/95 determines that such provision is only required on revaluations made as from July 1, 1995. The revaluation reserve is taxable when realized through depreciation and disposals of items. Considering current tax legislation, the revaluation reserve is subject to future taxation estimated as follows: |
2006 | 2005 | |||||||
Income tax | ||||||||
Balance of revaluation reserve | 75 | 108 | ||||||
Revaluation reserve on land | (31 | ) | (31 | ) | ||||
Income tax calculation basis | 44 | 77 | ||||||
Income tax (rate - 25%) | (11 | ) | (19 | ) | ||||
Social contribution | ||||||||
Income tax calculation basis | 44 | 77 | ||||||
Difference regarding IPC/BTNF on revaluation reserve balance | (22 | ) | (40 | ) | ||||
Social contribution calculation basis | 22 | 37 | ||||||
Social contribution (rate - 9%) | (2 | ) | (3 | ) | ||||
Income tax and social contribution | (13 | ) | (22 | ) | ||||
During this year, the portion of R$ 33 (2005 — R$ 35) was transferred to retained earnings as a result of realization of the revaluation reserve, as shown in the changes in stockholders’ equity. The tax effect on the realization was R$ 10 (2005 — R$ 10). | ||
(b) | Acquisitions of property, plant and equipment | |
COPESUL invested in 2006 the amount of R$ 126 (R$ 171 in 2005). The main investments are R$ 38 — replacement equipment to be used during scheduled programmed maintenance ; R$ 19 - operational reliability, technological updating, and profitability increase projects to be |
F-160
implemented during the PGM that is forecasted to take place in 2008; R$ 18 — industrial automation programs; R$ 10 — replacement of coils and revamping (technological updating) the furnaces; R$ 5 — building of Butadiene Unit, and R$ 7 — conversion of the MTBE unit to ETBE. The remaining balance of R$ 29 refers to various investment projects. | ||
13 | Deferred charges | |
Deferred charges comprises: |
2006 | 2005 | |||||||||||||||||||
Annual | ||||||||||||||||||||
amortization | Restated | Accumulated | ||||||||||||||||||
rates - % | cost | amortization | Net | Net | ||||||||||||||||
Development programs and other | 20 | 18 | (8 | ) | 10 | 11 | ||||||||||||||
18 | (8 | ) | 10 | 11 | ||||||||||||||||
14 | Suppliers — Third parties |
2006 | 2005 | |||||||
Local | 30 | 27 | ||||||
Foreign | 260 | 127 | ||||||
290 | 154 | |||||||
F-161
15 | Loans and financing | |
(a) | Liabilities for loans and financing are as follows: |
Annual | ||||||||||||||||
Index | charges (%)* | 2006 | 2005 | |||||||||||||
Foreign currency | ||||||||||||||||
Financing (investments) (US$2 million) | Currency basket and US$ | 8.70 | 5 | |||||||||||||
Financing and loans (US$3 million; 2004- US$18 million) | Currency Basket | 9.76 | 6 | 44 | ||||||||||||
11 | 44 | |||||||||||||||
Local currency | ||||||||||||||||
Loans and financing | TJLP | 11.67 | 40 | 49 | ||||||||||||
Hot money, “Compror”, NCE, and BACEN Resolution no. 2770 | CDI | 13.42 | 23 | 172 | ||||||||||||
Financing (investments) | TJLP | 10.00 | 83 | 50 | ||||||||||||
Copesul Receivables Securitization Fund | CDI | 57 | ||||||||||||||
146 | 328 | |||||||||||||||
157 | 372 | |||||||||||||||
Current liabilities | (50 | ) | (288 | ) | ||||||||||||
Long-term liabilities | 107 | 84 | ||||||||||||||
* | weighted average rate that reflects charges on loans. |
NCE — Export Credit Note CDI — Interbank Deposit Certificate TJLP — Long-Term Interest Rate | ||
In April 2004, Copesul International Trading, Inc. (CITI) established the “Euro Medium-term Note Program” guaranteed by COPESUL — Companhia Petroquímica do Sul for the issuance of US$ 125 million Notes (“Series I Notes”) in the foreign market (United States of America and Canada). In the last quarter of 2004, the CITI issued 100 million Notes, corresponding to US$ 100,000 thousand, which are held in treasury, without cost to the Company. In December 2006, all the contractual commitments were closed. |
F-162
(b) | The changes in loans and financing were as follows: |
Current | Long-term | Total | |||||||
At December 31, 2003 | 592 | 383 | 975 | ||||||
Additions | 311 | 121 | 432 | ||||||
Interest | 55 | 3 | 58 | ||||||
Transfer to short-term | 195 | (195 | ) | ||||||
Amortization | (950 | ) | (174 | ) | (1,124 | ) | |||
Monetary and exchange variation | 10 | 5 | 15 | ||||||
At December 31, 2004 | 213 | 143 | 356 | ||||||
Additions | 1,012 | 77 | 1,089 | ||||||
Interest | 39 | 6 | 45 | ||||||
Transfer to short-term | 64 | (64 | ) | ||||||
Amortization | (1,037 | ) | (79 | ) | (1,116 | ) | |||
Monetary and exchange variation | (3 | ) | 1 | (2 | ) | ||||
At December 31, 2005 | 288 | 84 | 372 | ||||||
Current | Long-term | Total | ||||||||||
At December 31, 2004 | 213 | 143 | 356 | |||||||||
Additions | 1,012 | 77 | 1,089 | |||||||||
Interest | 39 | 6 | 45 | |||||||||
Transfer to short-term | 64 | (64 | ) | |||||||||
Amortization | (1,037 | ) | (79 | ) | (1,116 | ) | ||||||
Monetary and exchange variation | (3 | ) | 1 | (2 | ) | |||||||
At December 31, 2005 | 288 | 84 | 372 | |||||||||
Additions | 604 | 47 | 651 | |||||||||
Interest | 28 | 28 | ||||||||||
Transfer to short-term | 25 | (25 | ) | |||||||||
Amortization | (893 | ) | (893 | ) | ||||||||
Monetary and exchange variation | (2 | ) | 1 | (1 | ) | |||||||
At December 31, 2006 | 50 | 107 | 157 | |||||||||
During 2006, the subsidiary CITI settled some loans for working capital and the additions and amortizations the Company made refer mostly to Export Credit Note operations. | ||
During the third quarter of 2006, the Company entered into a credit line agreement with BNDES - Banco Nacional de Desenvolvimento Social in the amount of R$ 338 for future investment in order to improve its manufacturing facilities. As of December 31, 2006 the Company had used R$ 43 of this credit line. | ||
(c) | Long-term financing falls due as follows: |
Year | 2005 | 2004 | ||
2006 | 132 | |||
2007 | 22 | 5 | ||
2008 | 23 | 4 | ||
2009 | 20 | 2 | ||
2010 | 13 | |||
2011 | 6 | |||
84 | 143 | |||
Year | 2006 | 2005 | ||||||
2007 | 22 | |||||||
2008 | 33 | 23 | ||||||
2009 | 30 | 20 | ||||||
2010 | 22 | 13 | ||||||
2011 | 14 | 6 | ||||||
2012 | 8 | |||||||
107 | 84 | |||||||
Guarantees | ||
The | ||
Local currency financing |
F-163
Foreign currencyTable of Contents
Loans and financing—mainly R$ 35 from ABN Amro Bank N.V.
Local currency
Loans and financing—financings in the amount of R$ 49 (2004—R$ 19) from program FINAME, obtained through BRDE with annual charges of 11.25% to 12.50% or TJLP plus 4.5% to 5.5% and maturity date in October 2010. In 2004 the amounts of R$ 18 was obtained from a FINEM program.
COPESUL—Companhia Petroquímica do Sul
Statements
at December 31, 20052006 and 2004
2005
All amounts in millions of reais, unless otherwise indicated
NCE—The amount of R$ 123 is related to export advances, denominated in Reais, received against export commitments and obtained from commercial banks with a commitment that the products will be exported mainly from Bank Boston and Banco do Brasil S.A. with annual charges of 102.5% to 103% of CDI and maturity date in January 2006 to December 2006.
Resolution 2.770—The amount of R$ 49 was obtained mainly from ING Bank N.V. is indexed to changes in the US dollar and with respect to them were entered cross-currency swaps changing the interest rate (US dollar plus 4% p.a.) to rated based on the CDI rate (102.5% to 103% of CDI).
Financing investment
The |
The NCE operations in the amount of R$ | ||
16 | Export drafts | |
The changes in advances contracted with financial institutions relating to |
Asset | Liability | |||||||||||||||
Exports already | ||||||||||||||||
invoiced and | ||||||||||||||||
provided as | ||||||||||||||||
source of | ||||||||||||||||
repayment of | ||||||||||||||||
export drafts | Short-term | Long-term | Total | |||||||||||||
At December 31, 2004 | 170 | 21 | 103 | 294 | ||||||||||||
Additions | 190 | 190 | ||||||||||||||
Interest | 17 | 17 | ||||||||||||||
New export receivables | 209 | (209 | ) | |||||||||||||
Amortization | (339 | ) | (19 | ) | (358 | ) | ||||||||||
Monetary and exchange variation | (22 | ) | 1 | (12 | ) | (33 | ) | |||||||||
At December 31, 2005 | 18 | 1 | 91 | 110 | ||||||||||||
Additions | 531 | 138 | 669 | |||||||||||||
Interest | 13 | 13 | ||||||||||||||
Transfer to short-term | 35 | (35 | ) | |||||||||||||
New export receivables | 526 | (526 | ) | |||||||||||||
Amortization | (545 | ) | (12 | ) | (49 | ) | (606 | ) | ||||||||
Monetary and exchange variation | 2 | (3 | ) | (6 | ) | (7 | ) | |||||||||
At December 31, 2006 | 1 | 39 | 139 | 179 | ||||||||||||
The amortization recorded in long-term liabilities in 2006 refers to the anticipated settlement of |
F-164
Local currency financing via FINEM and FINAME programs is guaranteed by Plant 2 and by the financed machinery and equipment, respectively.
The financing obtained with the financial institution Banco Nacional de Desenvolvimento Econômico e Social—BNDES amounting R$ 50 and signed on September 9, 2005 for installationTable of a pyrolysis furnace has personal guarantee through a surety bond granted by Banco Regional de Desenvolvimento do Extremo Sul—BRDE.Contents
The Company is the guarantor of working capital loans of its subsidiary amounting to R$ 35 (2004—R$ 134).
Operations with NCE, Compror and related to Resolution 2770 amounting R$ 172 are guaranteed by promissory notes and NCE’s issued by Copesul.
Statements 2005 F-165COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicatedExport drafts to be invoiced bear exchange variation plus average interest of 7.11% p.a. (11.75% in 2005), which are recorded in the statement of income as financial expenses. Long-term export drafts will fall due as shown below. 2006 2005 2007 91 2009 75 2010 64 139 91 17 Taxes and charges payable 2006 2005 ICMS payable 22 26 ICMS — tax replacement 3 5 CIDE on fuels payable 16 6 IRRF on interest on capital payable 3 3 Other retentions payable 1 2 45 42
16 Export draftsTable of Contents
The changes in advances contracted with financial institutions relating to exports to be invoiced are as follows:
Asset | Liability | |||||||||||
Exports already invoiced and provided as source of repayment of export drafts | Short-term | Long-term | Total | |||||||||
At December 31, 2003 | 14 | 121 | 500 | 635 | ||||||||
Additions | 226 | 114 | 340 | |||||||||
Interest | 43 | 43 | ||||||||||
Transfer to short-term | 371 | (371 | ) | |||||||||
New export receivables | 677 | (677 | ) | |||||||||
Amortization | (507 | ) | (48 | ) | (133 | ) | (688 | ) | ||||
Monetary and exchange variation | (14 | ) | (15 | ) | (7 | ) | (36 | ) | ||||
At December 31, 2004 | 170 | 21 | 103 | 294 | ||||||||
Additions | 190 | 190 | ||||||||||
Interest | 17 | 17 | ||||||||||
New export receivables | 209 | (209 | ) | |||||||||
Amortization | (339 | ) | (19 | ) | (358 | ) | ||||||
Monetary and exchange variation | (22 | ) | 1 | (12 | ) | (33 | ) | |||||
At December 31, 2005 | 18 | 1 | 91 | 110 | ||||||||
Export drafts to be invoiced bear exchange variation plus average interest of 11.75% p.a. (2004—9.97%), which are recorded in the statement of income as financial expenses.
Long-term export drafts liabilities will fall due in 2007.
In December 2005 the Company performed an export draft operation amounting to US$ 5 million thousand with the purpose of locking the U.S. dollar exchange rate, corresponding to R$ 12 and maturing in January 2006. The operation is presented at its net realization value in the financial statements.
17 Provision for programmed maintenance
This provision represents the estimated costs of planned scheduled stoppages, particularly the general stoppage that occurs every six years. The stoppage of Plant 1 occurred in the first half of 2001 and the next one should be in 2007. The stop of plant 2 happened in November of this year and the next one is planned to November 2011.
Statements 2005 At December 31,2003 Appropriation Transfers to current Use At December 31,2004 Appropriation Transfers to current Use At December 31,2005 F-166COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicatedThe changes in the provision for programmed maintenance are as follows: Current Long-term Total 10 53 63 19 34 53 40 (40 ) (14 ) (3 ) (17 ) 55 44 99 7 19 26 11 (11 ) (57 ) (57 ) 16 52 68 In accordance with the provisions contained in Deliberation CVM 489, dated of October 3, 2005, that approve and made obligatory the Accounting Pronouncement and Standard—NPC 22 about Provisions, Liabilities and Passive and Active Contingencies, issued by the Brazilian Institute of Independent Auditors—IBRACON, “…no provision is recognized for costs that need to be incurred to operate in the future. The only liabilities recognized in the balance sheet of an entity are those at existence at the balance sheet date”.As a result, in the financial statements for periods as from January 1, 2006 and prospectively the Company expects to no longer record a provision for future programmed maintenance but to capitalize the amounts expended on the stoppages and to amortize them through the period to the next planned stoppage. The effect of such change in accounting police should be recorded as an adjustment to retained earnings as of January 1, 2006 not restating prior periods.18 Related partiesTransactions with related parties mainly include commercial transactions and intercompany loans and are classified in the balance sheet according to the applicable legislation and maturity dates.Loans receivable from related parties were granted by the Company as follows:18 Income tax and social contribution Financial charges
Income tax and social contribution are calculated based on official rates. Their composition as of December 31, 2006 and 2005 is as follows:(a) Maturities
Composition of deferred income tax and social contribution 2006 2005 Income Social Income Social Calculation basis for deferred income tax and social contribution Tax Contribution Tax Contribution Provision for administrative, civil and labor contingencies 29 29 7 8 Provision for fiscal contingencies — IR and CIDE on services abroad 5 5 4 4 Provision for contingencies — pension plan 9 9 4 4 Exchange variation — deferred (26 ) (26 ) Provision for programmed maintenance 68 68 Other provisions 8 8 19 19 Copesul International Trading tax loss 2 2 Accelerated depreciation Law 11051/05 (15 ) Accelerated depreciation incentive (4 ) (7 ) Deferred taxes calculation basis 21 10 97 105 Deferred income tax (25%) 5 24 Deferred social contribution (9%) 1 9 Deferred total taxes 5 1 24 9 Short-term 2 1 4 1 Long-term 11 4 22 8 13 5 26 9 Short-term (1 ) Long-term (8 ) (4 ) (1 ) (8 ) (4 ) (2 ) 5 1 24 9 Changes in deferred taxes Recognized in income (2 ) (2 ) (7 ) (3 ) Recognized in stockholders’ equity (17 ) (6 ) (19 ) (8 ) (7 ) (3 ) LANTANA Trading Co. Ltd. (2004—125%Deferred income tax and social contribution assets and liabilities arose from temporary differences and are recognized in accounting terms taking into consideration the probable realization of CDI)(2004—5/10 to 7/8/2005)these taxes based on forecasts of future results prepared with basis on internal assumptions and on future economic scenarios that can, however, may change.
The criterion used to define the interest rate for these loans is the opportunity cost
The Company has given guarantees to financial institutions in relation to trade account receivables with related parties transferred to such financial institutions under “vendor” transactions, as follows:
2005 | 2004 | |||
Braskem S.A. | 469 | 573 | ||
Ipiranga Petroquímica S.A. | 244 | |||
Innova S.A. | 2 | |||
469 | 819 | |||
Statements 2005 Braskem S.A. (OPP S.A up to 6/22/2003) Ipiranga Petroquímica S.A. Refinaria Alberto Pasqualini—REFAP S.A. Petróleo Brasileiro S.A.— PETROBRAS Petrobras Distribuidora S.A. CPN—Incorporated Limited. Natal Trading Ltd. Lantana Trading Co. Ltd. Current Long-term Corporate income tax and social contribution Deferred income tax on accelerated depreciation F-167 Income before income tax and social contribution, net of employees and management profit sharing and before reversal of interest on own capital Social Contribution on Net Income (CSLL) Social Contribution (9%) Permanent additions Realization of revaluation reserve—difference In IPC/BTNF indices Foreign profits (not taxed/taxed at different rate) Amortization and depreciation—Law No.8200/91 Other Permanent exclusions Equity in results Other Social contribution expense Income tax (IR) Income tax (25%) Permanent additions Reversal of unpaid balances Foreign profits (not taxed/taxed at different rate) Other Permanent exclusions Equity in results Other Income tax expense Total income tax and social contribution in the income statementCOPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicatedThe following table presents balances and transactions with related parties as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003: Assets Liabilities Financial expenses Financial income Sales Purchases 2005 2004 2005 2004 2005 2004 2003 2005 2004 2003 2005 2004 2003 2005 2004 2003 20 14 1 2 8 113 2,573 2,349 1,772 66 100 102 18 15 1 2 1 2 7 25 1,711 1,713 1,216 36 96 79 11 51 902 388 556 1,104 1,781 1,422 4 14 16 8 19 17 33 36 6 1 146 8 52 (17 ) 49 175 2 2 1 12 73 122 4,372 4,112 3,004 2,116 2,384 2,176 (49 ) (29 ) (2 ) (2 ) 146 COPESUL—Companhia Petroquímica do SulNotes to the Consolidated Financial Statements—(Continued)at December 31, 2005 and 2004All amounts in millions of reais, unless otherwise indicated19 Income tax and social contribution(a)Composition of taxes payable Current Long-term 2005 2004 2005 2004 8 32 1 1 1 3 9 33 1 3 (b) Estimated realization period The values of the assets, net of the deferred tax liabilities, have the following expectations of realization: Net credits 2006 2005 2006 6 2007 1 23 2010 (1 ) (1 ) 2011 (4 ) 2015 and 2016 10 5 6 33 Since the taxable basis of the income tax and social contribution on the net income arise from not only the profit that can be generated, but also the existence of non-taxable income, non-deductible expenses, fiscal incentives, and other variables, there is not an immediate correlation between the Company’s net income and the result of income tax and social contribution. Therefore, the expectation of using the tax credits should not be taken as a single indicator of the Company’s future results. (c) Reconciliation of income tax and social contribution 2006 2005 2004 Income before income tax and social contribution 822 722 722 Social contribution (9%) (74 ) (65 ) (65 ) Permanent additions Realization of revaluation reserve — difference in IPC/BTNF (1 ) (2 ) (2 ) Foreign profits (2 ) (7 ) Amortization and depreciation — Law 8200/91 (1 ) (1 ) (1 ) Other (1 ) 1 Permanent exclusions Positive equity in results 2 7 PDI fiscal incentive 1 Other 2 5 Social contribution expense (carryforward) (74 ) (63 ) (67 ) 2005 2004 2003 698 701 127 (63 ) (63 ) (11 ) (2 ) (2 ) (2 ) (7 ) (4 ) (1 ) (1 ) (1 ) (1 ) 7 4 3 (63 ) (67 ) (14 ) (175 ) (175 ) (32 ) (1 ) (20 ) (12 ) (3 ) (1 ) (1 ) 20 12 11 1 1 (168 ) (175 ) (32 ) (231 ) (242 ) (46 )
The Company elected to pay income tax and social contribution based on annual taxable income, with prepayment based on the quarterly trial balances.
