Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes _______ No___X____INCORPORATION BY REFERENCE
THIS REPORT ON FORM 6-K IS INCORPORATED BY REFERENCE IN THE REGISTRATION STATEMENT ON FORM OF F-3ASR OF PETRÓLEO BRASILEIRO S.A. – PETROBRAS (NO. 333-139459) AND PETROBRAS INTERNATIONAL FINANCE COMPANY (NO. 333-139459-01).
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2009
Forward Looking Statements
This report on Form 6-K contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are not based on historical facts and are not assurances of future results. These forward-looking statements are subject to certain risks and uncertainties, including, but not limited to, our ability to obtain financing, changes by Petróleo Brasileiro S.A. – Petrobras in its use of our services for market purchases of crude oil and oil products, and changes in government regulations applicable to us and Petrobras.
All forward-looking statements attributed to us or a person acting on our behalf are expressly qualified in their entirety by this cautionary statement, and you should not place reliance on any forward-looking statement contained herein.
Basis of Presentation
You should read the following discussion of our financial condition and results of operations together with the attached unaudited consolidated financial statements and the accompanying notes for the nine-month period ended September 30, 2009, beginning on page F-2. You should also read our audited consolidated financial statements for the year ended December 31, 2008, and the accompanying notes, which are included in our annual report on Form 20-F filed with the United States Securities and Exchange Commission on May 22, 2009, but which are not presented in this Form 6-K. The unaudited consolidated financial statements for the nine-month period ended September 30, 2009, and September 30, 2008, and the accompanying notes, have been presented in U.S. dollars and prepared in accordance with U.S. GAAP. As a subsidiary of Petrobras, we also prepare our consolidated financial statements in