COPESUL—Table of Contents
Statements
at December 31, 20052006 and 2004
2005
All amounts in millions of reais, unless otherwise indicated
2006 | 2005 | 2004 | ||||||||||
Social contribution expense (brought forward) | (74 | ) | (63 | ) | (67 | ) | ||||||
Income tax (IR) | ||||||||||||
Income tax (25%) | (205 | ) | (181 | ) | (181 | ) | ||||||
Permanent additions | ||||||||||||
Negative result of equity method | (1 | ) | ||||||||||
Foreign profits | (4 | ) | (20 | ) | ||||||||
Other | (4 | ) | (3 | ) | ||||||||
Permanent exclusions | ||||||||||||
Equity in results | 4 | 20 | ||||||||||
Fiscal Incentives | 7 | |||||||||||
Other | 6 | 17 | 6 | |||||||||
Income tax expense | (196 | ) | (168 | ) | (175 | ) | ||||||
Total income tax and social contribution in the income statement | (270 | ) | (231 | ) | (242 | ) | ||||||
The Company elected to pay income tax and social contribution based on annual taxable income, with advance payments made based on quarterly interim trial balances. | ||
(d) | Fiscal incentives | |
The Company exercised its rights to fiscal incentives of PDTI — Program for Technological and Industrial Development based on Law No. 9532/97 of Decree No. 949/93 and on Ordinance No. 130/02 of the Ministry of Science and Technology (MCT) up to the year 2005. Beginning in 2006, the Company migrated to the incentives of Law 11196/05 of Decree No. 5798/06 and of MCT Ordinance No. 782/06 with incentive of R$ 3 in the present year. Fiscal incentives in audiovisual, child and adolescent fund, and operations of a cultural and artistic nature were also used during 2006 as well as the PAT — Program for the Worker’s Nutrition, reaching a total of R$ 7. These incentives were recorded directly as reductions of the IRPJ and CSLL accounts in the statement of income. |
F-168
20 Provision for contingenciesTable of Contents
19 | Stockholders’ equity | |
(a) | Capital | |
The proposal of the Board of Directors for the 1-to-100 reverse split of the Company’s shares was approved at the Extraordinary General Meeting of stockholders No. 107 held on January 20, 2005. This decreased the number of shares of the Company’s capital from 15,021,716,784 to 150,217,167 common shares, with no par value. The Company’s stockholder composition at December 31, 2006 and 2005 is shown below. |
Stockholders | Number of shares | (%) | ||||||
Ipiranga Group | 44,255,077 | 29.46 | ||||||
Braskem Group / Odebrecht | 44,255,077 | 29.46 | ||||||
Petrobras Química S.A. — PETROQUISA | 23,482,008 | 15.63 | ||||||
Other | 38,225,005 | 25.45 | ||||||
Total | 150,217,167 | 100.00 | ||||||
On March 6, 2006, as approved at the Ordinary/Extraordinary General Meeting, the Company carried out a capital increase in the amount of R$ 100 by the capitalization of fiscal incentive reserves of FUNDOPEM (2005 — R$ 50 from capitalization of legal reserve), without changing the number of original shares. | ||
The Company is authorized to increase capital up to the limit of R$ 1,100, without changing the by-laws, assuring preference to existing stockholders on subscription. | ||
(b) | Capital reserves |
2006 | 2005 | |||||||
FUNDOPEM | 284 | 334 | ||||||
Fiscal incentives — Program of Technological and Industrial Development — PDTI | 12 | 7 | ||||||
296 | 341 | |||||||
F-169
In September 1998, the Company started to set up a capital reserve based on the financial incentive of the Company Operation Fund (FUNDOPEM) — RS, according to Law No. 6427 of October 18, 1972 and amendments. The incentive was granted to the Company through Decree No. 38502, of May 11, 1998, and the benefit obtained is 50% of ICMS due for a maximum period of 8 years, as from September 1998 to August 2006. The amount accumulated since the beginning of the benefit, recorded as a capital reserve in stockholders’ equity, is R$ 610 (2005 — R$ 561), of which R$ 326 was used to increase capital, as approved at the General Meetings in 2006, 2004, 2003, 2001, and 2000. | ||
Beginning in 2003, the Company obtained the benefit of fiscal incentives of PDTI — Program for Technological and Industrial Development based on Law No. 9532/97 of Decree No. 949/93 and on Ordinance No. 130/02 of the Ministry of Science and Technology. There is a 60-month period in which these benefits must be used, beginning from March 2002 and therefore terminating in February 2007. During 2006, the Company recorded the benefit of this fiscal incentive in the amount of R$ 6 (2005 - - R$ 4) directly on the stockholders’ equity, as mentioned in Note 18 (d). | ||
(c) | Revaluation reserve | |
The realization of the revaluation reserve, based on depreciation, write-offs or disposals of the corresponding revalued assets, is transferred to retained earnings, also considering the tax effects of the provisions constituted. | ||
The tax charges levied on the revaluation reserve are recognized as this reserve is realized since they are previous to the publication of the CVM Deliberation No. 183/95. The tax charges levied on these reserves total R$ 13 (2005 — R$ 22), as shown in Note 12. | ||
(d) | Distribution of net income | |
According to the by-laws, net income for the year, adjusted under the terms of Law 6404/76, is to be appropriated as follows: (i) 5% to the legal reserve, not to exceed 20% of capital, and (ii) mandatory non-cumulative dividends, equivalent to 6% of capital, up to the limit of 25% of adjusted net income. Dividends will only be distributed when there is available income. The appropriation of the remaining net income will be determined by the General Meeting. |
F-170
(i) | The mandatory dividend, calculated according to corporate legislation and the by-laws, is as follows: |
2006 | 2005 | |||||||
Capital at the end of the year | 850 | 750 | ||||||
Dividend based on 6% of capital | 51 | 45 | ||||||
Net income for the year | 615 | 566 | ||||||
Transfer to legal reserve (5% of net income) | (31 | ) | (28 | ) | ||||
Net income basis for calculation of dividend | 584 | 538 | ||||||
Mandatory dividends (25% of adjusted net income) | 146 | 135 | ||||||
(ii) | Dividends proposed by management, subject to approval by the General Meeting, are as follows: |
2006 | 2005 | |||||||
Retained earnings | ||||||||
Prior year adjustment | 38 | |||||||
Realization of revaluation reserve | 34 | 35 | ||||||
Income tax and social contribution on realized revaluation reserve | (8 | ) | (11 | ) | ||||
Net income for the year | 615 | 567 | ||||||
Profit retained | ||||||||
Legal reserve | (32 | ) | (28 | ) | ||||
Profit distribution | ||||||||
Interest on capital paid and credited | (90 | ) | (99 | ) | ||||
Prepaid dividends | (372 | ) | (396 | ) | ||||
Proposed dividends | 185 | 68 | ||||||
(iii) | For the year ended December 31, 2006, the Company paid the amount of R$ 90 (2005 — R$ 99) as interest on capital calculated based on the variation of the Long-Term Interest Rate - TJLP and recorded according to Law No. 9249/95, including the amount of the mandatory minimum dividend, of which R$ 70 (2005 — R$ 78) had been paid by the closing of the year. |
F-171
The Extraordinary General Meeting No. 115 held on December 1, 2006 approved the complementary crediti of interest on capital for those stockholders of record on December 21, 2006 in the amount of R$ 19 at the ratio of R$ 0.129826274 per share, with retention of 15% withholding income tax of R$ 3. In 2005 these amounts were R$ 25 at the ratio of R$ 0.165087656 approved at the Extraordinary General Meeting No. 111 on November 28, 2005 and R$ 3 of withholding income tax. | ||
The income tax and social contribution benefit arising from the deductibility of this interest, recorded in the results for the year ended December 31, 2006, is R$ 30 (2005 — R$ 34). In compliance with tax legislation, the amount of interest on capital was recorded as financial expense. However, for the purposes of these financial statements, the interest on capital is presented as a distribution of net income in the year as provided for in CVM Deliberation No. 207/96. | ||
(iv) | In addition, during the year ended December 31, 2006, the Company prepaid dividends in the amount of R$ 372 (2005 — R$ 396), approved by the Extraordinary General Meetings held on May 22, 2006, August 23, 2006, and December 1, 2006. Payments were made on June 9, September 15, and December 15, 2006, respectively. | |
(e) | Prior year adjustments | |
The adjustment can be summarized as shown below. |
2006 | ||||
Provision for programmed maintenance (i) | 66 | |||
Taxes (ii) | (28 | ) | ||
Prior year adjustment — Total | 38 | |||
F-172
(i) | Up to December 31, 2005, the Provision for Programmed maintenance was set up considering the estimated costs of programmed maintenance, especially the general stoppage that occurs every six years. The stoppage of Plant 1 occurred in the first half of 2001 and the next one should be in 2008. The stoppage of Plant 2 took place in November 2005 and the next one is planned for November 2011. In accordance with the provisions contained in CVM Deliberation no. 489, dated October 3, 2005, that approved and made mandatory for listed companies the Accounting Pronouncement and Standard — NPC No. 22 (“Provisions, Liabilities and Contingent Assets and Liabilities”), issued by the Brazilian Institute of Independent Auditors — IBRACON which establishes that “...no provision is recognized for costs that need to be incurred to operate in the future. The only liabilities recognized in the balance sheet of an entity are those that exist at the balance sheet date.” Thus, the effects of the adoption of the procedures described above were recognized as a prior year adjustment due to a change in accounting practice, on January 1, 2006, charged directly to retained earnings. The effects of adopting this new accounting practice, net of the tax effects, are as follows: |
2006 | ||||
Reversal of the provision set up on December 31, 2005, net of the tax effects | 45 | |||
Capitalization of the expenses incurred with previous stoppages in property, plant and equipment, net of the tax effects | 41 | |||
Depreciation accumulated up to December 31, 2005 on the expenses incurred with previous stoppages in property, plant and equipment that were capitalized | (20 | ) | ||
66 | ||||
(ii) | On November 2001, COPESUL filed a Restitution Request of the Tax on Net Income — ILL with the Brazilian Revenue and Customs Secretariat seeking a compensation for the ILL paid from 1990 to 1992 as this tax has been considered unconstitutional according to the Federal Senate Resolution No. 82 of November 22, 1996. See Note 9.(a). | |
In December 2002, the Company recognized this credit because the legal advisors considered this a legal right. When originally recorded the credit the Company has not recognized the corresponding IRPJ and CSLL payable on the monetary correction of the credit. During 2006 the Company recognized the amount of R$ 28 as a tax payable. The monetary variations recorded in 2002 represents taxable income and during 2006 the Company recorded the corresponding tax payable against retained earnings as a correction of an error.. |
F-173
20 | Financial result | |
The net financial result is as follows: |
Consolidated | ||||||||
2006 | 2005 | |||||||
Financial income | ||||||||
Earnings on financial investments | 23 | 16 | ||||||
Revenue with derivatives of Fundo de Investimento Financeiro Multimercado Copesul | 315 | 113 | ||||||
Monetary variations on assets | 4 | 4 | ||||||
Exchange variations on assets | (11 | ) | (22 | ) | ||||
Interest on loans granted and other assets | 10 | 25 | ||||||
PASEP adjustment | 30 | |||||||
Other financial income | 1 | 1 | ||||||
372 | 137 | |||||||
Financial expenses | ||||||||
Interest and charges on loans and financing | (40 | ) | (62 | ) | ||||
Expense with derivatives of Fundo de Investimento Financeiro Multimercado Copesul | (284 | ) | (85 | ) | ||||
Monetary variations on liabilities | (1 | ) | (2 | ) | ||||
Exchange variations on liabilities | 9 | 33 | ||||||
Interest on capital | (90 | ) | (99 | ) | ||||
Other financial expenses | (57 | ) | (64 | ) | ||||
(463 | ) | (279 | ) | |||||
Net financial result | (91 | ) | (142 | ) | ||||
21 | Other operating income (expenses), net |
2006 | 2005 | |||||||
Operating income | ||||||||
Recovery of PIS, COFINS and ICMS | 8 | 11 | ||||||
Recovery of PASEP (Note 8 (h)) | 14 | |||||||
Recovery of IPI (a) | 16 | |||||||
Adjustment to the accrual for sale contract | 16 | |||||||
Other | 8 | 3 | ||||||
46 | 30 | |||||||
Operating expenses | �� | |||||||
Taxes, charges and contributions | (2 | ) | (1 | ) | ||||
Provisions for administrative, civil and labor contingencies | (22 | ) | (3 | ) | ||||
Actuarial liability — PETROS | (2 | ) | (2 | ) | ||||
(26 | ) | (6 | ) | |||||
Other operating income, net | 20 | 24 | ||||||
F-174
(a) | During 2005 the Company recognized as operating income a credit in the amount of R$ 16. The credit derives from the recalculation of presumed IPI credit on petrochemical naphtha acquisitions made from April 2002 to January 2004 according to provisions in Law No. 9.363/96. Such credit was used to offset federal taxes (IRPJ and CSLL) in that year. The corresponding taxes on the recognized credit were paid in order to avoid future challenges by the tax authorities. | |
22 | Financial instruments | |
The Company evaluated its assets and liabilities in relation to market and/or realizable values through available information and valuation methodologies established by management. However, both the interpretation of market data and the selection of valuation methods require considerable judgment and reasonable estimates to produce the appropriate realizable value. Consequently, the estimates presented do not necessarily indicate the amounts that can be realized in the current market. The use of different market assumptions and/or methodologies for estimates can have a significant effect on estimated realizable values. | ||
Valuation of the financial instruments | ||
The Company’s main asset and liability financial instruments at December 31, 2006, as well as the criteria for their valuation are described below. | ||
(a) | Cash and banks, financial investments, accounts receivable, other current assets and accounts payable | |
The amounts recorded are similar to their realizable values. | ||
(b) | Investments | |
The investments are mainly in a privately held subsidiary, recorded on the equity method of accounting, in which the Company has a strategic interest. Considerations of the market value of shares held are not applicable. | ||
(c) | Financing | |
These are subject to interest at normal market rates, as mentioned in Note 15 (a). The estimated market value was calculated based on the present value of the future disbursement of cash, using interest rates that are available to the Company for the issuance of debts with similar maturities and terms. |
F-175
(d) | Interest rate risk | |
This risk derives from the possibility of the Company incurring losses due to fluctuations in the interest rates that would increase the financial expenses related to loans and financings from the market. The Company made contracts of derivatives to hedge against the risk in some operations and it is also continually monitoring the market interest rate with the objective of evaluating the need of contracting new operations in order to protect itself from the risk of the volatility of these rates. | ||
(e) | Exchange rate risk | |
This risk derives from the possibility of the Company incurring losses due to fluctuations in the exchange rates that would reduce the nominal values billed or increase the amounts owed to the market. | ||
Since part of the Company’s revenues (around 10% — unaudited) is in US dollars, the main strategy is that this serves as a natural hedge for its liability operations recorded in foreign currency. | ||
At December 31, 2006, the Company had assets and liabilities denominated in US dollars in the amount of US$ 16 thousand and US$ 88 thousand, respectively, and it had no instrument to protect this exposure on that date. | ||
(f) | Derivatives | |
The net foreign exchange exposure is as follows: |
2006 | 2005 | |||||||
Financing and export drafts contracted originally in US$ | (189 | ) | (136 | ) | ||||
Assets contracted originally in US$ | 34 | 2 | ||||||
Derivative instruments contracted originally in US$ | 11 | |||||||
Net exposure | (144 | ) | (134 | ) | ||||
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2006 | 2005 | |||||||||||||||
Book value | Market value | Book value | Market value | |||||||||||||
Cash and banks | 200 | 200 | 113 | 113 | ||||||||||||
Swap receivables | 64 | 64 | 53 | 53 | ||||||||||||
Marketable securities | 39 | 39 | 14 | 14 | ||||||||||||
Locked exchange contract advance receivable | 2 | 2 | ||||||||||||||
Loans to third parties | 2 | 2 | 6 | 6 | ||||||||||||
Financial institutions | (156 | ) | (156 | ) | (372 | ) | (366 | ) | ||||||||
Export drafts billed and to be invoiced | (180 | ) | (178 | ) | (92 | ) | (92 | ) | ||||||||
Swaps and options payable | (23 | ) | (23 | ) | (5 | ) | (5 | ) | ||||||||
(52 | ) | (50 | ) | (283 | ) | (277 | ) | |||||||||
Cross-currency swap operations receiving US dollars and paying a fixed rate in reais were entered into in order to minimize the effect of the variations of the exchange rates on liabilities. The Company also opted to use time deposits indexed to the US dollar. | ||
At December 31, 2006, the Company had forward purchase of foreign exchange, not yet settled, related to operations for purchasing raw material in the amount of US$ 109 thousand (2005 — US$ 41 thousand) equivalent to R$ 232 thousand (2005 — R$ 95 thousand). | ||
As shown above, the book values of the financial instruments are recorded at values that approximate its estimated market value. | ||
23 | Insurance | |
The Company’s policy is to contract insurance at levels adequate for the risks involved with its operations. Considering the characteristics of its risks, management contracts insurance under the concept of maximum possible loss in a single event, and maintains coverage for operational risks, civil responsibilities and loss of profits. Also, the Company contracts transportation, group life, sundry risks and vehicle insurance. |
F-177
24 | Provision for contingencies | |
On the dates of the financial statements, the Company presented the following liabilities and the corresponding judicial deposits related to the contingencies: |
Provisions for | ||||||||||||||||
Judicial deposits | contingencies | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Tax contingencies (a) | 7 | 6 | 5 | 4 | ||||||||||||
Labor and social security contingencies (b) | 1 | 1 | 27 | 4 | ||||||||||||
Civil complaints (c) | 2 | 3 | ||||||||||||||
8 | 7 | 34 | 11 | |||||||||||||
The Company is a party to labor, civil, and tax claims as well as others in progress and is discussing these issues from both an administrative and judicial point of view and these are backed by judicial deposits when applicable. The provisions for the possible losses from these processes are estimated and updated by the administration based on the opinion of its legal external consultants. | ||
(a) | Tax contingencies | |
With respect to the Income Tax and Economic Domain Intervention Contribution (CIDE) on payment of technical assistance services, the Company has been judicially questioning the legality of charging these taxes since August 2002 and has made judicial deposits. The purpose of the process is to avoid double taxation with respect to the countries with which Brazil has tax treaties and provisions have been made in the same amounts as judicial deposits as shown in Note 10. | ||
(b) | Labor and social security contingencies | |
The Company has ongoing labor claims, mainly related to salary equivalence claims and overtime. A provision for these contingencies was |
F-178
Furthermore, the Company has made provision for labor losses related to suits filed by the Petrochemical Industry Labor Union of Triunfo concerning the rights claimed by the Company’s shift workers to receive overtime, claiming delays during transfer and change of shifts. A partial grant was given in trial court in deference to the workers claims to overtime. However in appellate court on December 11, 2006 an ordinary appeal was filed by the Company and the expectation is the total or at least partial reversal of the unfavorable decision in the 4th Regional Labor Court of Appeals. | ||
(c) | Civil contingencies | |
The main lawsuits are | ||
Possible losses | ||
The Company has suits of both a tax and civil nature involving risks of loss classified by the management as possible based on the evaluation of its legal advisors and for which no provisions have been set up. They are listed below. | ||
(a) | Tax losses | |
The Brazilian Revenue and Customs Secretariat (SRF) penalized the Company in 1999, establishing a tax assessment referring to IRPJ and CSLL for 1994, related to the |
(b) | Civil losses | |
A civil lawsuit is still |
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Remote losses | ||
(a) | Tax losses | |
(i) | Federal tax lawsuits related to the effects of Law No. 8200/91 on the social contribution on net income and on corporate income tax, for which provisions were not recorded, considering the opinion of management and the legal advisors that there are good chances of a favorable outcome. | |
(ii) | In September 2003, the Company was assessed by the Federal Tax Auditors |
Based on the opinion of its legal advisors and external tax consultants, the Company decided not to |
In view of the contents of an infraction notice, in a recent decision the Brazilian Federal Supreme |
25 | Actuarial liability — PETROS |
21 Shareholders’ equity
(a) |
The proposal of the Board of Directors for the 1-to-100 reverse split of the Company’s shares was approved at the Extraordinary General Meeting of shareholders No. 107 held on January 20, 2005. This resolution decreased the number of shares of the Company’s capital from 15,021,716,784 to 150,217,167 common shares, with no par value.
The Company is authorized to increase capital up to the limit of R$ 1,100, without changing the by-laws, assuring preference to existing shareholders on subscription.
COPESUL—Companhia Petroquímica do Sul
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005 and 2004
All amounts in millions of reais, unless otherwise indicated
2005 | 2004 | |||
FUNDOPEM | 335 | 246 | ||
Fiscal incentives—Program for Technological and Industrial Development | 6 | 2 | ||
341 | 248 | |||
In September 1998, the Company started to set up a capital reserve based on the financial incentive of the Company Operation Fund (FUNDOPEM) for the State of Rio Grande do Sul, according to Law No. 6427 of October 18, 1972 and amendments. The incentive was granted to the Company through Decree 38502, of May 11, 1998, and the benefit obtained is 50% of ICMS due for the maximum period of 8 years, as from September 1998. The amount accumulated since the beginning of the benefit, recorded as a capital reserve in shareholders’ equity, is R$ 561 (2004—R$ 472), of which R$ 226 was used to increase capital, as approved at the General Shareholders Meetings in 2004, 2003, 2001 and 2000.
Since 2003, the fiscal incentive PDTI—Program for technological and Industrial Development was granted to the Company, ruled by Law 9532/97, Decree 949/93 and Order 130/02 of Ministry of Science and Technology. The benefit is over a 60 month period, as from March 2002, therefore, extended through February 2007.
According to the Company’s by-laws, net income for the year, adjusted under the terms of Law No. 6404/76, is to be appropriated as follows: (i) 5% to the legal reserve, not to exceed 20% of capital; and (ii) mandatory non-cumulative dividends, equivalent to 6% of capital, corresponding at least 25% of adjusted net income, in the terms of the law. Dividends will only be distributed when there is available income. The appropriation of the remaining net income will be determined at the General Shareholders Meeting.
2005 | 2004 | |||||
Capital at the end of the year | 750 | 700 | ||||
Dividend based on 6% of capital | 45 | 42 | ||||
Net income for the year | 567 | 547 | ||||
Transfer to legal reserve | (28 | ) | (27 | ) | ||
Base net income for calculation of dividend | 539 | 520 | ||||
Mandatory dividends (25% of adjusted net income) | 135 | 130 | ||||
COPESUL—Companhia Petroquímica do Sul
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005 and 2004
All amounts in millions of reais, unless otherwise indicated
2005 | 2004 | |||||
Retained earnings at the beginning of the year | ||||||
Realization of revaluation reserve | 35 | 35 | ||||
Income tax and social contribution on realized revaluation reserve | (11 | ) | (10 | ) | ||
Net income for the year | 567 | 547 | ||||
Profit retained | ||||||
Legal reserve | (28 | ) | (27 | ) | ||
Profit distribution | ||||||
Interest on own capital paid and credited | (99 | ) | (88 | ) | ||
Interim dividends | (396 | ) | (339 | ) | ||
Proposed dividends as of December 31 | 68 | 118 | ||||
22 Financial expenses, net
Financial income (expenses), net is summarized as follows:
2005 | 2004 | 2003 | |||||||
Income on financial investments | 44 | 9 | (137 | ) | |||||
Monetary variations on assets | 4 | 2 | (8 | ) | |||||
Exchange variations on assets | (22 | ) | (3 | ) | (82 | ) | |||
Interest on loans receivable | 25 | 82 | 200 | ||||||
Other financial income | 1 | 28 | 25 | ||||||
Interest and charges on loans and financing | (62 | ) | (102 | ) | (218 | ) | |||
Monetary variations on liabilities | (2 | ) | (4 | ) | (8 | ) | |||
Exchange variations on liabilities | 33 | 25 | 255 | ||||||
Interest on own capital (Note 21(f)) | (99 | ) | (88 | ) | (87 | ) | |||
Other financial expenses | (64 | ) | (112 | ) | (101 | ) | |||
Net total | (142 | ) | (163 | ) | (161 | ) | |||
COPESUL—Companhia Petroquímica do Sul
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005 and 2004
All amounts in millions of reais, unless otherwise indicated
23 Other operating income (expenses), net
2005 | 2004 | 2003 | |||||||
Operating income | |||||||||
Recovery of PIS, COFINS and ICMS | 11 | 48 | |||||||
Reversal of long-term contributions and taxes | 2 | 2 | |||||||
Adjustment to the accrual for sale contract | 16 | ||||||||
Other | 1 | 2 | |||||||
28 | 50 | 4 | |||||||
Operating expenses | |||||||||
Taxes, charges and contributions | (1 | ) | (5 | ) | (10 | ) | |||
Provisions for administrative, civil and labor contingencies | (3 | ) | (2 | ) | (1 | ) | |||
Actuarial liability—PETROS | (2 | ) | (1 | ) | (2 | ) | |||
(6 | ) | (8 | ) | (13 | ) | ||||
Other operating income (expenses), net | 22 | 42 | (9 | ) | |||||
24 Financial instruments
The book value and market value of the main financial instruments are as follows:
2005 | 2004 | |||||||||||
Book value | Market value | Book value | Market value | |||||||||
Cash and banks | 113 | 113 | 175 | 175 | ||||||||
Swap receivables | 53 | 53 | 1 | 1 | ||||||||
Marketable securities | 14 | 14 | 81 | 81 | ||||||||
Receivables from related parties | 146 | 146 | ||||||||||
Loans to third parties | 6 | 6 | 9 | 10 | ||||||||
Loans and financing | (372 | ) | (366 | ) | (356 | ) | (351 | ) | ||||
Export drafts to be invoiced | (92 | ) | (92 | ) | (124 | ) | (124 | ) | ||||
Swaps and options payable | (5 | ) | (5 | ) | (8 | ) | (8 | ) | ||||
(283 | ) | (277 | ) | (76 | ) | (70 | ) | |||||
In 2004, the Company had derivative operations with the purpose of hedging for its exposure to exchange rate fluctuations in view of the significant volume of pre-payment of export operations not yet settled.
25 Insurance
The Company’s policy is to contract insurance at levels adequate for the risks involved in its operations. Considering the characteristics of its risks, management contracts insurance under the concept of maximum possible loss in a single event, and maintains coverage for operational risks, civil responsibilities and loss of profits.
Also, the Company contracts transportation, group life, sundry risks and vehicle insurance.
COPESUL—Companhia Petroquímica do Sul
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005 and 2004
All amounts in millions of reais, unless otherwise indicated
26 PETROS—Fundação PETROBRAS de Seguridade Social
The Company and its employees contribute to |
According to the PETROS |
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(b) | In compliance with CVM Deliberation 371/2000, the |
2006 | 2005 | |||||||
Fair value of plan assets | 388 | 337 | ||||||
Present value of actuarial obligations | 406 | 357 | ||||||
Actuarial liability | (18 | ) | (20 | ) | ||||
Total net actuarial liability to be provided | (18 | ) | (20 | ) | ||||
Actuarial liability already provided | 9 | 7 | ||||||
Net actuarial liability — unprovided | (9 | ) | (13 | ) | ||||
According to CVM Deliberation 371 of December 13, 2000, item 84, in the |
2005 | 2004 | |||||
Fair value of plan assets | 338 | 270 | ||||
Present value of actuarial obligations | 357 | 301 | ||||
Actuarial liability | (19 | ) | (31 | ) | ||
Total net actuarial liability to be provided | (19 | ) | (31 | ) | ||
Actuarial liability recorded | 7 | 5 | ||||
Unrecorded net actuarial liability | (12 | ) | (26 | ) | ||
According to CVM Deliberation 371 of December 13, 2000, the Company started recognizing monthly, as from 2002, 1/60 of the unrecorded actuarial liability at December 31, 2001. Accordingly, the amount of R$ 2 was recorded in other operating expenses in 2005 (2004—R$ 2).
The main actuarial assumptions used in the determination of actuarial liabilities are presented below. Inflation was assumed to be 5% as of December 2005 (2004—5%):
|
The actuarial valuation at November 30, 2006 concluded that the Company needs to increase the future contributions in order to complement the benefits, but since it is within the limits defined by CVM Deliberation 371 and in accordance with accounting practices adopted in Brazil, the Company opted not to adjust the supplementary actuarial liability. | |||
| ||||
| ||||
| ||||
| ||||
|
F-181
2006 | 2005 | |||||||
Real discount rate | 6 | % | 6 | % | ||||
Expected return on the assets of the plan | 6 | % | 6 | % | ||||
Real salary growth | 2% up to 47 years of age and none after 48 years old | 2% up to 47 years of age and none after 48 years old | ||||||
Biometrics bases | ||||||||
Mortality for pension and charges (not disabled) | AT-2000 | AT-2000 | ||||||
Mortality for pension and charges (disabled) | Experience of C.A.P. (*) | Experience of C.A.P. (*) | ||||||
Disability | Álvaro Vindas (**) | Álvaro Vindas (**) | ||||||
Other charges | Experience of STEA (***) | Experience of STEA (***) |
| ||||
| ||||
Álvaro | ||||
| ||||
COPESUL—Companhia Petroquímica do Sul
Notes to the Consolidated Financial Statements—(Continued)
at December 31, 2005 and 2004
All amounts in millions of reais, unless otherwise indicated
In May 2003, the Administrative Council approved the Complementary Pension Plan called COPESULPREV, a closed defined contribution plan. This plan aims to provide benefits to employees not included in the old PETROS plan, which is now closed to new members. Plan management will be carried out through Fundação PETROBRAS de Seguridade Social — PETROS, in an independent manner, not linked to any other pension plan managed by that entity, in compliance with Complementary Law | ||
26 | Related parties | |
According to CVM Deliberation 26/86, related parties are defined as those entities, whether individuals or companies, with which the Company has the possibility of contracting, in the broad sense of this word, in conditions which might not be following terms of interchangeability and independence which are found in transactions with third parties not related to the Company, not subject to its managerial control or not subject to any other influence. |
F-182
27 CommitmentsTable of Contents
Purchase commitments
The Company purchases naphtha from Petrobras and Repsol-YPF as well as condensate (a raw material) from Sonatrach, based under contracts with a total minimum annual purchase volume of metric tons equivalent to R$ 4,078 (2004—R$ 3,739) valued at the prices for purchase of such products ruling at the respective year end.
Copesul purchases coal for its utility unit based under a contract that expires in 2008. The minimum annual purchase commitment is 120,000 metric tons, which amounts to R$ 13 (2004—R$ 9) valued at the prices for purchase of such products ruling at the respective year end.
The Company purchases natural gas under two long-term contracts that expire in 2023. One contract is for consumption of natural gas by its cogeneration turbine. The minimum annual purchase commitment is 66,576 metric tons, which amounts to R$ 25 (2004—R$ 28) valued at the prices for purchase of such products ruling at the respective year end. The other contract is for consumption in its utility unit. The minimum annual purchase commitment is 7,600 metric tons (2004—15,238 metric tons), which amounts to R$ 6 (2004—R$ 11) valued at the prices for purchase of such products ruling at the respective year end.
All these contracts described above have take-or-pay clauses for its quantities.
28 Subsequent event
At the Annual and Extraordinary General Meeting No. 112 held on March 6, 2005, the capitalization of a capital reserve was approved in the amount of R$ 100, increasing capital from R$ 750 to R$ 850.
29 Summary of principal differences between accounting practices adopted in Brazil (“Brazilian GAAP”) and US GAAP
29.1 Narrative description of differences between Brazilian GAAP and US GAAP
A summary of the Company’s principal accounting policies that affect the determination of net income and shareholder’s equity in Brazilian GAAP as compared to US GAAP is set forth in this section. Section 29.2 includes a quantitative reconciliation of net income and shareholders’ equity between Brazilian GAAP and US GAAP.
(a) Remeasurement of financial statements for the effects of inflation
Under Brazilian GAAP until 1995, theComissão de Valores Mobiliarios (CVM, the Brazilian securities exchange regulator) required publicly traded companies subject to its reporting requirements to prepare and publish: (a) statutory financial information prepared according to the accounting principles prescribed by
Statements 2005 F-183COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated Assets Liabilities Financial expenses Financial income Sales Purchases 2006 2005 2006 2005 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 Braskem S.A. 39 20 2 1 1 2 8 2,753 2,573 2,349 17 66 100 Ipiranga Petroquímica S.A. 15 18 3 1 2 7 1,886 1,711 1,713 19 36 96 Refinaria Alberto Pasqualini — REFAP S.A. 4 11 20 77 51 900 902 388 Petróleo Brasileiro S.A. — PETROBRAS 37 1,655 1,104 1,781 Petrobras Distribuidora S.A. 1 2 4 14 10 8 19 CPN — Incorporated Limited. 33 36 42 Natal Trading Ltd. 6 Lantana Trading Co. Ltd. 8 52 58 49 63 2 1 12 73 4,718 4,372 4,112 2,643 2,116 2,384
Brazilian Corporate Law and (b) as supplemental information, financial statements expressed in currency of constant purchasing power (the “constant currency method”). The requirement to present financial statements following the constant currency method was eliminated when indexation of financial statements for Brazilian statutory and tax purposes was discontinued on January 1, 1996. As such, these financials statements prepared following Brazilian GAAP have been remeasured to reflect the effect of inflation through December 31, 1995. The index selected for this remeasurement was the Fiscal Reference Unit (UFIR), the index established by the tax authorities for preparation of financial statements under Corporate Law as well as the index selected by the CVM.
Under US GAAP Brazil was considered to be a hyperinflationary economy until June 30, 1997, and, accordingly, all balances and transactions prior to that date should be remeasured at June 30, 1997 price-levels. As from January 1, 1996, with the elimination of the requirement to present constant currency financial statements, no index has been established for this purpose under Brazilian GAAP. The index the Company selected for remeasurement as from January 1, 1996 to June 30, 1997, for purposes of the reconciliation to US GAAP, is the General Market Price Index—Internal Availability (IGP—DI).
This difference affects the carrying amount of property, plant and equipment and related depreciation as well as of inventories, exclusively due to the effect of depreciation of property, plant and equipment on the cost of inventories.
(b) RevaluationTable of property, plant and equipmentContents
Under Brazilian GAAP, as explained in Note 12, the Company has recorded in prior years a revaluation of certain of its fixed assets.
Under US GAAP, property, plant and equipment is recorded at its historical cost and revaluations are not allowed.
As a result, the reconciliations presented in Note 29.2 include a reversal of such revaluation and related depreciation recognized under Brazilian GAAP.
(c) Capitalization of interest on property, plant and equipment
Under Brazilian GAAP, only interest on loans and financing which have been obtained for the specific purpose of financing property, plant and equipment is capitalized.
For US GAAP purposes, interest is capitalized during the construction period of qualifying assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 34, “Capitalization of interest cost”, which requires capitalization of interest expense no only of loans and financing for the specific purpose of financing property, plant and equipment. Interest is capitalized based on the average borrowing rate of the company applied to qualifying assets under constructions.
(d) Pension benefits
Pension benefit obligations for Brazilian GAAP purposes should be accounted for following CVM Instruction 371/2000, which requires the mandatory application of Brazilian Accounting Standard IBRACON NPC 26. Under CVM Instruction 371/2000, disclosure of pension and other post-retirement obligations is required as from December 31, 2001 while recognition of the related obligations is required as from years ended December 31 2002. As permitted by NPC 26 the initial transitional obligation, which is the difference between
Statements 2005 F-184COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated27 Commitments Purchase commitments The Company purchases naphtha from Petrobras and Repsol-YPF as well as condensate (a raw material) from Sonatrach, based under contracts with a total minimum annual purchase volume of metric tons equivalent to R$ 4,062 (2005 — R$ 3,941) valued at the prices for purchase of such products ruling at the respective year end. Copesul purchases coal for its utility unit based under a contract that expires in 2008. The minimum annual purchase commitment is 120,000 metric tons, which amounts to R$ 12
(2005 — R$ 13) valued at the prices for purchase of such products ruling at the respective year end.The Company purchases natural gas under two long-term contracts that expire in 2023. One contract is for consumption of natural gas by its cogeneration turbine. The minimum annual purchase commitment is 65,664 metric tons, which amounts to R$ 25 (2005 — R$ 25) valued at the prices for purchase of such products ruling at the respective year end. The other contract is for consumption in its utility unit. The minimum annual purchase commitment is 5,472 metric tons (2005 — 7,600 metric tons), which amounts to R$ 5 (2005 — R$ 6) valued at the prices for purchase of such products ruling at the respective year end. All these contracts described above have take-or-pay clauses for its quantities. 28 Summary of principal differences between accounting practices adopted in Brazil (“Brazilian GAAP”) and US GAAP 28.1 Narrative description of differences between Brazilian GAAP and US GAAP A summary of the Company’s principal accounting policies that affect the determination of net income and shareholder’s equity in Brazilian GAAP as compared to US GAAP is set forth in this section. Section 29.2 includes a quantitative reconciliation of net income and shareholders’ equity between Brazilian GAAP and US GAAP.
plan assets and plan projected benefit obligation at
(a) | Remeasurement of financial statements for the effects of inflation | |
Under Brazilian GAAP until 1995, the CVM required publicly traded companies subject to its reporting requirements to prepare and publish: (a) statutory financial information prepared according to the accounting principles prescribed by Brazilian Corporate Law and (b) as supplemental information, financial statements expressed in currency of constant purchasing power (the “constant currency method”). The requirement to present financial statements following the constant currency method was eliminated when indexation of financial statements for Brazilian statutory and tax purposes was discontinued on January 1, 1996. As such, these financials statements prepared following Brazilian GAAP have been remeasured to reflect the effect of inflation through December 31, 1995. The index selected for this remeasurement was the Fiscal Reference Unit (UFIR), the index established by the tax authorities for preparation of financial statements under Corporate Law as well as the index selected by the CVM. | ||
Under US GAAP, Brazil was considered to be a hyperinflationary economy until June 30, 1997, and, accordingly, all balances and transactions prior to that date should be remeasured at June 30, 1997 price-levels. As from January 1, 1996, with the elimination of the requirement to present constant currency financial statements, no index has been established for this purpose under Brazilian GAAP. The index the Company selected for remeasurement as from January 1, 1996 to June 30, 1997, for purposes of the reconciliation to US GAAP, is the General Market Price Index — Internal Availability (IGP — DI). | ||
This difference affects the carrying amount of property, plant and equipment and related depreciation as well as of inventories, exclusively due to the effect of depreciation of property, plant and equipment on the cost of inventories. | ||
(b) | Revaluation of property, plant and equipment | |
Under Brazilian GAAP, as explained in Note 12, the Company has recorded in prior years a revaluation of certain of its fixed assets. | ||
Under US GAAP, property, plant and equipment is recorded at its historical cost and revaluations are not allowed. | ||
As a result, the reconciliations presented in Note 29.2 include a reversal of such revaluation and related depreciation recognized under Brazilian GAAP. |
F-185
Table of the employeesContents
(c) | Capitalization of interest on property, plant and equipment | |
Under Brazilian GAAP, only interest on loans and financing which have been obtained for the specific purpose of financing property, plant and equipment is capitalized. | ||
For US GAAP purposes, interest is capitalized during the construction period of qualifying assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 34, “Capitalization of interest cost”, which requires capitalization of interest expense no only of loans and financing for the specific purpose of financing property, plant and equipment. Interest is capitalized based on the average borrowing rate of the company applied to qualifying assets under constructions. | ||
(d) | Pension benefits | |
Pension benefit obligations for Brazilian GAAP purposes should be accounted for following CVM Instruction 371/2000, which requires the mandatory application of Brazilian Accounting Standard IBRACON NPC 26. Under CVM Instruction 371/2000, disclosure of pension and other post-retirement obligations is required as from December 31, 2001 while recognition of the related obligations is required as from years ended December 31 2002. As permitted by NPC 26 the initial transitional obligation, which is the difference between plan assets and plan projected benefit obligation at the date of initial recognition, may be recognized by the Company over a 60 month period as from the year ended December 31, 2002. After initial application of the standard, actuarial gains and losses are deferred and recognized in income over the estimated remaining service period of the employees to the extent that those actuarial gains and losses exceed 10% of the higher of the plan assets and the projected benefit obligation. |
F-186
reais, unless otherwise indicated
GAAP, and (iii) the recognition as from December 31, 2006 as asset or liability, as appropriate, of the funded status against accumulated other comprehensive income.
F-187
Years ended December 31 | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Benefit obligation at beginning of year | 359 | 305 | 256 | |||||||||
Service cost | 8 | 7 | 6 | |||||||||
Interest cost | 37 | 33 | 28 | |||||||||
Benefit payments | (31 | ) | (19 | ) | (14 | ) | ||||||
Actuarial losses | 36 | 33 | 29 | |||||||||
Benefit obligation at end of year | 409 | 359 | 305 | |||||||||
Years ended December 31 | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Plan assets at fair value at beginning of year | 347 | 282 | 230 | |||||||||
Actual return on plan assets | 86 | 74 | 57 | |||||||||
Employer contributions (net of administrative fee) | 5 | 6 | 5 | |||||||||
Employee contributions (net of administrative fee) | 4 | 4 | 4 | |||||||||
Benefit payments | (31 | ) | (19 | ) | (14 | ) | ||||||
Plan assets at fair value at end of year | 411 | 347 | 282 | |||||||||
At December 31 | ||||||||
2006 | 2005 | |||||||
Funded status at end of year | 2 | (12 | ) | |||||
Unrecognized prior service cost | 20 | |||||||
Unrecognized net actuarial gain | (15 | ) | ||||||
Accrued benefit cost (pre-paid plan) | 2 | (7 | ) | |||||
Additional minimum liability | (1 | ) | ||||||
Total asset (liability) recorded in the balance sheet | 2 | (8 | ) | |||||
F-188
Years ended December 31 | |||||||||
2005 | 2004 | 2003 | |||||||
Change in benefit obligation | |||||||||
Benefit obligation at beginning of year | 305 | 256 | 209 | ||||||
Service cost | 7 | 6 | 5 | ||||||
Interest cost | 33 | 28 | 23 | ||||||
Benefit payments | (19 | ) | (14 | ) | (11 | ) | |||
Actuarial losses | 33 | 29 | 30 | ||||||
Benefit obligation at end of year | 359 | 305 | 256 | ||||||
Statements 2005 Plan assets at fair value Plan assets at fair value at beginning of year Actual return on plan assets Employer contributions (net of administrative fee) Employee contributions (net of administrative fee) Benefit payments Plan assets at fair value at end of year Funded status Funded status at end of year Unrecognized prior service cost Unrecognized net actuarial losses Accrued benefit cost Accrued benefit cost to be recognized under US GAAP Total minimum liability Amount of additional minimum liability and intangible asset F-189COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated Years ended December 31 2005 2004 2003 282 230 196 74 57 38 6 5 4 4 4 3 (19 ) (14 ) (11 ) 347 282 230 At December 31 2005 2004 (12 ) (23 ) 20 23 (15 ) (5 ) (7 ) (5 ) is required to bedoes no longer exist.which would be recorded against intangible assets not affecting therefore the reconciliationsin accumulated comprehensive income upon implementation of SFAS 158 are presented in Note 29.2 The additional minimum liability to be recognized is presented below: 2005 2004 7 5 8 18 1 13 2006 Unrecognized prior service cost (17 ) Unrecognized net actuarial gain 28 11 355 (2004—404 (2005 — R$ 300)355). Years ended December 31 2006 2005 2004 Service cost 8 7 6 Interest cost 37 33 28 Expected return on plan assets (36 ) (31 ) (26 ) Amortization of unrecognized prior service cost 3 3 4 Employee contributions (net of administrative fee) (4 ) (4 ) (4 ) Net periodic benefit cost 8 8 8
Years ended December 31 | |||||||||
2005 | 2004 | 2003 | |||||||
Service cost | 7 | 6 | 5 | ||||||
Interest cost | 33 | 28 | 23 | ||||||
Expected return on plan assets | (31 | ) | (26 | ) | (22 | ) | |||
Amortization of unrecognized prior service cost | 3 | 4 | 3 | ||||||
Employee contributions (net of administrative fee) | (4 | ) | (4 | ) | (3 | ) | |||
Net periodic benefit cost | 8 | 8 | 6 | ||||||
Statements 2005 Asset Category Equity securities Debt securities Real estate Other (loans and financing) F-190COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated200520042003Assumed discount rateInflation + 6.0% p.a.Inflation + 6.0% p.a.Inflation + 6.0% p.a.Expected rate of future salary increasesInflation + 2% p.a. up to 47 years oldand none after 48 years oldInflation + 2% p.a. up to 47 years old and none after 48 years oldInflation + 2% p.a. up to 47 years old and none after 48 years oldExpected rate of future pension increasesInflation + 0.0% p.a.Inflation + 0.0% p.a.Inflation + 0.0% p.a.Expected rate of return on plan assetsInflation + 6.0% p.a.Inflation + 6.0% p.a.Inflation + 6.0% p.a.Inflation5% p.a.5% p.a.5% p.a. 2006 2005 2004 Assumed discount rate Inflation + 6.0% p.a. Inflation + 6.0% p.a. Inflation + 6.0% p.a. Expected rate of future salary increases Inflation + 1.7% p.a. up to 47 years old and none after 48 years old Inflation + 2% p.a. up to 47 years old and none after 48 years old Inflation + 2% p.a. up to 47 years old and none after 48 years old Expected rate of future pension increases Inflation + 0.0% p.a. Inflation + 0.0% p.a. Inflation + 0.0% p.a. Expected rate of return on plan assets Inflation + 6.0% p.a. Inflation + 6.0% p.a. Inflation + 6.0% p.a. Inflation 4.5% p.a. 5% p.a. 5% p.a. 2005,2006 and 20042005 are as follows: 2005 2004 33.42 % 43.80 % 50.51 % 40.29 % 6.96 % 6.94 % 9.11 % 8.97 % 100.00 % 100.00 % 2006 2005 Equity securities 39.23 % 33.42 % Debt securities 45.88 % 50.51 % Real estate 6.38 % 6.96 % Other (loans and financing) 8.51 % 9.11 % 100.00 % 100.00 % 2006.2007.
Year | ||||
2007 | 38 | |||
2008 | 38 | |||
2009 | 37 | |||
2010 | 37 | |||
2011 | 37 | |||
2012 to 2016 | 174 | |||
361 | ||||
(e) | Deferred charges | |
Under Brazilian GAAP, pre-operating expenses incurred in the construction or expansion of a new facility may be deferred until the facility begins commercial operations. Additionally, all costs related to the organization and start-up of a new business may be capitalized to the extent that they are considered recoverable. Deferred charges are amortized over a period of five to ten years. As described in Note 13 the company deferred pre-operating expenses related to expansion, projects for new products, and to organizational restructurings, which are being amortized at the rate of 20% p.a. | ||
Under US GAAP, the rules are restrictive as to the costs that can be capitalized and the amounts recorded as deferred charges under Brazilian GAAP do not meet the criteria for capitalization and should be expensed as incurred. | ||
As a result, the reconciliations presented in Note 28.2 include a reversal of those charges which were deferred under Brazilian GAAP. | ||
(f) | Tax incentives | |
Under Brazilian GAAP, the various tax incentives of the Company (in the form of tax reduction or exemption for defined periods) are accounted for directly as an increase in a capital reserve account in shareholders’ equity. The Company records the taxes as expense in the consolidated statement of income for the amounts that would be due absent the benefit, and recognizes a reduction in the tax payable against the capital reserve. | ||
For US GAAP reconciliation purposes the amount of those incentives is recognized directly in the statement of income. |
F-191
Year | ||
2006 | 14 | |
2007 | 18 | |
2008 | 20 | |
2009 | 21 | |
2010 | 23 | |
2011 to 2015 | 139 | |
235 | ||
COPESUL—Table of Contents
Statements
at December 31, 20052006 and 2004
2005
All amounts in millions of reais, unless otherwise indicated
(g) | Income tax and social contribution on the revaluation of property, plant and equipment | |
Under Brazilian GAAP, and as explained in Note 12, no deferred tax liability was recognized for the difference between the tax value and the book value of property, plant and equipment that resulted from the revaluation of property, plant and equipment. Depreciation in the financial statements is recorded based on the revaluated amount. For income tax purposes, depreciation is deductible based on only the historical restated cost of property, plant and equipment acquired and the amortization of the revaluation is not deductible. The revaluation, when originally recorded, was recognized as an increase in property, plant and equipment against a capital reserve. The reserve is reduced against retained earnings as the revaluation is recognized as expense through depreciation or through the sale of the revalued assets. The increase in income tax payable resulting from the non-deductibility of the revaluation is recognized as a reduction in equity against retained earnings. | ||
Under US GAAP, no deferred tax is required to be recorded on the revaluation because the revaluation is reverted. The increase in income tax payable resulting from non-deductibility of the revaluation is considered an expense for purposes of the reconciliation presented in Note 29.2. | ||
(h) | Derivative financial instruments | |
Under Brazilian GAAP, foreign currency derivatives are recorded by comparing contractual exchange rates to exchange rates ruling at month end. Under the swap agreements, the Company pays or receives at maturity the amounts of the difference between the variation corresponding to an interest rate based on the CDI rate and an amount based on the US Dollar exchange rate plus a fixed rate. Gains and losses on swap agreements are recorded based on the contractual rates and year-end exchange rates. Gains on options and forward contracts are recorded when the contracts expire, while losses are recorded based on the position of each invididual instrument at year-end. | ||
Under US GAAP, all derivatives are required to be recorded at fair value on the balance sheet and all variations in fair value are required to be recorded in the statement of income, unless they qualify as a hedge. None of the derivatives entered into by the Company qualified for hedge accounting during the periods presented. |
F-192
(e) Deferred chargesTable of Contents
Under Brazilian GAAP, pre-operating expenses incurred in the construction or expansion of a new facility may be deferred until the facility begins commercial operations. Additionally, all costs related to the organization and start-up of a new business may be capitalized to the extent that they are considered recoverable. Deferred charges are amortized over a period of five to ten years. As described in Note 13 the company deferred pre-operating expenses related to expansion, projects for new products, and to organizational restructurings, which are being amortized at the rate of 20% p.a.
Under US GAAP, the rules are restrictive as to the costs that can be capitalized and the amounts recorded as deferred charges under Brazilian GAAP do not meet the criteria for capitalization and should be expensed as incurred.
As a result, the reconciliations presented in Note 29.2 include a reversal of those charges which were deferred under Brazilian GAAP.
(f) Tax incentives
Under Brazilian GAAP, the various tax incentives of the Company (in the form of tax reduction or exemption for defined periods) are accounted for directly as an increase in a capital reserve account in shareholders’ equity. The Company records the taxes as expense in the consolidated statement of income for the amounts that would be due absent the benefit, and recognizes a reduction in the tax payable against the capital reserve.
For US GAAP reconciliation purposes the amount of those incentives is recognized directly in the statement of income.
(g) Income tax and social contribution on the revaluation of property, plant and equipment
Under Brazilian GAAP, and as explained in Note 12, no deferred tax liability was recognized for the difference between the tax value and the book value of property, plant and equipment that resulted from the revaluation of property, plant and equipment. Depreciation in the financial statements is recorded based on the revaluated amount. For income tax purposes, depreciation is deductible based on only the historical restated cost of property, plant and equipment acquired and the amortization of the revaluation is not deductible. The revaluation, when originally recorded, was recognized as an increase in property, plant and equipment against a capital reserve. The reserve is reduced against retained earnings as the revaluation is recognized as expense through depreciation or through the sale of the revalued assets. The increase in income tax payable resulting from the non-deductibility of the revaluation is recognized as a reduction in equity against retained earnings.
Under US GAAP, no deferred tax is required to be recorded on the revaluation because the revaluation is already reverted. The increase in income tax payable resulting from non-deductibility of the revaluation is considered an expense for purposes of the reconciliation presented in Note 29.2.
(h) Derivative financial instruments
Under Brazilian GAAP, foreign currency derivatives are recorded by comparing contractual exchange rates to exchange rates at month end. Under the swap agreements, the Company pays or receives at maturity the amounts of the difference between the variation corresponding to an interest rate based on the CDI rate and an
Statements 2005 F-193COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated(i) Provision for dividends and interest on own capital Under Brazilian GAAP, at each balance sheet date the directors are required to propose a dividend distribution from earnings and accrue for this in the financial statements. Under Brazilian GAAP, companies are permitted to distribute or capitalize an amount of interest on own capital, subject to certain limitations and calculated based on a government interest rate multiplied by shareholders’ equity. Such interest is deductible for tax purposes and is recorded as a dividend. Although not affecting net income, except for the tax benefit, the Company includes this nominal charge in financial expenses and reverses out the same amount before net income. Under US GAAP, since proposed dividends in excess of the mandatory minimum dividend required to be paid by its by-laws may be ratified or modified at the annual Shareholders’ Meeting, such proposed dividends in excess of the mandatory minimum dividends are not considered declared at the balance sheet date and therefore are not accrued. However, interim dividends paid or interest on own capital already credited to the shareholders as capital remuneration under Brazilian legislation is considered declared for US GAAP purposes. Under US GAAP, interest on own capital are accounted for as tax-deductible dividends. Dividends paid during the years ended December 31, 2006 and 2005 as interim dividends exceeded mandatory minimum dividends and for that reason the porivin for dividends and interest on own capital recorded under Brazilian GAAP is being reverted in the reconciliation to US GAAP. (j) Provision for programmed maintenance As indicated in Note 19 up to December 31, 2005 the Company recorded a provision accruing in advance for programmed maintenance on its financial statements in Brazilian GAAP. Effective January 1, 2006 the Company adopted the provisions of NPC No. 22 and modified its accounting policy to no longer provide in advance expected amounts to be incurred in the future during scheduled stoppages but rather to capitalize as part of property, plant and equipment the amounts incurred during each stoppage and amortize those amounts over the expected period until the next stoppage, a method know as “built-in overhaul method”. The effect of changing the accounting policy has been recorded as an adjustment to retained earnings as of January 1, 2006. Under US GAAP, FASB Staff Position AUG AIR-1 “Accounting for Planned Major Maintenance Activities” was issued on September 2006. AUG AIR-1 prohibits the use of the accrue-in-advance method and allows to use either the built-in overhaul method, the direct expensing method or the deferral method. AUG AIR-1 is mandatory to the first fiscal year beginning after December 15, 2006. Earlier adoption is permitted. The guidance in AUG AIR-1 shall be applied retrospectively for all financial statements presented.
amount based on the US Dollar exchange rate plus a fixed rate. Gains and losses on swap agreements are recorded based on the contractual rates and year-end exchange rates. Gains on options and forward contracts are recorded when the contracts expire, while losses are recorded based on the position of each individual instrument at year-end.
Under US GAAP, all derivatives are required to be recorded at fair value on the balance sheet and all variations in fair value are required to be recorded in the statement of income, unless they qualify as a hedge. None of the derivatives entered into by the Company qualified for hedge accounting during the periods presented.
(i) Provision for dividends and interest on own capitalTable of Contents
Under Brazilian GAAP, at each balance sheet date the directors are required to propose a dividend distribution from earnings and accrue for this in the financial statements. Under Brazilian GAAP, companies are permitted to distribute or capitalize an amount of interest on own capital, subject to certain limitations and calculated based on a government interest rate multiplied by shareholders’ equity. Such interest is deductible for tax purposes and is recorded as a dividend. Although not affecting net income, except for the tax benefit, the Company includes this nominal charge in financial expenses and reverses out the same amount before net income.
Under US GAAP, since proposed dividends in excess of the mandatory minimum dividend required to be paid by its by-laws may be ratified or modified at the annual Shareholders’ Meeting, such proposed dividends in excess of the mandatory minimum dividends are not considered declared at the balance sheet date and therefore are not accrued. However, interim dividends paid or interest on own capital already credited to the shareholders as capital remuneration under Brazilian legislation is considered declared for US GAAP purposes. Under US GAAP, interest on own capital are accounted for as tax-deductible dividends.
(j) Earnings per share
Under Brazilian GAAP, disclosure of earnings per share is normally computed based on the number of shares outstanding at the end of the year, although a weighted-average basis is acceptable.
Under US GAAP, in accordance with SFAS 128, “Earnings per Share”, the presentation of earnings per is required for public companies, including earnings per share from continuing operations and net income per shares on the face of the income statement, and the per share effect of changes in accounting principles. A dual presentation is required: basic and diluted. Computations of basic and diluted earnings per share data should be based on the weighted average number of common shares outstanding during the period and all dilutive potential common shares outstanding during each period presented, respectively. If a share dividend, share split or reverse share split is approved earnings per share should be retroactively restated as if such change had been in effect as of the beginning of the earliest period presented.
No financial instruments have been issued by the Company which have a dilutive effect, and therefore basic and diluted earnings per share are the same.
(k) Consolidation of receivables securitization fund (“FIDC”)
On March 1, 2004 the Company obtained financing through the FIDC, a special purpose entity. The FIDC is managed by Votorantim Assets Management DTVM Ltda., an independent asset manager. The FIDC has two classes of quotas: senior quotas and subordinated quotas. The FIDC issued senior quotas in exchange of R$ 125
Statements 2005 F-194COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicatedcontributed by third-parties and subordinated quotasFor US GAAP purposes, the Company has early applied AUG AIR-1 and has also adopted the “built-in overhaul method” for US GAAP, and has restated the reconciliation for years ended December 31, 2005 and 2004 to adjust for the application of the new accounting policy. Upon application of AUG AIR-1 the Company presents: (i) in the reconciliation of shareholders equity the reversal of the “accrue-in-advance” provision for programmed maintenance which is recorded in Brazilian GAAP and to capitalize the costs incurred in prior stoppages net of the related depreciation; and (ii) in the reconciliation of net income the reversal of the amount charged to expense in Brazilian GAAP to create the provision for programmed maintenance and is recognizing depreciation for the year of the capitalized costs under the new policy. exchange of R$ 25. Allaccounting policy had the subordinated quotas were issued to and are held by the Company. The senior quotas have the right to a fixed return of 106.5% of CDI. Subordinated quotas have right to any excess offollowing effects on net income ofand earnings per share under US GAAP for the fund over the return attributed to senior quotas. Senior quotas are mandatorily redeemable by the fund under an amortization schedule beginning on November 2004 and over a 22 month period. The subordinated quotas should represent at least 15% of total equity of the Fund. The FIDC is required to invest in receivables originated by the Company. As ofyears ended December 31, 2005 and 2004 the Company received R$ 125 from the FIDC as payment for the purchase2004: Years ended December 31, 2005 2004 Net income under US GAAP, as originally reported 623 611 Effect of change in accounting policy for programmed maintenance (7 ) 21 Net income under US GAAP, retrospectively adjusted 616 632 Earnings per share (basic and diluted), as originally reported 4.15 4.06 Effect of change in accounting policy for programmed maintenance (0.05 ) 0.15 Earnings per share (basic and diluted), retrospectively adjusted 4.10 4.21 (k) Income tax payable on monetary correction As described in Note 19.(ii) the Company recorded as prior year adjustment in retained earnings the recognition of a tax payable amounting to R$ 28 corresponding to income tax and social contribution on the monetary correction of certain tax credits that should have been recognized in prior years. For US GAAP the Company has concluded that the effect of this prior year adjustment is not material to net income for the year ended December 31, 2006 and has therefore recorded the tax payable against the 2006 net income.
Table of receivables, R$ 25 of receivables were transferredContents
(l) | Earnings per share | |
Under Brazilian GAAP, disclosure of earnings per share is normally computed based on the number of shares outstanding at the end of the year, although a weighted-average basis is acceptable. | ||
Under US GAAP, in accordance with SFAS 128, “Earnings per Share”, the presentation of earnings per share is required for public companies. A dual presentation is required: basic and diluted. Computations of basic and diluted earnings per share data should be based on the weighted average number of common shares outstanding during the period and all dilutive potential commom shares outstanding during each period presented, respectively. If a share dividend, share split or reverse share split is approved earnings per share should be retroactively restated as if such change had been in effect as of the beginning of the earliest period presented. | ||
No financial instruments have been issued by the Company which have a dilutive effect, and therefore basic and diluted earnings per share are the same. | ||
(m) | Consolidation of receivables securitization fund (“FIDC”) | |
On March 1, 2004 the Company obtained financing through the FIDC, a special purpose entity. The FIDC is managed by Votorantim Assets Management DTVM Ltda., an independent asset manager. The FIDC has two classes of quotas: senior quotas and subordinated quotas. The FIDC issued senior quotas in exchange of R$ 125 contributed by third-parties and subordinated quotas in exchange of R$ 25. All the subordinated quotas were issued to and are held by the Company. The senior quotas have the right to a fixed return of 106.5% of CDI. Subordinated quotas have right to any excess of net income of the fund over the return attributed to senior quotas. Senior quotas are mandatorily redeemable by the fund under an amortization schedule that begin on November 2004 and ended on August 2006 when the FIDC was liquidated. The subordinated quotas should represent at least 15% of total equity of the Fund. The FIDC is required to invest in receivables originated by the Company. As of December 31, 2005 and 2004 the Company received R$ 125 from the FIDC as payment for the purchase of receivables, R$ 25 of receivables were transferred to the FIDC in exchange for the subornidated quotas and R$ 2 of receivables were transferred to the FIDC as repayment of the proceeds received (2005 — R$ 13). |
F-195
Under Brazilian GAAP, the Company accounts for the subordinated quotas received as marketable securities at the net asset value determined by the administrator of the FIDC and recognizes a debt under loan and financing for the proceeds received, carrying interest at 112% of CDI. When receivables are transferred to the FIDC, they are transferred at a discount to their face amount; at the transfer of the receivables are derecognized for their carrying amount, a loss is recognized for the discount and the debt with the FIDC is reduced by the discounted amount.
Under US GAAP, in accordance with FASB Interpretation No. 46 “Consolidation of Variable Interest Entities (revised December 2003)”, the FIDC is considered a variable interest entity and is being consolidated by the Company since its inception.
(l) Classification of statement of income line items
Under Brazilian GAAP, in addition to the differences described in the items above, the classification of certain income and expense items is presented differently from US GAAP. We have recast our statement of income under Brazilian GAAP to present a condensed statement of income in accordance with US GAAP (Note 29.3). The reclassifications are summarized as follows:
Under Brazilian GAAP, the Company accounts for the subordinated quotas received as marketable securities at the net asset value determined by the administrator of the FIDC and recognizes a debt under loan and financig for the proceeds received, carrying interest at 112% of CDI. When receivables are transferred to the FIDC, they are transferred at a discount to their face amount; at the transfer of the receivables they are derecognized for their carrying amount, a loss is recognized for the discount and the debt with the FIDC is reduced by the discounted amount. | ||
Under US GAAP, in accordance with FASB Interpretation No. 46 “Consolidation of Variable Interest Entities (revised December 2003)”, the FIDC is considered a variable interest entity and is being consolidated by the Company since its inception. | ||
(n) | Classification of statement of income line items | |
Under Brazilian GAAP, in addition to the differences described in the items above, the classification of certain income and expense items is presented differently from US GAAP. We have recast our statement of income under Brazilian GAAP to present a condensed statement of income in accordance with US GAAP (Note 28.3). The reclassifications are summarized as follows: | ||
(i) | Interest income and interest expense, together with other financial charges, are displayed within operating income in the statement of income presented in accordance with Brazilian GAAP. These amounts have been reclassified to non-operating income and expenses in the condensed statement of income in accordance with US GAAP; |
(ii) | Under Brazilian GAAP, foreign exchange gains and losses are displayed as financial income or expenses. Under US GAAP foreign exchange gains and losses are recorded in a specific line as non-operating income (expenses); |
(iii) | Under Brazilian GAAP, losses incurred in 2004 on the early payment of debt are recorded as financial expense. Under US GAAP such cost is recorded in a specific line as non-operating expense; |
(iv) | Under Brazilian GAAP, management fees are recorded in a specific line as operating expenses. For US GAAP purposes such costs are included as operating expenses in selling, general and administrative expenses; |
(v) | Under Brazilian GAAP, employees and management profit sharing are recorded after income tax and social contribution. Under US GAAP, these items are included as operating expenses. |
F-196
COPESUL—Table of Contents
Statements
at December 31, 20052006 and 2004
2005
All amounts in millions of reais, unless otherwise indicated
(m) Classification of balance sheet line items
Under Brazilian GAAP, the classification of certain balance sheet items is presented differently from US GAAP. We have recast our consolidated balance sheet under Brazilian GAAP to present a condensed consolidated balance sheet in accordance with US GAAP Note 29.3. The reclassifications are summarized as follows:
(o) | Classification of balance sheet line items | |
Under Brazilian GAAP, the classification of certain balance sheet items is presented differently from US GAAP. We have recast our consolidated balance sheet under Brazilian GAAP to present a condensed consolidated balance sheet in accordance with US GAAP Note 28.3. The reclassifications are summarized as follows: | ||
(i) | Cash equivalents is not specifically defined under Brazilian GAAP. Cash and banks under Brazilian GAAP comprises cash in hand, placed in banks, |
(ii) | Under Brazilian GAAP, in accordance with Law 6.404/76, loans receivable from related parties, resulting from non-operating transactions are classified as Long Term assets, regardless of their contractual maturity. Under US GAAP they are classified as current or non-current assets based on their contractual maturity; |
(iii) | Under Brazilian GAAP, invoices for export sales for which the Company authorized a bank to use, upon their collection, the proceeds to repay export draft debt are recognized as a reduction of current assets, and debt is also reduced for the same amount. For US GAAP purposes, the invoices are presented as receivables and the debt is not reduced until collection of the proceeds and settlement of the debt have actually took place; |
(iv) | Under Brazilian GAAP, deferred income taxes are not netted and assets are shown separately from liabilities. For US GAAP purposes, deferred tax assets and liabilities are netted within the same taxpayer and same tax jurisdiction and are classified as current or non-current based on the classification of the underlying temporary difference. |
F-197
(n) Additional disclosures required by US GAAPTable of Contents
(i) Advertising costs
Advertising costs are expensed as incurred and are included in selling, general and administrative expense. Advertising costs amounted to R$ 14, R$ 9 and R$ 7 for the years ended December 31, 2005, 2004 and 2003, respectively.
(ii) Freight expenses
Freight expenses are recorded in a specific line as selling expenses in the following amounts: R$ 70, R$ 69 and R$ 62 at December 31, 2005, 2004 and 2003, respectively.
(o) Recently issued accounting standards
The CVM approved on August 2004 Instruction No. 408 which requires consolidation of special purpose entities (“SPE”) when a company has decision-making rights with respect to the activities of a SPE or has the right to obtain the majority of the benefits or is exposed to the majority of the losses of the SPE or of the assets of the SPE. Instruction No. 408 is effective as from January 1, 2005
Statements 2005 F-198COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated(p) Additional disclosures required by US GAAP (i) Advertising costs Advertising costs are expensed as incurred and are included in selling, general and administrative expense. Advertising costs amounted to R$ 21, R$ 14 and R$ 9 for the years ended December 31, 2006, 2005 and 2004, respectively. (ii) Freight expenses Freight expenses are recorded in a specific line as selling expenses in the following amounts: R$ 83, R$ 70 and R$ 69 at December 31, 2006, 2005 and 2004, respectively. (q) Recently issued accounting standards In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. Management is currently evaluating the effect of FIN 48 on the Company’s financial condition and results of operations. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. SFAS 157 retains the exchange price notion and clarifies that the exchange price is the price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. SFAS 157 is effective for the Company’s financial statements for the year beginning on January 1, 2008, with earlier adoption permitted. Management is currently evaluating the effect of SFAS 157 on the Company’s financial condition and results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, which requires idle facility expenses, excessive spoilage, and double freight and rehandling costs to be treated as current period charges and also requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. Accounting Research Bulletin No. 43, Inventory Pricing, previously required such expenses to be treated as current period expenses only if they meet the criterion of “so abnormal”, which was not a defined term. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier adoption permitted. The company does not believe that the adoption of SFAS No. 151 will have a material impact on the company’s consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, which eliminates the exception from fair value measurements for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS no. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, with earlier adoption permitted. The company does not believe that the adoption of SFAS No. 153 will have a material impact on the company’s consolidated financial position or results of operations.
Statements 2005 F-199COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated28.2 Reconciliation of differences between Brazilian GAAP and US GAAP 28.2.1 Differences in net income Years ended December 31 Reference in 29.1 2006 2005 2004 615 567 547 1. Remeasurement of financial statements for the effect of inflation — Depreciation on fixed assets for the year (a) (69 ) (77 ) (76 ) 2. Reversal of depreciation for the year on revaluation of property, plant and equipment (b) 34 35 35 3. Depreciation of capitalized interest on construction of property, plant and equipment (c) (8 ) (9 ) (8 ) 4. Effect in net income of pension benefits (d) (1 ) 5. Reversal of amortization related to deferred charges (e) 1 2 5 6. Recognition as expense of amounts recorded as deferred charges during the year (e) (1 ) (3 ) (1 ) 7. Tax incentives (f) (i) Company Operation Fund — FUNDOPEM 50 89 89 (ii) Program for Technological and Industrial Development — PDTI 5 4 3 8. Income tax and social contribution on the revaluation of property, plant and equipment (g) (8 ) (11 ) (10 ) 9. Effects from change in accounting policy for programmed maintenance (j) (11 ) 32 10. Income tax payable on monetary correction (k) (28 ) 11. Derivative financial instruments (h) (1 ) 12. Deferred income tax on all adjustments except for 2, 7, 8 and 10 28 36 16 13. Other adjustments (4 ) (6 ) 2 615 616 632
29.2 ReconciliationTable of differences between Brazilian GAAP and US GAAPContents
29.2.1 Differences in net income
Reference in 29.1 | Years ended December 31 | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Net income under Brazilian GAAP | 567 | 547 | 168 | |||||||||
1. Remeasurement of financial statements for the effect of inflation: | ||||||||||||
(i) Depreciation on fixed assets for the year | (a | ) | (77 | ) | (76 | ) | (76 | ) | ||||
(ii) Inventories | (a | ) | ||||||||||
2. Reversal of depreciation for the year on revaluation of property, plant and equipment | (b | ) | 35 | 35 | 35 | |||||||
3. Depreciation of capitalized interest on construction of property, plant and equipment | (c | ) | (9 | ) | (8 | ) | (8 | ) | ||||
4. Effect in net income of pension benefits | (d | ) | (1 | ) | 1 | |||||||
5. Reversal of amortization related to deferred charges | (e | ) | 2 | 5 | 9 | |||||||
6. Recognition as expense of amounts recorded as deferred charged during the year | (e | ) | (3 | ) | (1 | ) | (4 | ) | ||||
7. Tax incentives: | (f | ) | ||||||||||
(i) Company Operation Fund—FUNDOPEM | 90 | 89 | 104 | |||||||||
(ii) Program for Technological and Industrial Development—PDTI | 3 | 3 | ||||||||||
8. Income tax and social contribution on the revaluation of property, plant and equipment | (g | ) | (11 | ) | (10 | ) | (10 | ) | ||||
9. Derivative financial instruments | (h | ) | (1 | ) | 115 | |||||||
10. Deferred income tax on all adjustments except for 2, 7 and 8 | 32 | 27 | (15 | ) | ||||||||
11. Other adjustments | (6 | ) | 2 | 7 | ||||||||
Net income under US GAAP | 623 | 611 | 326 | |||||||||
Weighted average number of shares issued and outstanding after giving retroactive effect to the reverse share split approved on January 20, 2005 (Note 28)—Basic and diluted | 150,217,167 | 150,217,167 | 150,217,167 | |||||||||
Earnings per share (in Brazilian Reais) | 4.15 | 4.06 | 2.17 |
Statements 2005 F-200COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated29.2.2 Years ended December 31 Reference in 28.1 2006 2005 2004 150,217,167 150,217,167 150,217,167 4.09 4.10 4.21 December 31 Reference 2006 2005 1,300 1,247 1. Remeasurement of financial statements for the effect of inflation: (i) Fixed assets net of accumulated depreciation (a) 16 85 (ii) Inventories (a) 1 1 2. Reversal of revaluation of property, plant and equipment (b) (75 ) (109 ) 3. Capitalization of interest on construction of property, plant and equipment (c) 186 186 4. Depreciation of capitalized interest on construction of property, plant and equipment (c) (148 ) (140 ) 5. Reversal of amortization related to deferred charges (e) 63 62 6. Recognition as expense of amounts recorded as deferred charged during the year (e) (73 ) (73 ) 9. Effects from change in accounting policy for programmed maintenance: (j) Reversal of provision recorded under Brazilian GAAP 68 Capitalization of cost in prior stoppage, net of depreciation 33 10. Difference between amount recognized of pension plan asset (liability) (d) 11 (1 ) 8. Deferred income tax on all adjustments except for 2 (17 ) (76 ) 9. Proposed dividends in excess of mandatory minimum dividend (i) 185 68 10. Other adjustments (3 ) 2
December 31 | |||||||||
Reference | 2005 | 2004 | |||||||
Shareholders’ equity under Brazilian GAAP | 1,247 | 1,161 | |||||||
1. Remeasurement of financial statements for the effect of inflation: | |||||||||
(i) Fixed assets net of accumulated depreciation | (a | ) | 85 | 162 | |||||
(ii) Inventories | (a | ) | 1 | 1 | |||||
2. Reversal of revaluation of property, plant and equipment | (b | ) | (109 | ) | (144 | ) | |||
3. Capitalization of interest on construction of property, plant and equipment | (c | ) | 186 | 186 | |||||
4. Depreciation of capitalized interest on construction of property, plant and equipment | (c | ) | (140 | ) | (131 | ) | |||
5. Reversal of amortization related to deferred charges | (e | ) | 62 | 59 | |||||
6. Recognition as expense of amounts recorded as deferred charged during the year | (e | ) | (73 | ) | (69 | ) | |||
7. Deferred income tax on all adjustments except for 2 and 8 | (41 | ) | (73 | ) | |||||
8. Proposed dividends in excess of mandatory minimum dividend | (i | ) | 68 | 118 | |||||
9. Other adjustments | 6 | ||||||||
Shareholders’ equity under US GAAP | 1,286 | 1,276 | |||||||
Statements 2005 F-201COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated December 31 Reference 2006 2005 1,446 1,353
29.3 US GAAP condensed financial informationTable of Contents
Based on the reconciling items and discussion above, Copesul’s condensed consolidated balance sheet, statement of income condensed consolidated and statement of changes in shareholders’ equity under US GAAP are as follows:
(a) Condensed balance sheet under US GAAP
2005 | 2004 | |||
Assets | ||||
Current assets | ||||
Cash and cash equivalents | 64 | 97 | ||
Trading investments | 41 | 132 | ||
Certificates of deposit | 3 | 2 | ||
Loans to related parties | 146 | |||
Trade accounts receivable | 198 | 219 | ||
Inventories, net | 495 | 427 | ||
Taxes and charges recoverable | 29 | 7 | ||
Deferred income taxes | 5 | 29 | ||
Swaps receivable | 53 | 1 | ||
Prepaid expenses | 14 | 13 | ||
Prepaid income taxes | 230 | 192 | ||
Other accounts receivable | 9 | 7 | ||
1,141 | 1,272 | |||
Property, plant and equipment, net | 1,129 | 1,210 | ||
Other noncurrent assets | ||||
Held-to-maturity investments | 1 | 1 | ||
Investments at cost, net | 9 | 11 | ||
Judicial deposits | 8 | 14 | ||
Taxes and charges recoverable | 103 | 97 | ||
Prepaid expenses | 6 | 5 | ||
Loans to third parties | 6 | 9 | ||
Intangible asset—recognition of minimum pension obligation | 1 | 13 | ||
Other accounts receivable | 1 | 1 | ||
135 | 151 | |||
Total assets | 2,405 | 2,633 | ||
Statements 2005 F-202COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated28.3 US GAAP condensed financial information Based on the reconciling items and discussion above, Copesul’s condensed consolidated balance sheet, statement of income condensed consolidated and statement of changes in shareholders’ equity under US GAAP are as follows: (a) Condensed balance sheet under US GAAP Assets 2006 2005 Current assets Cash and cash equivalents 169 64 Trading investments 70 41 Certificates of deposit 3 Loans to related parties Trade accounts receivable 254 198 Inventories,net 572 495 Taxes and charges recoverable 101 29 Deferred income taxes 2 Swaps receivable 64 53 Prepaid expenses 13 14 Prepaid income taxes 227 230 Other accounts receivable 6 9 1,478 1,136 Property, plant and equipment, net 1,010 1,162 Other noncurrent assets Held-to-maturity investments 1 1 Investments at cost,net 10 9 Judicial deposits 9 8 Taxes and charges recoverable 121 103 Prepaid expenses 4 6 Loans to third parties 2 6 Intangible asset — recognition of minimum pension obligation 1 Prepaid pension cost 2 Other accounts receivable 1 1 150 135 Total assets 2,638 2,433
2005 | 2004 | |||
Liabilities and shareholders’ equity | ||||
Current liabilities | ||||
Suppliers | 156 | 148 | ||
Social and labor contributions and charges | 49 | 53 | ||
Provision for income taxes | 231 | 225 | ||
Taxes and charges payable | 42 | 35 | ||
Short-term debt, including current portion of long-term debt | 231 | 128 | ||
Short-term export drafts, including current portion of long-term export drafts | 19 | 191 | ||
Quotas subject to mandatory redemption | 51 | 85 | ||
Provision for programmed maintenance | 16 | 55 | ||
Interest on own capital | 21 | 19 | ||
Payables related to swaps, forwards and options | 5 | 8 | ||
Advances from customers | 13 | 11 | ||
Retirement benefit obligation | 6 | 5 | ||
Profit sharing and other | 27 | 26 | ||
867 | 989 | |||
Long-term liabilities | ||||
Long-term debt, net of current portion | 84 | 98 | ||
Long-term export draft, net of current portion | 91 | 103 | ||
Quotas subject to mandatory redemption | 45 | |||
Provision for programmed maintenance | 52 | 44 | ||
Deferred income taxes | 12 | 57 | ||
Provision for tax, civil and labor proceedings | 11 | 9 | ||
Retirement benefit obligation | 2 | 12 | ||
252 | 368 | |||
Commitments and contingencies | ||||
Shareholders’ equity | 1,286 | 1,276 | ||
Total liabilities and shareholders’ equity | 2,405 | 2,633 | ||
Statements 2005 F-203COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated Liabilities and shareholders’ equity 2006 2005 Current liabilities Suppliers 354 156 Social and labor contributions and charges 45 49 Provision for income taxes 259 242 Taxes and charges payable 45 42 Short-term debt, including current portion of long-term debt 50 231 Short-term export drafts, including current portion of long-term export drafts 40 19 Quotas subject to mandatory redemption 51 Interest on own capital 17 21 Payables related to swaps, forwards and options 23 5 Advances from customers 4 13 Retirement benefit obligation 6 Profit sharing and other 35 27 872 862 Long-term liabilities Long-term debt, net of current portion 107 84 Long-term export draft, net of current portion 139 91 Quotas subject to mandatory redemption Taxes and charges payable 26 Deferred income taxes 14 30 Provision for tax, civil and labor proceedings 34 11 Retirement benefit obligation 2 320 218 Shareholders’ equity 1,446 1,353 Total liabilities and shareholders’ equity 2,638 2,433
(b) Condensed statementTable of income under US GAAPContents
2005 | 2004 | 2003 | |||||||
Gross sales | 7,348 | 7,153 | 5,453 | ||||||
Taxes and contributions on sales | (1,642 | ) | (1,623 | ) | (1,123 | ) | |||
Net sales and services | 5,706 | 5,530 | 4,330 | ||||||
Cost of products, utilities and services | (4,651 | ) | (4,454 | ) | (3,799 | ) | |||
Gross profit | 1,055 | 1,076 | 531 | ||||||
Operating (expenses) income | |||||||||
Selling, general and administrative | (184 | ) | (189 | ) | (157 | ) | |||
Employees profit sharing | (22 | ) | (20 | ) | (10 | ) | |||
Other operating income (expenses), net | 28 | 44 | (7 | ) | |||||
Operating profit | 877 | 911 | 357 | ||||||
Non-operating income (expenses) | |||||||||
Financial income (expenses), net | (62 | ) | (81 | ) | (132 | ) | |||
Loss on anticipated payment of debt paid in advance settlement | (16 | ) | |||||||
Foreign exchange gains, net | 12 | 22 | 173 | ||||||
Other | 5 | (1 | ) | ||||||
Income before income taxes and social contribution | 832 | 836 | 397 | ||||||
Income tax benefit (expense) | |||||||||
Current | (231 | ) | (272 | ) | (44 | ) | |||
Deferred | 22 | 47 | (27 | ) | |||||
Net income for the year | 623 | 611 | 326 | ||||||
(c) Condensed statement of changes in shareholders’ equity under US GAAP
Years Ended December 31 | |||||||||
2005 | 2004 | 2003 | |||||||
At beginning of the year | 1,276 | 1,102 | 985 | ||||||
Net income | 623 | 611 | 326 | ||||||
Dividends | (514 | ) | (349 | ) | (123 | ) | |||
Interest on own capital | (99 | ) | (88 | ) | (86 | ) | |||
At end of the year | 1,286 | 1,276 | 1,102 | ||||||
Statements 2005 F-204COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated 2006 2005 2004 8,148 7,348 7,153 Taxes and contributions on sales (1,722 ) (1,642 ) (1,623 ) 6,426 5,706 5,530 Cost of products, utilities and services (5,326 ) (4,661 ) (4,423 ) 1,100 1,045 1,107 Selling, general and administrative (190 ) (184 ) (189 ) Employees profit sharing (24 ) (22 ) (20 ) Other operating income (expenses), net 18 28 44 904 867 942 Financial income (expenses), net 1 (62 ) (81 ) Loss on anticipated payment of debt paid in advance settlement (16 ) Foreign exchange gains, net (2 ) 12 22 Other (12 ) 5 891 822 867 Current (297 ) (238 ) (271 ) Deferred 21 32 35 615 616 632 (c) Condensed statement of changes in shareholders’ equity under US GAAP Years Ended December 31 2006 2005 2004 1,353 1,350 1,154 Net income 615 616 632 Transition effect of application of SFAS 158, net of taxes 8 Dividends (440 ) (514 ) (348 ) Interest on own capital (90 ) (99 ) (88 ) 1,446 1,353 1,350
29.4 StatementsTable of cash flowsContents
2005 | 2004 | 2003 | |||||||
Cash provided by operating activities | |||||||||
Net income for the year | 623 | 611 | 326 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities | |||||||||
Depreciation and amortization | 250 | 248 | 244 | ||||||
Provision for programmed maintenance (appropriation) | 26 | 54 | 29 | ||||||
Provision for administrative, civil and labor contingencies | 4 | 3 | 2 | ||||||
Provision for actuarial liabilities—PETROS | 2 | 2 | 2 | ||||||
Loss on disposals of assets | 5 | 3 | |||||||
Interest, foreign exchange and monetary variation on long-term | |||||||||
Liabilities | (16 | ) | (11 | ) | (163 | ) | |||
Other assets | 5 | (7 | ) | (11 | ) | ||||
Loss (gain) on trading investments | 10 | 14 | (15 | ) | |||||
Interest on investment in certificates of deposit | (1 | ) | (2 | ) | |||||
Interest on quotas subject to mandatory redemption | (10 | ) | 16 | ||||||
Unrealized gain related to forwards, swaps and options, net | (3 | ) | (30 | ) | (73 | ) | |||
Interest, foreign exchange and monetary variation on loans to related parties and other current liabilities | 15 | (12 | ) | 62 | |||||
Interest and monetary variation on short-term debts | (22 | ) | (33 | ) | (69 | ) | |||
Deferred income tax | (22 | ) | (47 | ) | 27 | ||||
Decrease/increase in assets and liabilities | |||||||||
Trade accounts receivable | 21 | 277 | (213 | ) | |||||
Inventories | (68 | ) | (144 | ) | 21 | ||||
Purchases of trading investments | (186 | ) | (928 | ) | (459 | ) | |||
Sales and redemptions of trading investments | 267 | 1,077 | 179 | ||||||
Other assets | 155 | (91 | ) | 11 | |||||
Suppliers | 8 | 34 | (321 | ) | |||||
Provision for programmed maintenance (use) | (57 | ) | (18 | ) | (12 | ) | |||
Other liabilities | (210 | ) | 214 | 68 | |||||
Net cash provided by operating activities | 796 | 1,227 | (362 | ) | |||||
Statements 2005 F-205COPESUL—Statements—(Continued)
at December 31, 20052006 and 2004
All amounts in millions of reais, unless otherwise indicated 2006 2005 2004 Cash provided by operating activities Net income for the year 615 616 632 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 288 250 248 Provision for administrative, civil and labor contingencies 24 4 3 Net effects on working capital related to Programmed maintenance (1 ) (21 ) 6 Provision for actuarial liabilities — PETROS 2 2 2 Loss on disposals of assets 29 5 Interest, foreign exchange and monetary variation on long-term Liabilities (4 ) (16 ) (11 ) Other assets (6 ) 5 (7 ) Loss (gain) on trading investments 10 14 Interest on investment in certificates of deposit (1 ) (1 ) (2 ) Interest on quotas subject to mandatory redemption (44 ) (10 ) 16 Unrealized gain related to forwards, swaps and options, net 17 (3 ) (30 ) Interest, foreign exchange and monetary variation on loans to related parties and other current liabilities 15 (12 ) Interest and monetary variation on short-term debts 5 (22 ) (33 ) Deferred income tax (21 ) (32 ) (35 ) Decrease/increase in assets and liabilities Trade accounts receivable (56 ) 21 277 Inventories (76 ) (68 ) (144 ) Purchases of trading investments (195 ) (186 ) (928 ) Sales and redemptions of trading investments 165 267 1,077 Other assets (24 ) 155 (94 ) Suppliers 198 8 34 Other liabilities 26 (203 ) 214 941 796 1,227
2006 | 2005 | 2004 | ||||||||||
Cash flows from investing activities | ||||||||||||
Held-to-maturity investments, net | (1 | ) | ||||||||||
Redemptions in certificates of deposit | 24 | |||||||||||
Investment in certificates of deposit | 4 | (1 | ) | |||||||||
Receivables related to forwards, swaps and options, net | (11 | ) | (52 | ) | 9 | |||||||
Loans to related parties | ||||||||||||
Issuances | (325 | ) | ||||||||||
Repayments | 130 | 522 | ||||||||||
Acquisitions of property, plant and equipment | (198 | ) | (171 | ) | (131 | ) | ||||||
Acquisitions of investments | (2 | ) | ||||||||||
Net cash provided by (used in) investing activities | (205 | ) | (94 | ) | 96 | |||||||
Cash flows from financing activities | ||||||||||||
Short-term debt | ||||||||||||
Proceeds | 1,660 | 1,198 | 514 | |||||||||
Payments | (1,864 | ) | (1,183 | ) | (706 | ) | ||||||
Long-term debt | ||||||||||||
Proceeds | 185 | 81 | 133 | |||||||||
Payments | (71 | ) | (153 | ) | (989 | ) | ||||||
Quotas subject to mandatory redemption | ||||||||||||
Proceeds | 125 | |||||||||||
Payments | (8 | ) | (68 | ) | (12 | ) | ||||||
Dividends paid | (439 | ) | (513 | ) | (346 | ) | ||||||
Interest on own capital paid | (94 | ) | (97 | ) | (83 | ) | ||||||
Net cash used in financing activities | (631 | ) | (735 | ) | (1,364 | ) | ||||||
Net decrease in cash and cash equivalents | 105 | (33 | ) | (41 | ) | |||||||
Cash and cash equivalents at beginning of year | 64 | 97 | 138 | |||||||||
Cash and cash equivalents at end of the year | 169 | 64 | 97 | |||||||||
Cash paid during the period for | ||||||||||||
Interest | 33 | 63 | 106 | |||||||||
Income taxes | 240 | 238 | 244 |
F-206
2005 | 2004 | 2003 | |||||||
Cash flows from investing activities | |||||||||
Held-to-maturity investments, net | (1 | ) | 25 | ||||||
Redemptions in certificates of deposit | 24 | 70 | |||||||
Investment in certificates of deposit | (1 | ) | |||||||
Receivables related to forwards, swaps and options, net | (52 | ) | 9 | 373 | |||||
Loans to related parties | |||||||||
Issuances | (325 | ) | (880 | ) | |||||
Repayments | 130 | 522 | 1,007 | ||||||
Acquisitions of property, plant and equipment | (171 | ) | (131 | ) | (47 | ) | |||
Acquisitions of investments | (2 | ) | |||||||
Net cash provided by (used in) investing activities | (94 | ) | 96 | 548 | |||||
Cash flows from financing activities | |||||||||
Short-term debt | |||||||||
Proceeds | 1,198 | 514 | 963 | ||||||
Payments | (1,183 | ) | (706 | ) | (976 | ) | |||
Long-term debt | |||||||||
Proceeds | 81 | 133 | 590 | ||||||
Payments | (153 | ) | (989 | ) | (636 | ) | |||
Quotas subject to mandatory redemption | |||||||||
Proceeds | 125 | ||||||||
Payments | (68 | ) | (12 | ) | |||||
Dividends paid | (513 | ) | (346 | ) | (123 | ) | |||
Interest on own capital paid | (97 | ) | (83 | ) | (72 | ) | |||
Net cash used in financing activities | (735 | ) | (1,364 | ) | (254 | ) | |||
Net decrease in cash and cash equivalents | (33 | ) | (41 | ) | (70 | ) | |||
Cash and cash equivalents at beginning of year | 97 | 138 | 208 | ||||||
Cash and cash equivalents at end of the year | 64 | 97 | 138 | ||||||
Cash paid during the period for | |||||||||
Interest | 63 | 106 | 129 | ||||||
Income taxes | 238 | 244 | 97 |
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Consolidated Balance Sheets
In millions of reais
3/31/2007 | 12/31/2006 | |||||
Unaudited | ||||||
Assets | ||||||
Current assets | ||||||
Cash and cash equivalents (Note 4) | 272 | 201 | ||||
Marketable securities (Note 5) | 41 | 38 | ||||
Customers | ||||||
Local customers | 129 | 180 | ||||
Foreign customers | 198 | 75 | ||||
Export drafts - billed (Note 16) | (75 | ) | (1 | ) | ||
Swap receivables (Note 6) | 87 | 64 | ||||
Inventories (Note 7) | 541 | 571 | ||||
Taxes and charges recoverable (Note 8) | 113 | 115 | ||||
Prepaid expenses (Note 9) | 11 | 14 | ||||
Other accounts receivable | 9 | 5 | ||||
1,326 | 1,262 | |||||
Noncurrent assets | ||||||
Long-term receivables | ||||||
Marketable securities (Note 5) | 1 | 1 | ||||
Taxes and charges recoverable (Note 8) | 147 | 137 | ||||
Judicial deposits (Note 10) | 9 | 9 | ||||
Prepaid expenses (Note 9) | 4 | 4 | ||||
Loans to third parties | 1 | 2 | ||||
Claims receivable and other | 2 | 2 | ||||
164 | 155 | |||||
Permanent assets | ||||||
Investments (Note 11) | 7 | 10 | ||||
Property, plant and equipment (Note 12) | 994 | 1,030 | ||||
Deferred charges (Note 13) | 10 | 10 | ||||
1,011 | 1,050 | |||||
1,175 | 1,205 | |||||
Total assets | 2,501 | 2,467 | ||||
Liabilities and stockholders’ equity | ||||||
Current liabilities | ||||||
Suppliers (Note 14) | 275 | 354 | ||||
Loans and financing (Note 15) | 87 | 50 | ||||
Export drafts - to be invoiced (Note 16) | 85 | 39 | ||||
Taxes and charges payable (Note 17) | 33 | 45 | ||||
Social and labor contributions and charges | 42 | 45 | ||||
Proposed dividends | 185 | |||||
Interest on own capital | 1 | 17 | ||||
Income tax and social contribution (Note 18) | 105 | 44 | ||||
Swaps and options payable (Note 6) | 43 | 23 | ||||
Advances from customers | 7 | 5 | ||||
Profit sharing and other | 17 | 34 | ||||
695 | 841 | |||||
Noncurrent liabilities | ||||||
Long-term liabilities | ||||||
Loans and financing (Note 15) | 99 | 107 | ||||
Export drafts - to be invoiced (Note 16) | 133 | 139 | ||||
Income tax and social contribution (Note 18) | 37 | 37 | ||||
Provision for contingencies (Note 24) | 36 | 34 | ||||
Actuarial liability - PETROS (Note 25) | 8 | 9 | ||||
313 | 326 | |||||
Stockholders’ equity (Note 19) | ||||||
Capital | 910 | 850 | ||||
Capital reserve | 238 | 296 | ||||
Revaluation reserve | 68 | 75 | ||||
Revenue reserve | 79 | 79 | ||||
Retained earnings | 198 | |||||
1,493 | 1,300 | |||||
Total liabilities and stockholders’ equity | 2,501 | 2,467 | ||||
* * *The accompanying notes are an integral part of these financial statements.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Unaudited Interim Consolidated Statements of Operations
In millions of reais, except when otherwise indicated
Quarter ended 3/31/2007 | Quarter ended 3/31/2006 | |||||
Gross sales | ||||||
Sale of petrochemical products and utilities | ||||||
Local market | 1,939 | 1,703 | ||||
Foreign market | 229 | 157 | ||||
2,168 | 1,860 | |||||
Taxes, contributions and freight on sales | ||||||
ICMS | (228 | ) | (233 | ) | ||
PIS, COFINS, CIDE and ISS | (194 | ) | (186 | ) | ||
Freight | (19 | ) | (14 | ) | ||
(441 | ) | (433 | ) | |||
Net sales and services | 1,727 | 1,427 | ||||
Cost of products, utilities and services | (1,397 | ) | (1,176 | ) | ||
Gross profit | 330 | 251 | ||||
Operating (expenses) income | ||||||
Selling | (18 | ) | (8 | ) | ||
General and administrative | (13 | ) | (11 | ) | ||
Management fees | (1 | ) | (1 | ) | ||
Depreciation and amortization | (3 | ) | (3 | ) | ||
Other operating income (expenses), net (Note 21) | (1 | ) | 10 | |||
(36 | ) | (13 | ) | |||
Operating profit before financial result | 294 | 238 | ||||
Financial result (Note 20) | ||||||
Financial expenses | (154 | ) | (51 | ) | ||
Financial income | 159 | 49 | ||||
5 | (2 | ) | ||||
Operating profit | 299 | 236 | ||||
Non-operating result | ||||||
Non operating income | 1 | |||||
Non-operating expenses | (3 | ) | (6 | ) | ||
(3 | ) | (5 | ) | |||
Income before income tax and social contribution | 296 | 231 | ||||
Provision for income tax and social contribution (Note 18) | (102 | ) | (78 | ) | ||
Deferred income tax and social contribution (Note 18) | 5 | 1 | ||||
Net income of the period before profit sharing | 199 | 154 | ||||
Profit sharing | (6 | ) | (5 | ) | ||
Net income of the period | 193 | 149 | ||||
Outstanding shares at the end of the period (in thousands) | 150,217 | 150,217 | ||||
Net income per share (in R$) | 1.28 | 0.99 | ||||
The accompanying notes are an integral part of these financial statements.
EXHIBIT INDEXCOPESUL - Companhia Petroquímica do Sul and subsidiaries
Unaudited Interim Statement of Changes in Stockholders’ Equity
In millions of reais, except per share amounts
Capital | Capital reserve Fiscal incentives | Revaluation reserve | Revenue reserve Legal | Retained earnings | Total | |||||||||||
At December 31, 2005 | 750 | 341 | 108 | 48 | 1,247 | |||||||||||
Prior year adjustment | 38 | 38 | ||||||||||||||
Capitalization of capital reserve - FUNDOPEM | 100 | (100 | ) | |||||||||||||
Fiscal incentives | ||||||||||||||||
FUNDOPEM | 18 | 18 | ||||||||||||||
Program for Technological and Industrial Development - PDTI | 8 | 8 | ||||||||||||||
Realization of revaluation reserve | ||||||||||||||||
Revaluation - 1983 | (1 | ) | 1 | |||||||||||||
Revaluation - 1989 | (7 | ) | 7 | |||||||||||||
Income tax and social contribution on realized revaluation reserve | (2 | ) | (2 | ) | ||||||||||||
Net income for the period | 149 | 149 | ||||||||||||||
At March 31, 2006 | 850 | 267 | 100 | 48 | 193 | 1,458 | ||||||||||
At December 31, 2006 | 850 | 296 | 75 | 79 | 1,300 | |||||||||||
Capitalization of capital reserve - FUNDOPEM | 60 | (60 | ) | |||||||||||||
Fiscal incentives - PDI - Technological Research and Industrial Development | 2 | 2 | ||||||||||||||
Realization of revaluation reserve | ||||||||||||||||
Revaluation - 1989 | (7 | ) | 7 | |||||||||||||
Income tax and social contribution on realized revaluation reserve | (2 | ) | (2 | ) | ||||||||||||
Net income for the period | 193 | 193 | ||||||||||||||
At March 31, 2007 | 910 | 238 | 68 | 79 | 198 | 1,493 | ||||||||||
The accompanying notes are an integral part of these financial statements.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Consolidated Statements of Changes in Financial Position
In millions of reais
Quarter ended 3/31/2007 | Quarter ended 3/31/2006 | |||||
Unaudited | Unaudited | |||||
Financial resources were provided by | ||||||
Operations | ||||||
Net income for the period | 193 | 149 | ||||
Expenses (income) not affecting working capital | ||||||
Depreciation | 57 | 57 | ||||
Amortization | 1 | |||||
Provision for administrative, civil and labor contingencies | 1 | (1 | ) | |||
Monetary and exchange variations of long -term liabilities | ||||||
Long-term liabilities | (6 | ) | (6 | ) | ||
Long-term receivables | (2 | ) | ||||
Disposals of property, plant and equipment | 3 | 2 | ||||
Income tax and social contribution | ||||||
Long-term receivables | (2 | ) | (18 | ) | ||
Realization of revaluation reserve | (2 | ) | (2 | ) | ||
245 | 179 | |||||
Third parties | ||||||
Decrease in long-term receivables | ||||||
Marketable securities | 18 | |||||
Related parties | (6 | ) | 1 | |||
Prepaid expenses | 1 | 2 | ||||
Increase in long-term liabilities | ||||||
Financial institutions | 2 | |||||
Fiscal incentives of FUNDOPEM and Program for Technological and | ||||||
Industrial Development - PDTI | 2 | 25 | ||||
(3 | ) | 48 | ||||
Other | ||||||
Effect on working capital from the change in the accounting procedure adjustments | (22 | ) | ||||
(22 | ) | |||||
Total funds provided | 242 | 205 | ||||
Financial resources were used for | ||||||
Long-term receivables | ||||||
Taxes and charges recoverable | 2 | 3 | ||||
Loans to third parties and other | 1 | |||||
Permanent assets | ||||||
Property, plant and equipment | 22 | 15 | ||||
Transfer from long-term to current liabilities | ||||||
Financial institutions | 8 | 5 | ||||
Total funds used | 32 | 24 | ||||
Increase in working capital | 210 | 181 | ||||
Current assets | ||||||
At the end of the period | 1,326 | 971 | ||||
At the beginning of the period | 1,262 | 908 | ||||
64 | 63 | |||||
Current liabilities | ||||||
At the end of the period | 695 | 577 | ||||
At the beginning of the period | 841 | 695 | ||||
(146 | ) | (118 | ) | |||
Increase in working capital | 210 | 181 | ||||
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Unaudited Interim Consolidated Statements of Cash Flows
In millions of reais
Quarter ended 3/31/2007 | Quarter ended 3/31/2006 | |||||
Net income of the period | 193 | 149 | ||||
Expenses (income) not affecting cash | ||||||
Depreciation | 57 | 57 | ||||
Amortization | 1 | |||||
Provision for administrative, civil and labor contingencies | 1 | (1 | ) | |||
Monetary and exchange variations | (2 | ) | ||||
Interest and monetary variations on current assets | ||||||
Interest | 1 | (6 | ) | |||
Monetary and exchange variations | (10 | ) | (13 | ) | ||
Disposals of property, plant and equipment and other | 3 | |||||
Swap difference receivable, net | (23 | ) | (8 | ) | ||
Swap and options difference payable, net | 21 | (3 | ) | |||
Deferred income tax and social contribution | (5 | ) | (1 | ) | ||
Trade accounts receivable | (72 | ) | 18 | |||
Trade notes linked to the FIDC | 3 | |||||
Inventories | 29 | 38 | ||||
Other accounts receivable - current and long-term | (3 | ) | (86 | ) | ||
Suppliers | (79 | ) | 4 | |||
Other accounts payable - current and long-term | 28 | 33 | ||||
Fiscal incentives - FUNDOPEM and PDTI | 2 | 25 | ||||
Net cash provided by operating activities | 144 | 207 | ||||
Marketable securities in current and long-term investments | ||||||
Investments | (36 | ) | (26 | ) | ||
Redemptions | 32 | 8 | ||||
Loans to third-parties -Receipts | 1 | 2 | ||||
Additions to property, plant and equipment | (21 | ) | (15 | ) | ||
Net cash used in investing activities | (24 | ) | (31 | ) | ||
Loans, financing and export drafts | ||||||
Issuances | 321 | 241 | ||||
Repayments | (169 | ) | (278 | ) | ||
Interest on own capital | (17 | ) | (21 | ) | ||
Dividends paid | (184 | ) | (68 | ) | ||
Net cash used in financing activities | (49 | ) | (126 | ) | ||
Net change in cash and cash equivalents | 71 | 50 | ||||
Initial cash and cash equivalents balance | 201 | 113 | ||||
Final cash and cash equivalents balance | 272 | 163 | ||||
Net change in cash and cash equivalents | 71 | 50 | ||||
The accompanying notes are an integral part of these financial statements.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
1 | Operations |
The Company, headquartered in Triunfo, Rio Grande do Sul, is a closely-held corporation and its main objectives are (a) manufacture, sale, import and export of chemical and petrochemical products and fuel; b) production and distribution of goods, as well as rendering services to companies of the Southern Petrochemical Complex and management of the logistic services pertinent to its waterway and terrestrial terminals; c) participation in other companies as quotaholder or stockholder.
The main suppliers of raw materials in the local market are PETROBRAS - Petróleo Brasileiro S.A. and Refinaria Alberto Pasqualini - REFAP S.A. and overseas, the companies Sonatrach SPA and Repsol YPF S.A.
The Company’s main customers are located in the Petrochemical Complex in Triunfo, Rio Grande do Sul. Additionally, the Company’s sales of hydrocarbon solvents and fuels are made both in the domestic and international markets, and the latter being mainly to Mercosur (Southern Common Market) and the United States.
2 | Presentation of the financial statements |
The financial statements for the three-months ended March 31, 2007 for legal and regulatory purposes were approved by the Company’s Board of Directors on April 24, 2007 (the financial statements for the year ended December 31, 2006 were approved on January 30, 2007).
The consolidated financial statements were prepared and are being presented in accordance with accounting practices adopted in Brazil, based on the provisions included in Brazilian Corporate Law as well as the Brazilian Securities Commission (CVM) standards and procedures. The financial statements presented here do not include the parent company’s stand-alone financial statements and are not intended for statutory purposes.
The preparation of financial statements requires the use of estimates to account for certain assets and liabilities and other transactions. Therefore, the Company’s financial statements include estimates referring to the selection of useful lives of fixed assets, provisions for contingent liabilities and determination of income tax liabilities. Actual results may differ from such estimates.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
3 | Significant accounting practices |
The accounting practices adopted in the presenting consolidated financial statements as of March 31, 2007 are consistent with those disclosed in the audited financial statements as of December 31, 2006.
(a) | Consolidated financial statements |
These consolidated financial statements include the wholly-owned subsidiaries Copesul International Trading, Inc., CCI - Comercial Importadora S.A., and Fundo de Investimento Financeiro Multimercado Copesul, a mutual fund whose quotas are wholly-owned by the Company. In the consolidation process, intercompany balances, income, expenses, and unrealized profits arising from intercompany transactions were eliminated, as well as investments in subsidiaries.
(b) | Marketable securities and swap receivables and payables |
These assets are recorded at cost plus accrued income up to the balance sheet date (accrual basis), adjusted to market value, when lower.
(c) | Allowance for doubtful accounts |
The Company has no allowance for doubtful accounts, since losses are not expected to occur in relation to accounts receivable.
(d) | Inventories |
Inventories are stated at average cost of acquisition or production, adjusted to market value, when lower.
(e) | Investments |
Investments are recorded at acquisition cost and adjusted to market value, when applicable.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
(f) | Property, plant and equipment |
Property, plant and equipment are stated at cost, plus revaluation, less accumulated depreciation combined with the following aspects:
Capitalization of the financial charges incurred during the construction period of property, plant, and equipment.
Depreciation of property, plant and equipment, calculated on the straight-line basis in accordance with the estimated useful lives of assets, supported by an independent appraisal report, using the rates mentioned in Note 12.
Revaluations of property, plant and equipment made in 1983 and 1989 based on appraisals carried out by independent appraisers.
(g) | Deferred charges |
Deferred charges include pre-operating expenses related to expansion, projects for new products, development of systems, and organizational restructuring expenditures, amortized at the rate of 20% per annum (p.a.), Note 13.
(h) | Rights and obligations |
Rights are stated at cost or realization value, including, when applicable, earnings and monetary restatements and exchange rate variations. Liabilities are recognized at their known or estimated values, including corresponding charges, monetary restatements and exchange rate variations when applicable.
(i) | Income tax and social contribution |
Provision for income tax is recorded with the inclusion of the portion of fiscal incentives. Deferred taxes were recognized considering current rates for income tax and social contribution on tax losses and temporary differences, to the extent that realization is considered probable, as shown in Note 18.
(j) | Determination of results of operations |
Income and expenses are determined on the accrual basis.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
(k) | Reclassifications in the statement of operations |
In order to be consistent with the presentation criteria followed by the Braskem group, in the preparation of this financial statements, the Company made certain changes in the classification criteria used in prior periods, which for comparative purposes were also made to the financial information for the year ended December 31, 2006 and for the three-months ended March 31, 2006 presented herewith. The reclassifications were as follows:
i. | Sale of services and resale of goods were distributed between domestic and foreign market; |
ii. | Freight expenses are currently presented as deductions from gross revenues while previously were considered selling expenses; |
iii. | Depreciation and amortization are separately disclosed which before were included as selling expenses and general and administrative expenses, as appropriate; and |
iv. | Deferred income tax and social contribution are separately presented. In prior periods were presented together with current income tax expense under provisions for income tax and social contribution. |
Below is a summary of the effects:
3/31/2007 (Unaudited) | |||||||||
Previous criterion | Reclassifications | Current criterion | |||||||
Domestic market | 1,735 | 204 | 1,939 | ||||||
Sale of services and resale of goods | 204 | (204 | ) | ||||||
1,939 | 1,939 | ||||||||
Taxes, contributions, and freight on sales | (421 | ) | (19 | ) | (440 | ) | |||
Selling | (40 | ) | 21 | (19 | ) | ||||
General and administrative | (14 | ) | 1 | (13 | ) | ||||
Depreciation and amortization | (3 | ) | (3 | ) | |||||
Management and employees profit sharing | (6 | ) | 6 | ||||||
Provision for income tax and social contribution | (97 | ) | (5 | ) | (102 | ) | |||
Deferred income tax and social contribution | 5 | 5 | |||||||
(572 | ) | (572 | ) | ||||||
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
3/31/2006 (Unaudited) | |||||||||
Previous criterion | Reclassifications | Current criterion | |||||||
Domestic market | 1,691 | 12 | 1,703 | ||||||
Sale of services and resale of goods | 12 | (12 | ) | ||||||
1,703 | 1,703 | ||||||||
Taxes, contributions, and freight on sales | (419 | ) | (14 | ) | (433 | ) | |||
Selling | (25 | ) | 17 | (8 | ) | ||||
General and administrative | (12 | ) | 1 | (11 | ) | ||||
Depreciation and amortization | (3 | ) | (3 | ) | |||||
Management and employees profit sharing | (5 | ) | 5 | ||||||
Provision for income tax and social contribution | (76 | ) | (2 | ) | (78 | ) | |||
Deferred income tax and social contribution | 1 | 1 | |||||||
(532 | ) | (532 | ) | ||||||
(l) | Statement of cash flows |
The consolidated statement of cash flows is prepared in accordance with the Accounting Standards and Procedures - NPC no. 20 of IBRACON (Institute of Independent Auditors of Brazil).
4 | Cash and cash equivalents |
The investments included in this account have a term of no longer than 90 days.
3/31/2007 | 12/31/2006 | |||
Unaudited | ||||
Cash and banks | 1 | 7 | ||
Investments in Fundo Investimento Financeiro Multimercado Copesul: | ||||
Bank Deposit Certificates - CDB | 43 | 88 | ||
Financial Treasury Bills - LFT | 14 | 13 | ||
National Treasury Bills | 1 | 1 | ||
Investment Funds | 13 | 12 | ||
Simple debentures and other | 110 | 43 | ||
Interest bearing account | 8 | |||
Overnight and term deposits | 82 | 37 | ||
272 | 201 | |||
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
5 | Marketable Securities |
3/31/2007 | 12/31/2006 | |||
Unaudited | ||||
Term deposit | 42 | 39 | ||
Total | 42 | 39 | ||
Current assets | 41 | 38 | ||
Long-term receivables | 1 | 1 | ||
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
6 | Swap receivables and payables |
The Company entered into transactions involving US dollar options, called ‘Box Options’ as shown and commented below with the sole purpose of investing cash at a more attractive rate. Besides that, it also contracted Swap operations aiming to obtain maximization of the profitability earned by ‘Fundo de Investimento Financeiro Multimercado Copesul’, which is managed by COPESUL and whose custodian and manager is Banco Santander Brasil S.A.
On March 31, 2007 and December 31, 2006, the assets and liabilities of ‘Fundo de Investimento Financeiro Multimercado Copesul’ were distributed among the various accounts of the balance sheet in accordance with the nature of the respective accounts in compliance with Instruction CVM 408/2004.
(a) | Amounts receivable |
3/31/2007 | 12/31/2006 | |||
Unaudited | ||||
Swap receivables | 7 | 27 | ||
Options - Fixed income Box Operations | 80 | 37 | ||
87 | 64 | |||
(b) | Amounts payable |
3/31/2007 | 12/31/2006 | |||
Unaudited | ||||
Swap payable | 4 | 23 | ||
Options payable | 39 | |||
43 | 23 | |||
Box options are combined operations that involve purchase and sale of options in US dollars for the same maturity at a certain price, so that, regardless of the future US dollar rate, the Company previously knows the net result of those operations. It is similar, therefore, to fixed income operations. The value paid for the options, called a premium, refers to the amount invested by the Company and the sum redeemed will be the premium plus the earned pre-fixed return. In parallel to the contracting of purchase and sale operations of options, the Company uses Swaps with the purpose of exchanging the fixed income yield for the variance of Interbank Deposit Certificates - CDI.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
7 | Inventories |
Inventories are represented as follows:
3/31/2007 | 12/31/2006 | |||
Unaudited | ||||
Raw materials | 367 | 379 | ||
Finished products | 89 | 99 | ||
Resupply and other materials | 73 | 73 | ||
Chemical and intermediate products | 12 | 20 | ||
541 | 571 | |||
8 | Taxes and charges recoverable |
This account is represented as follows:
Current | Long-term | |||||||
3/31/2007 | 12/31/2006 | 3/31/2007 | 12/31/2006 | |||||
Unaudited | Unaudited | |||||||
Deferred taxes | ||||||||
Deferred income tax on temporary additions (a) | 4 | 2 | 12 | 11 | ||||
Deferred social contribution on temporary additions (a) | 2 | 4 | 4 | |||||
6 | 2 | 16 | 15 | |||||
Other taxes and charges recoverable | ||||||||
Prepaid IRPJ | 32 | |||||||
Prepaid CSLL | 17 | |||||||
Withholding tax | 1 | |||||||
CSLL recoverable | 12 | |||||||
Tax on Net Income (ILL) (b) | 54 | 54 | ||||||
ADIR - Additional State Income Tax (c) | 27 | 28 | ||||||
ICMS on acquisition of property, plant and equipment (d) | 9 | 8 | 10 | 10 | ||||
PASEP recoverable (e) | 15 | 33 | 23 | |||||
COFINS recoverable | 3 | |||||||
COFINS on acquisition of property, plant and equipment (f) | 2 | 2 | 2 | 2 | ||||
Prepaid ICMS (g) | 43 | 72 | ||||||
ICMS recoverable | 3 | 1 | ||||||
IPI recoverable (h) | 5 | 5 | ||||||
107 | 113 | 131 | 122 | |||||
113 | 115 | 147 | 137 | |||||
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
(a) | The Company recorded deferred assets on the loss of its subsidiary Copesul International Trading, Inc. - CITI in view of the loss in March 2007, which were offset with profits during this year. The Company also recorded deferred tax assets on temporary differences in current assets and long-term receivables in accordance with the expectation of their realization. The credits totaled R$22 (R$17 on December 31, 2006) and are expected to be realized as follows: |
% | ||||
Year | 3/31/2007 | 12/31/2006 | ||
Unaudited | ||||
2007 | 27.76 | 12.90 | ||
2008 | * | * | ||
2009 and after | 72.24 | 87.10 | ||
100.00 | 100.00 | |||
(b) | This refers to the tax credit of Tax on Net Income - ILL paid from 1989 to 1991 and was recognized in accounting terms in the assets of December 2002 as this tax was considered unconstitutional according to Resolution of the Federal Senate No. 82 of November 18, 1996 and republished on November 22, 1996. The Company is seeking administratively the right of compensation of this credit with other taxes. |
(c) | On March 31, 2007, the Company had recorded a receivable of R$27 (R$28 on December 31, 2006) relating to Additional State Income Tax (ADIR), for which the Company was awarded a final favorable judgment, and a security to cover court-ordered debts was issued. This security should be received at its original amount, in cash, plus legal interest, in successive and equal annual installments over a maximum ten-year period, from 2001. Up to March 31, 2007, no installment had been settled on its maturity, but they may be offset in future years against State taxes, as determined by Article 2 of Constitutional Amendment 30 of September 13, 2000. As a means of precaution, the Company filed an appeal in order to avoid the first installment becoming time-barred as well as to offset the ICMS tax credit with ICMS payable generated in its operations. |
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
(d) | As from August 2000, the Company started recording the ICMS credits paid on acquisitions of property, plant and equipment, as determined by Complementary Law 102 dated July 11, 2000. The credits to be offset are as follows: |
Year | 3/31/2007 | 12/31/2006 | ||
Unaudited | ||||
2007 | 7 | 8 | ||
2008 | 7 | 7 | ||
2009 | 3 | 3 | ||
2010 | 2 | * | ||
19 | 18 | |||
Current assets | 9 | 8 | ||
Long-term receivables | 10 | 10 | ||
(e) | During 2006 the Company recognized a PASEP judicial tax credit in the amount of R$45, seeking the right to carry out the payments in accordance with Complementary Law 8/70, using as a calculation basis the revenue of the sixth month prior to the occurrence of the taxable event, in light of Resolution No. 49/95 of the Federal Senate in a final decision. This credit was recognized in the income statement for the year 2006 in the accounts of other net operating income in the amount of R$14 and financial income of R$30. |
The changes in this credit are shown below:
3/31/2007 | 12/31/2006 | |||||
Unaudited | ||||||
Beginning balance | 38 | |||||
PASEP credit with final favorable judgment | 45 | |||||
Amount of credit compensated with PIS | (5 | ) | (7 | ) | ||
PASEP balance | 33 | 38 | ||||
Currently the Company has the right to make the offset of the PASEP credit with PIS and under orientation of its legal advisors filed a judicial claim for the right to offset it with other federal taxes.
(f) | The Company recognizes PIS and COFINS recoverable credits on the acquisitions of property, plant and equipment, which will be realized in 24 and 48 months depending on the asset acquired as permitted by Law 10865/04 and Decree 5222/04. |
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
(g) | During the year 2006, the Company advanced the amounts related to ICMS on future sales in the amount of R$72. The offset of the prepaid ICMS is being done in 10 monthly and consecutive payments, with charges adjusted by the ‘Unidade Padrão Fiscal do RS’-UPF (Standard Fiscal Unit of RS), having begun in January 2007. The prepayment amount not yet offset on March 31, 2007 totals R$43. |
(h) | The Company recognizes an IPI credit on the acquisitions of raw materials used in the production process, despite these products being defined as “zero rate”. In order to use these credits, every quarter they are offset with federal taxes in accordance with Decree 4544/2002 and paragraph 4, article 16 of the Regulatory Instruction No. 460/2004 of the Brazilian Revenue Secretariat. The long-term balance refers to the IPI Credit Premium that was judicially recognized and will be realized by the end of 2008. |
9 | Prepaid Expenses |
Prepaid expenses comprise payments made in advance, relating to benefits or services to be received by the Company in future years.
Realization will not be in cash, but by appropriation to the results of operations, as follows:
Realization terms | 3/31/2007 | 12/31/2006 | ||||
Unaudited | ||||||
Insurance | Up to Nov/2007 (Dec/06 to Nov/2007) | 7 | 10 | |||
Chemical products (catalysts) | Up to Sep/2018 (Dec/06 to Sep/2018) | 8 | 8 | |||
Total | 15 | 18 | ||||
Current assets | 11 | 14 | ||||
Long-term receivables | 4 | 4 | ||||
The long-term portion refers to chemical products (catalysts) which are used as agents that promote a chemical reaction in the production of basic petrochemicals. Their average useful life and amortization period is 6 years.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
10 | Judicial deposits |
3/31/2007 | 12/31/2006 | |||
Unaudited | ||||
Tax claims: | ||||
Income tax | 2 | 2 | ||
CIDE on technical assistance services | 4 | 4 | ||
IRRF on technical assistance services | 1 | 1 | ||
7 | 7 | |||
Labor claims | 2 | 2 | ||
9 | 9 | |||
The Company has made judicial deposits and has recorded a provision for contingencies relating to income taxes and CIDE in connection with lawsuits, as described in Note 24 (a).
11 | Investments |
(a) | Information on investments: |
3/31/2007 | 12/31/2006 | |||
Unaudited | ||||
Other Investments | 7 | 10 | ||
7 | 10 | |||
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
(b) | Information on subsidiaries |
Copesul International Trading, Inc. - CITI has the function of performing “Trading Company” operations and prepares its financial statements in Brazilian Real.
Parent company | ||||||
Copesul International Trading, Inc. - CITI | 3/31/2007 | 12/31/2006 | ||||
Unaudited | ||||||
Capital | 99 | 99 | ||||
Stockholders’ equity | 97 | 116 | ||||
Holding percentage - total and voting capital | 100 | % | 100 | % | ||
Number of shares | 98,529,157 | 98,529,157 | ||||
3/31/2007 | 3/31/2006 | |||||
Unaudited | Unaudited | |||||
Income (loss) in the period/year | (5 | ) | 17 |
12 | Property, plant and equipment |
3/31/2007 Unaudited | 12/31/2006 | ||||||||||
Annual depreciation rates % (*) | Revalued and restated cost | Accumulated depreciation | Net | Net | |||||||
Equipment and installations | |||||||||||
Operations | 10 | 2,010 | (1,503 | ) | 507 | 535 | |||||
Utilities | 10 | 911 | (840 | ) | 71 | 79 | |||||
Storage and transfers | 10 | 434 | (341 | ) | 93 | 98 | |||||
Maintenance Stoppage - CVM Del. No. 489/05 (**) | 21 | 92 | (39 | ) | 53 | 57 | |||||
Other (***) | 15 | 89 | (70 | ) | 19 | 20 | |||||
Buildings and construction | 4 | 56 | (23 | ) | 33 | 33 | |||||
Improvements | 4 | 22 | (11 | ) | 11 | 10 | |||||
Land | 38 | 38 | 38 | ||||||||
Construction in progress | 150 | 150 | 141 | ||||||||
Maintenance Stoppage in Progress - CVM Del. No. 489/05 | 19 | 19 | 19 | ||||||||
3,821 | (2,827 | ) | 994 | 1,030 | |||||||
(*) | weighted-average rate that reflects the depreciation expense (Note 3 (f)). |
(**) | supported by appraisal reports issued by specialized companies. |
(***) | information technology equipment, furniture and fixtures, among others are included in this account. |
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
Certain items of fixed assets were given as guarantee for financing operations, as shown in Note 15 (d).
(a) | Revaluations |
Revaluations of property, plant and equipment made in 1983 and 1989, based on appraisal reports issued by specialized companies, produced the following effects on the balance sheet:
3/31/2007 (Unaudited) | 12/31/2006 | ||||||||
Revaluation | Accumulated realization | Net | Net | ||||||
Equipment and installations | 1,339 | (1,317 | ) | 22 | 28 | ||||
Buildings and construction | 17 | (7 | ) | 10 | 11 | ||||
Improvements | 7 | (3 | ) | 4 | 4 | ||||
Land | 32 | 32 | 32 | ||||||
Total | 1,395 | (1,327 | ) | 68 | 75 | ||||
Revaluation reserve | 68 | 75 | |||||||
Realizations of the revaluation reserve occur through depreciation and disposals of the revalued assets each year. The amounts realized are transferred directly to retained earnings, on which the effects of income tax and social contribution are also considered at the current rates.
The Company did not set up a provision for deferred income tax and deferred social contribution on the balance of the revaluation reserve, since CVM Deliberation 183/95 determines that such provision is only required on revaluations made as from July 1, 1995. The revaluation reserve is taxable when realized through depreciation and disposals of items. Considering current tax legislation, the revaluation reserve is subject to future taxation estimated as follows:
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
Statement of the calculation used to estimate future income tax and social contribution on the revaluation reserve:
3/31/2007 | 12/31/2006 | |||||
Unaudited | ||||||
Income tax: | ||||||
Balance of revaluation reserve | 68 | 75 | ||||
Revaluation reserve on land | (31 | ) | (31 | ) | ||
Income tax calculation basis | 37 | 44 | ||||
Income tax (rate - 25%) | (9 | ) | (11 | ) | ||
Social contribution: | ||||||
Income tax calculation basis | 37 | 44 | ||||
Difference regarding IPC/BTNF on revaluation reserve balance | (18 | ) | (22 | ) | ||
Social contribution calculation basis | 19 | 22 | ||||
Social contribution (rate - 9%) | (2 | ) | (2 | ) | ||
Income tax and social contribution | (11 | ) | (13 | ) | ||
During this quarter, the portion of R$7 (R$33 during year 2006) was transferred to retained earnings upon realization of the revaluation reserve, as shown in the changes in shareholders’ equity. The tax effect on the realization was R$2 (R$10 during year 2006).
(b) | Acquisitions of property, plant and equipment |
COPESUL invested the amount of R$21 in the first quarter 2007. The main investments are R$4 - operational reliability, technological updating, and profitability increase projects to be implemented during the PGM that is forecasted to take place in 2008; R$5 - industrial automation programs; R$6 - replacement of coils and technological updating of the furnaces and R$4 - conversion of the MTBE unit to ETBE. The remaining balance of R$2 refers to various investment projects. In the year 2006 COPESUL invested the amount of R$126. The main investments are R$38 - direct investments to make feasible the General Maintenance Stoppage (PGM); R$19 - operational reliability, technological updating, and profitability increase projects to be implemented during the PGM that is forecasted to take place in 2008; R$19 - industrial automation programs; R$10 - replacement of coils and technological updating of the furnaces; R$5 - building of Butadiene Unit, and R$7 - conversion of the MTBE unit to ETBE. The remaining balance of R$28 refers to various investment projects.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
13 | Deferred charges |
Deferred charges comprise:
Annual amortization | 3/31/2007 Unaudited | 12/31/2006 | |||||||||
rates % (p.a.) | Restated cost | Accumulated amortization | Net | Net | |||||||
Development programs | 20 | 63 | (53 | ) | 10 | 10 | |||||
63 | (53 | ) | 10 | 10 | |||||||
14 | Suppliers |
3/31/2007 | 12/31/2006 | |||
Unaudited | ||||
Local | 51 | 94 | ||
Foreign | 224 | 260 | ||
275 | 354 | |||
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
15 | Loans and financing |
(a) | Liabilities for loans and financing are as follows: |
Index | Annual charges (%)* | 3/31/2007 | 12/31/2006 | |||||
Unaudited | ||||||||
Foreign currency | ||||||||
Financing (investments) - US$2 million | Currency basket and US$ | 9.04 | 4 | 4 | ||||
Financing and loans (US$25 million) | Currency Basket | 10.11 | 51 | 7 | ||||
55 | 11 | |||||||
Local currency | ||||||||
Loans and financing | TJLP | 11.53 | 37 | 40 | ||||
Hot money, NCE and BACEN Resolution 2770 | CDI | 12.95 | 13 | 23 | ||||
Financing (Investments) | TJLP | 9.64 | 81 | 83 | ||||
131 | 146 | |||||||
186 | 157 | |||||||
Current liabilities | 87 | 50 | ||||||
Long-term liabilities | 99 | 107 | ||||||
* | weighted-average rate that reflects the charges on loans. |
NCE - Export Credit Note
CDI - Interbank Deposit Certificate
TJLP - Long-Term Interest Rate
BACEN - Brazilian Central Bank
(b) | The changes in loans and financing were as follows: |
Short-term | Long-term | Total | |||||||
At December 31, 2005 | 288 | 84 | 372 | ||||||
Additions | 604 | 47 | 651 | ||||||
Interest | 28 | 28 | |||||||
Transfer to short-term | 24 | (24 | ) | ||||||
Linked | (893 | ) | (893 | ) | |||||
Monetary and exchange variations | (1 | ) | (1 | ) | |||||
At December 31, 2006 | 50 | 107 | 157 | ||||||
Additions | 116 | 116 | |||||||
Interest | 4 | 4 | |||||||
Transfer to short-term | 8 | (8 | ) | ||||||
Linked | (90 | ) | (90 | ) | |||||
Monetary and exchange variations | (1 | ) | (1 | ) | |||||
At March 31, 2007 (Unaudited) | 87 | 99 | 186 | ||||||
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
During the third quarter of 2006, the Company entered into a credit line agreement with BNDES - Banco Nacional de Desenvolvimento Econômico e Social in the amount of R$338 for future investment in order to improve its manufacturing facilities. By March 31, 2007 the Company had used R$43 of this credit line.
(c) | Long-term financing falls due as follows: |
Year | 3/31/2007 | 12/31/2006 | ||
Unaudited | ||||
2008 | 25 | 33 | ||
2009 | 30 | 30 | ||
2010 | 23 | 22 | ||
2011 | 13 | 14 | ||
2012 | 8 | 8 | ||
99 | 107 | |||
(d) | Guarantees |
The foreign currency financing are guaranteed in part by the mortgage of plant 2 and by letter of guarantee.
Local currency financing via FINEM and FINAME programs is guaranteed by Plant 2 and by the financed machinery and equipment, respectively.
The financing contracted with the Banco Nacional de Desenvolvimento Econômico e Social - BNDES, on September 9, 2005, amounting to R$50, for the installation of a pyrolysis furnace, has as a fiduciary guarantee a letter of guarantee issued by the Banco Regional de Desenvolvimento do Extremo Sul - BRDE. For the rest of the investment financing, the Company placed plant 2 as guarantee.
The Company is the guarantor of working capital loans of its subsidiary amounting to R$45 through the issuing of promissory notes.
The NCE operations in the amount of R$3 (R$23 at December 31, 2006) are guaranteed by COPESUL itself in the same NCE contracted document.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
The Company has given secondary guarantees to financial institutions in relation to “vendor” transactions for Braskem S.A. and the amount of the principal is R$585 (R$613 at December 31, 2006). Losses are not expected for the Company as a result of these obligations.
Additionally, in March 2007, the Company placed R$1 (R$1 at December 31, 2006) as a guarantee of energy purchase operations (National Operator of the Electric System - ONS), recorded in long-term marketable securities.
16 | Export drafts |
The changes in advances contracted with financial institutions relating to exports to be invoiced are as follows:
Billed | To be invoiced | |||||||||||
Current assets | Current liabilities | Long-term liabilities | Total | |||||||||
At December 31, 2005 | 18 | 1 | 91 | 110 | ||||||||
Additions | 531 | 138 | 669 | |||||||||
Interest | 13 | 13 | ||||||||||
Transfer to short-term | 35 | (35 | ) | |||||||||
New export receivables | 527 | (527 | ) | |||||||||
Amortization | (545 | ) | (12 | ) | (49 | ) | (606 | ) | ||||
Monetary and exchange variations | 1 | (2 | ) | (6 | ) | (7 | ) | |||||
At December 31, 2006 | 1 | 39 | 139 | 179 | ||||||||
Additions | 205 | 205 | ||||||||||
Interest | 3 | 3 | ||||||||||
New export receivables | 159 | (159 | ) | |||||||||
Amortization | (84 | ) | (2 | ) | (86 | ) | ||||||
Monetary and exchange variations | (1 | ) | (1 | ) | (6 | ) | (8 | ) | ||||
At March 31, 2007 (Unaudited) | 75 | 85 | 133 | 293 | ||||||||
Export drafts to be invoiced bear exchange variation plus average interest of 7.55% p.a. (7.11% p.a. in 2006), which are recorded in the statement of income as financial expenses.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
Long-term export drafts falls due as follows:
Year | 3/31/2007 | 12/31/2006 | ||
Unaudited | ||||
2009 | 72 | 75 | ||
2010 | 61 | 64 | ||
133 | 139 | |||
17 | Taxes and charges payable |
3/31/2007 | 12/31/2006 | |||
Unaudited | ||||
ICMS payable | 18 | 22 | ||
ICMS - tax replacement | 3 | 3 | ||
CIDE on fuels payable | 11 | 16 | ||
IRRF on interest on own capital payable | 3 | |||
Other retentions payable | 1 | 1 | ||
33 | 45 | |||
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
18 | Income tax and social contribution |
(a) | Composition of deferred income tax and social contribution |
3/31/2007 Unaudited | 12/31/2006 | |||||||||||
Income tax | Social contribution | Income tax | Social contribution | |||||||||
Calculation basis for deferred income tax and social contribution | ||||||||||||
Provision for administrative, civil and labor contingencies | 30 | 30 | 29 | 29 | ||||||||
Provision for fiscal contingencies - IR and CIDE on services abroad | 5 | 5 | 5 | 5 | ||||||||
Provision for contingencies - pension plan | 9 | 9 | 9 | 9 | ||||||||
Exchange variation - deferred | (25 | ) | (25 | ) | (26 | ) | (26 | ) | ||||
Provision for employee profit-sharing | 5 | 5 | ||||||||||
Other provisions | 10 | 9 | 8 | 8 | ||||||||
Copesul International Trading tax loss | 5 | 5 | ||||||||||
Accelerated depreciation Law 11.051/05 | (18 | ) | (15 | ) | ||||||||
Accelerated depreciation incentive | (4 | ) | * | (4 | ) | |||||||
Deferred taxes calculation basis | 35 | 20 | 21 | 10 | ||||||||
Deferred income tax (25%) | 9 | 5 | ||||||||||
Deferred social contribution (9%) | 2 | 1 | ||||||||||
Deferred total taxes | 9 | 2 | 5 | 1 | ||||||||
Assets | ||||||||||||
Short-term | 4 | 2 | 2 | |||||||||
Long-term | 12 | 4 | 11 | 4 | ||||||||
16 | 6 | 13 | 4 | |||||||||
Liabilities | ||||||||||||
Long-term | (7 | ) | (4 | ) | (8 | ) | (3 | ) | ||||
(7 | ) | (4 | ) | (8 | ) | (3 | ) | |||||
9 | 2 | 5 | 1 | |||||||||
3/31/2007 Unaudited | 12/31/2006 | |||||||||||
Income tax | Social contribution | Income tax | Social contribution | |||||||||
Changes in the deferred taxes in the result | 4 | 1 | (2 | ) | (2 | ) |
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
The deferred income tax and social contribution assets and liabilities arose from temporary differences and are recognized in accounting terms taking into consideration the probable realization of these taxes based on forecasts of future results prepared and founded on internal assumptions and on future economic scenarios that can, however, undergo changes.
(b) | Estimated realization period |
The values of the assets, net of the deferred tax liabilities, have the following expectations of realization:
Year | 3/31/2007 | 12/31/2006 | ||||
Unaudited | ||||||
2007 | 6 | 1 | ||||
2010 | (1 | ) | (1 | ) | ||
2011 | (4 | ) | (4 | ) | ||
2015 and 2016 | 10 | 10 | ||||
11 | 6 | |||||
Since the taxable basis of the income tax and social contribution arises from not only the profit that can be generated, but also the existence of non-taxable income, non-deductible expenses, fiscal incentives, and other variables, there is not an immediate correlation between the Company’s net income and the result of income tax and social contribution. Therefore, the expectation of using the tax credits should not be taken as the only indicator of the Company’s future results.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
(c) | Reconciliation of income tax and social contribution |
3/31/2007 | 03/31/2006 | |||||
Unaudited | Unaudited | |||||
Income before income tax and social contribution | 296 | 231 | ||||
Social contribution on net income (CSLL) | ||||||
Social contribution (9%) | (27 | ) | (21 | ) | ||
Permanent additions | ||||||
Realization of revaluation reserve - difference in IPC/BTNF | (1 | ) | ||||
Equity in losses of subsidiares | (1 | ) | ||||
Other | (1 | ) | (1 | ) | ||
Permanent exclusions | ||||||
Equity in earnings of subsidiaries | 1 | |||||
CITI tax credit/loss | 1 | |||||
Other | 1 | |||||
Social contribution expense | (27 | ) | (22 | ) | ||
Income tax (IR) | ||||||
Income tax (25%) | (74 | ) | (58 | ) | ||
Permanent additions | ||||||
Equity in losses of subsidiaries | (1 | ) | (2 | ) | ||
Other | (2 | ) | ||||
Permanent exclusions | ||||||
Equity in earnings of subsidiaries | 2 | |||||
CITI tax credit/loss | 1 | |||||
Fiscal incentives | 1 | 1 | ||||
Other | 1 | |||||
Income tax expense | (75 | ) | (56 | ) | ||
Total income tax and social contribution in the income statement | (102 | ) | (78 | ) | ||
During 2007 and 2006, the taxation basis was annual taxable income, with an election for payment by monthly estimate.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
(d) | Fiscal incentives |
The Company exercised its rights to fiscal incentives of PDTI - Program for Technological and Industrial Development based on Law No. 9532/97, Decree No. 949/93 and on Ordinance No. 130/02 of the Ministry of Science and Technology (MCT) up to the year 2005. Beginning in 2006, the Company migrated to the incentives of PDI - Technological Research and Technological Innovation Development resulting from Law 11,196/05, Decree No. 5.798/06 and of MCT Ordinance No. 782/06 with income tax and social contribution incentive of R$1 in the present quarter. Fiscal incentives in child and adolescent fund, and operations of a cultural and artistic nature were also used during 2007 as well as the PAT - Program for the Worker’s Nutrition, reaching a total of R$2 (R$1 in the same period of 2006). These incentives were recorded directly as reductions of the IRPJ accounts in the statement of income.
19 | Stockholders’ equity |
(a) | Capital |
The Company’s stockholder composition at March 31, 2007 and 2006 is shown below.
STOCKHOLDERS | Number of shares | (%) | ||
Ipiranga Group (i) | 44,255,077 | 29.46 | ||
Braskem Group / Odebrecht | 44,255,077 | 29.46 | ||
Petrobras Química S.A. - PETROQUISA | 23,482,008 | 15.63 | ||
Other | 38,225,005 | 25.45 | ||
Total | 150,217,167 | 100.00 | ||
On March 5, 2007, as approved at the Ordinary/Extraordinary General Meeting, the Company carried out a capital increase in the amount of R$ 60 by the capitalization of fiscal incentive reserves of FUNDOPEM, without changing the number of original shares.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
(i) | Relevant fact |
Acquisition of the Ipiranga Group
A Relevant Fact was published in the press on March 19, 2007 that deals with the acquisition of the Ipiranga Group by Ultrapar Participações S.A. (Ultrapar) in the capacity of agent for the account and order of Braskem and Petrobras. Braskem and Petrobras will own the petrochemical assets represented by Ipiranga Química S.A., Ipiranga Petroquímica S.A. (IPQ) and by the latter’s interest in Copesul, in the proportion of 60% for Braskem and 40% for Petrobras.
On April 18, 2007, Braskem and Copesul announced by a Relevant Fact that Braskem, through its subsidiary EDSP58 Participações S.A. (“Offeror”), together with Unibanco - União de Bancos Brasileiros S.A., as intermediary institution (“Intermediary”), submitted a request for registering a public tender offer for the acquisition of Copesul shares (“Offer”) to delist it from the São Paulo Stock Exchange - BOVESPA (“BOVESPA”) as provided for in article 4, paragraph 4 of Law no. 6,404/76 and the CVM Instruction no. 361/02 and in compliance with the information already disclosed by the Relevant Fact published on March 19, 2007. The Offeror is a corporation with capital held by Braskem and by Petróleo Brasileiro S.A. - Petrobras, in the proportion of 60% and 40%, respectively.
The appraisal report on the above-mentioned Offer, issued by Calyon Corporate Finance Brasil - Consultoria Financeira Ltda., dated April 16, 2007, was sent on April 18 to the Brazilian Securities Commission - CVM (“CVM”) and is available for anyone interested at the São Paulo Stock Exchange - Bovespa, at Braskem’s headquarters, and at the Offeror, the Intermediary, at Copesul, as well as at CVM, and was also available beginning on that date, at the following electronic addresses: www.braskem.com.br, www.copesul.com.br, www.bovespa.com.br, and www.cvm.gov.br, as established by article 8, paragraph 5, of CVM Instruction no. 361/02.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
Tender Offer for shares of Copesul (“Offer”):
On October 5, 2007, Braskem and Copesul by means of a Relevant Fact, which has been copied below, informed the result of the Tender Offer for Copesul shares (“Offer”):
“Braskem S.A. (“Braskem”), for the account and through its controlled company EDSP58 Participações S.A. (“Offeror”) and Copesul - Companhia Petroquímica do Sul (“Copesul”), in compliance to the terms of CVM Instruction no. 358/02, inform that in the Tender Offer for the Acquisition of Common Shares Issued by Copesul (“Offer”) held on this date in the electronic trading system of the São Paulo Stock Exchange - Bovespa, the Offeror purchased 34,040,927 (thirty-four million, forty thousand, nine hundred and twenty seven) common shares of Copesul, which represent more than 2/3 (two-thirds) of the outstanding shares.
Since more than 2/3 (two-thirds) of the shares in circulation were purchased, after verifying compliance with the norms that apply to the Offer, the Brazilian Securities Commission (“CVM”) delisted Copesul on October 17, 2007.
During 3 (three months) from the offer date, the holders of Copesul shares may sell their shares to the Offeror for the same price as during the Offer, updated through the date of the actual payment, according to the notification of the Offer published on August 14, 2007.
Furthermore, considering that the remaining shares in circulation are less than 5% (five percent) of the total shares, Copesul’s Board of Directors will call a Stockholders’ General Meeting to discuss the purchase of these shares for the price of the Offer, according to paragraph 5 of article 4 of Law no. 6,404/76.
According to the terms of Ruling 361/02, Bovespa has 4 business days to send to CVM the final reports regarding the auction.”
(b) | Capital reserves |
Capital reserves are made up as follows:
3/31/2007 | 12/31/2006 | |||
Unaudited | ||||
FUNDOPEM | 223 | 284 | ||
Fiscal incentives - PDI - Technological Research and Technological Innovation Development | 15 | 12 | ||
238 | 296 | |||
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
In September 1998, the Company started to set up a capital reserve based on the financial incentive of the Company Operation Fund (FUNDOPEM) - RS, according to Law 6427 of October 18, 1972 and amendments. The incentive was granted to the Company through Decree 38502, of May 11, 1998, and the benefit obtained is 50% of ICMS due for a maximum period of 8 years, beginning in September 1998 until August 2006. The amount accumulated since the beginning of the benefit, recorded as a capital reserve in stockholders’ equity was R$610, of which R$386 (R$326 at December 31, 2006) was used to increase capital, as approved at the General Meetings in 2007, 2006, 2004, 2003, 2001, and 2000.
Beginning in 2003, the Company obtained the benefit of fiscal incentives of PDTI - Fiscal incentives - PDI - Technological Research and Technological Innovation Development based on Law No. 9532/97 and No. 11196/05, Decrees No. 949/93 and 5798/06 and on Ordinance No. 130/02 and No. 783/06 of the Ministry of Science and Technology. There is a 60-month period in which these benefits must be used, beginning from March 2002 and terminating in February 2007. During this quarter, the Company recorded the benefit of this fiscal incentive in the amount of R$2 directly in the stockholders’ equity.
(c) | Revaluation reserve |
The realization of the revaluation reserve, based on depreciation, write-offs or disposals of the corresponding revalued assets, is transferred to retained earnings, also considering the tax effects of the provisions constituted.
The tax charges levied on the revaluation reserve are recognized as this reserve is realized since they are previous to the publication of the CVM Deliberation No. 183/95. The tax charges levied on these reserves total R$11 (R$13 on December 31, 2006) as shown in Note 12(a).
(e) | Prior year adjustments |
The adjustment can be summarized as shown below.
Provision for programmed maintenance (i) | 66 | ||
Taxes (ii) | (28 | ) | |
Prior year adjustment - Total | 38 | ||
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
(i) | Up to December 31, 2005, |
Reversal of | 45 | ||
Capitalization of the expenses incurred with previous stoppages in property, plant and | 41 | ||
Depreciation accumulated up to December 31, 2005 on the expenses incurred with previous stoppages in property, plant and equipment that were capitalized. | (20 | ) | |
(ii) | ||
In December 2002, the Company recognized this credit because the legal advisors considered this a legal right. When originally recorded the credit the Company has not recognized the corresponding IRPJ and CSLL payable on the monetary correction of the credit. During 2006 the Company recognized the amount of R$28 as a tax payable. The monetary variations recorded in 2002 represents taxable income and during 2006 the Company recorded the corresponding tax payable against retained earnings as a correction of an error.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
20 | Financial result |
The Company’s financial result in the first quarter 2007, compared with 2006, is as follows:
3/31/2007 | 3/31/2006 | |||||
Unaudited | Unaudited | |||||
Financial income | ||||||
Earnings on financial investments | 2 | 4 | ||||
Revenue with derivatives of Fundo de Investimento Financeiro Multimercado Copesul | 158 | 42 | ||||
Monetary variations on assets | 3 | 4 | ||||
Exchange variations on assets | (6 | ) | (4 | ) | ||
Interest on loans receivable | 1 | 3 | ||||
Other financial income | 1 | |||||
159 | 49 | |||||
Financial expenses | ||||||
Interest and charges on loans and financing | (7 | ) | (11 | ) | ||
Expense with derivatives of Fundo de Investimento Financeiro Multimercado Copesul | (151 | ) | (34 | ) | ||
Monetary variations on liabilities | (1 | ) | ||||
Exchange variations on liabilities | 14 | 7 | ||||
Other financial expenses | (10 | ) | (12 | ) | ||
(154 | ) | (51 | ) | |||
Net financial result | 5 | (2 | ) | |||
21 | Other operating income (expenses), net |
3/31/2007 | 03/31/2006 | ||||
Unaudited | Unaudited | ||||
Operating income | |||||
Recovery of PIS, COFINS and ICMS | 1 | 2 | |||
Other | 7 | ||||
1 | 9 | ||||
Operating expenses | |||||
Taxes, charges and contributions | |||||
Provisions for administrative, civil, and labor contingencies | (1 | ) | |||
Profit sharing | (1 | ) | 1 | ||
(2 | ) | 1 | |||
Other operating income (expenses) - net | (1 | ) | 10 | ||
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
(i) | In 2005, according to provisions in Law No. 9363/96, the Company recalculated the presumed IPI credit on petrochemical naphtha acquisitions made from April 2002 to January 2004, establishing an additional credit of R$16, which was completely compensated with federal taxes that same year and the taxes levied on the recognized credit were paid in order to avoid future challenges by the tax authorities. This payment was recognized in accounting terms in the group of recoverable taxes. |
22 | Financial Instruments |
The Company evaluated its assets and liabilities in relation to market and/or realizable values through available information and evaluation methodologies established by management. However, both the interpretation of market data and the selection of valuation methods require considerable judgment and reasonable estimates to produce the appropriate realizable value. Consequently, the estimates presented do not necessarily indicate the amounts that can be realized in the current market. The use of different market hypotheses and/or methodologies for estimates can have a significant effect on estimated realizable values.
Valuation of the financial instruments
The Company’s main asset and liability financial instruments at March 31, 2007, as well as the criteria for their valuation/evaluation are described below.
(a) | Cash and banks, financial investments, accounts receivable, other current assets and accounts payable |
The amounts recorded are similar to their realizable values.
(b) | Investments |
The investments are mainly in a privately held subsidiary, recorded on the equity method of accounting, in which the Company has a strategic interest. Considerations of the market value of shares held are not applicable.
(c) | Financing |
These are subject to interest at normal market rates, as mentioned in Note 15 (a). The estimated market value was calculated based on the present value of the future disbursement of cash, using interest rates that are available to the Company for the issuance of debts with similar maturities and terms.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
(d) | Interest rate risk |
This risk derives from the possibility of the Company incurring losses due to fluctuations in the interest rates that would increase the financial expenses related to loans and financings from the market. The Company made contracts of derivatives to hedge against the risk in some operations and it is also continually monitoring the market interest rate with the objective of evaluating the need of contracting new operations in order to protect itself from the risk of the volatility of these rates.
(e) | Exchange rate risk |
This risk derives from the possibility of the Company incurring losses due to fluctuations in the exchange rates that would reduce the nominal values billed or increase the amounts owed to the market.
Since part of the Company’s revenues (around 10%) is in US dollars, the main strategy is that this serves as a natural hedge for its liability operations recorded in foreign currency.
At March 31, 2007, the Company had assets and liabilities denominated in US dollars in the amount of US$60 million and US$133 million, respectively, and it had no instrument to protect this exposure on that date.
(f) | Derivatives |
The net exchange exposure is as follows:
3/31/2007 | 12/31/2006 | |||||
Unaudited | ||||||
Financing and export drafts in US$ | (273 | ) | (189 | ) | ||
Assets in US$ | 124 | 34 | ||||
Derivative instruments in US$ | 45 | 11 | ||||
Net exposure | (104 | ) | (144 | ) | ||
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
The book value and market value of the main financial instruments are as follows:
3/31/2007 Unaudited | 12/31/2006 | |||||||||||
Book value | Market value | Book value | Market value | |||||||||
Cash and banks | 272 | 272 | 200 | 200 | ||||||||
Swaps and options receivable | 87 | 87 | 64 | 64 | ||||||||
Marketable securities | 42 | 42 | 39 | 39 | ||||||||
Locked exchange contract advance receivable | 2 | 2 | ||||||||||
Loans to third parties | 1 | 1 | 2 | 2 | ||||||||
Financial institutions | (185 | ) | (185 | ) | (156 | ) | (156 | ) | ||||
Export drafts billed and to be invoiced | (293 | ) | (294 | ) | (180 | ) | (178 | ) | ||||
Swaps and options payable | (44 | ) | (44 | ) | (23 | ) | (23 | ) | ||||
(120 | ) | (121 | ) | (52 | ) | (50 | ) | |||||
Asset swap operations in US dollars and liability at a fixed rate were contracted in order to minimize the effect of the variations of the exchange rates on liabilities. As for the cash operations, the Company opted to use time deposits indexed to the US dollar.
At March 31, 2007, the Company had lock-in operations on exchange not yet settled on operations for purchasing raw material in the amount of US$24 million (US$109 million at December 31, 2006) equivalent to R$48 (R$232 at December 31, 2006).
As shown above, the accounting values of the financial instruments are recorded at levels that are close to the market.
23 | Insurance |
The Company’s policy is to contract insurance at levels adequate for the risks involved with its operations. Considering the characteristics of its risks, management contracts insurance under the concept of maximum possible loss in a single event, and maintains coverage for operational risks, civil responsibilities and loss of profits. Also, the Company contracts transportation, group life, sundry risks and vehicle insurance.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
24 | Contingencies |
On the dates of the financial statements, the Company presented the following liabilities and the corresponding judicial deposits related to the contingencies, as determines CVM Instruction no. 489 of October 3, 2005 that approved the IBRACON Pronouncement no. 22 as to forecasts, liabilities, liability contingencies, and asset contingencies:
Judicial deposits | Provisions for contingencies | |||||||
3/31/2007 | 12/31/2006 | 3/31/2007 | 12/31/2006 | |||||
Unaudited | Unaudited | |||||||
Tax contingencies (a) | 7 | 7 | 5 | 5 | ||||
Labor and social security contingencies (b) | 2 | 2 | 28 | 27 | ||||
Civil complaints (c) | 3 | 2 | ||||||
9 | 9 | 36 | 34 | |||||
The Company is a party to labor, civil, and tax claims as well as others in progress and is discussing these issues at both the administrative and judicial levels and these are backed by judicial deposits when applicable. The provisions for the losses from these processes are estimated and updated by management based on the opinion of its external legal advisors.
(a) | Tax contingences |
With respect to the Income Tax and Economic Domain Intervention Contribution (CIDE) on payment of technical assistance services, the Company has been judicially questioning the legality of charging these taxes since August 2002 and has made judicial deposits. The purpose of the process is to avoid double taxation with respect to the countries with which Brazil has tax treaties and provisions have been made in the same amounts as judicial deposits as shown in Note 10.
(b) | Labor and social security contingencies |
The Company has ongoing labor claims, mainly related to salary equalization and overtime. A provision for these contingencies was recorded considering the estimates of the legal advisors for probable loss. Judicial deposits were made when required. The Company is a party to labor, civil, and tax claims as well as others in progress and is discussing these at both the administrative and judicial levels, backed by judicial deposits when applicable.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
Furthermore, the Company has made provision for labor losses related to suits filed by the Petrochemical Industry Labor Union of Triunfo concerning the rights claimed by the Company’s shift workers to receive overtime, due to alleged delays during transfer and change of shifts. A partial grant was given in trial court in favor of the workers’ claims to overtime. However, in appellate court on December 11, 2006 an ordinary appeal was filed by Copesul and the expectation is the total or at least partial reversal of the unfavorable decision in the 4th Regional Labor Court of Appeals.
(c) | Civil contingencies |
The main lawsuits are related to complaints made by contracted workers related to losses that supposedly occurred as a result of various economic plans.
Possible losses
The Company has suits of both tax and civil nature involving risks of loss classified by the management as possible, but not probable, based on the evaluation of its legal advisors and for which no provisions have been set up.
(a) | Tax claims |
The Brazilian Revenue Secretariat (SRF) raised an assessment against Copesul in 1999, referring to IRPJ and CSLL for 1994, in connection with the monetary restatement of the balance sheet and equity method adjustment, arising from accounting recognition of dividends distributed by its subsidiary overseas. The adjusted amount on September 30, 2006 was R$21. In 2002, the investee filed an appeal with the Taxpayer Board, which was judged in 2005 with a result totally favorable to Copesul. The court decision of the Taxpayer Board was published in the 4th quarter of 2006 and an appeal was made by the Attorney of the Internal Revenue Service to the High Court of Appeals for Fiscal Matters, to which the Company has already offered a brief of respondent. This lawsuit now awaits the decision of this Court.
(b) | Civil claims |
A civil lawsuit is still outstanding against Copesul brought by the minority stockholder Petroquímica Triunfo S.A., questioning aspects involved in the privatization process related to the conversion of preferred shares into common shares before the privatization auction and the preference for subscription of shares in relation to the bidders in the auction. Management and the legal advisors do not expect losses to arise from this lawsuit.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
25 | Pension plan |
The Company and its employees contribute to PETROS - Fundação Petrobras de Seguridade Social, in connection with retirement and defined benefit pension plans. In 2006, the global contribution rate was 12.93% on the total of income of employees linked to the plan. The Company contributed during the first quarter of 2007 with R$1 (R$6 in the year 2006).
According to the regulations of the PETROS - Fundação Petrobras de Seguridade Social Benefits Plan and pertinent legislation, in case of a significant shortfall of technical reserves, the sponsors and participants will contribute additional financial resources, or there should be an adjustment of the benefits of the plan to the available funds. Up to the present date no such contribution was needed.
In May 2003, the Board of Directors approved the Complementary Pension Plan called COPESULPREV, a closed defined contribution plan. This plan aims to provide benefits to employees not included in the old PETROS plan, which is now closed to new members. Plan management will be carried out through Fundação PETROBRAS de Seguridade Social - PETROS, in an independent manner, not linked to any other pension plan managed by that entity, in compliance with Complementary Law 109/2001.
26 | Related parties |
According to CVM Deliberation 26/86, related parties are defined as those entities, whether individuals or companies, with which the Company has the possibility of contracting, in the broad sense of this word, other than those which might apply to transactions with independent third parties, not subject the Company’s managerial control or any other influence.
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
(a) | Assets and Liabilities |
3/31/2007 | 12/31/2006 | |||
Unaudited | ||||
Assets | ||||
Current - Credits - Customers | ||||
Local customers | ||||
Braskem S.A. | 29 | 39 | ||
Ipiranga Petroquímica S.A. | 8 | 15 | ||
Refinaria Alberto Pasqualini - REFAP S.A. | 5 | 5 | ||
Petróleo Brasileiro S.A. - PETROBRAS | 4 | * | ||
46 | 59 | |||
Foreign Customers | ||||
Ipiranga Trading | 121 | * | ||
121 | * | |||
167 | 59 | |||
3/31/2007 | 12/31/2006 | |||
Unaudited | ||||
Liabilities | ||||
Current liabilities | ||||
Suppliers | ||||
Braskem S.A. | 3 | 3 | ||
Ipiranga Petroquímica S.A. | 3 | 3 | ||
Refinaria Alberto Pasqualini - REFAP S.A. | 16 | 20 | ||
Petróleo Brasileiro S.A. - PETROBRAS | 4 | 37 | ||
26 | 63 | |||
(b) | Statement of Operations Accounts |
3/31/2007 | 3/31/2006 | |||
Unaudited | Unaudited | |||
Operations | ||||
Gross sales and/or Services | ||||
Braskem S.A. | 650 | 650 | ||
Ipiranga Petroquímica S.A. | 476 | 461 | ||
Refinaria Alberto Pasqualini - REFAP S.A. | 42 | 5 | ||
Ipiranga Trading | 129 | |||
1,297 | 1,116 | |||
Purchases | ||||
Braskem S.A. | 7 | 3 | ||
Ipiranga Petroquímica S.A. | 7 | 3 | ||
Refinaria Alberto Pasqualini - REFAP S.A. | 325 | 160 | ||
Petrobras Brasileiro S.A. - PETROBRAS | 221 | 300 | ||
Braskem Incorporated Limited | 42 | |||
560 | 508 | |||
COPESUL - Companhia Petroquímica do Sul and subsidiaries
Notes to the consolidated financial statements
at March 31, 2007 and 2006 (Unaudited) and December 31, 2006
In millions of reais, except when otherwise indicated
27 | Subsequent events |
During December 2007, the EDSP58 Participações S.A. was incorporated by Copesul. As a result of this transaction, COPESUL - Companhia Petroquímica do Sul is now a direct subsidiary of Braskem S.A.
* * *
F-248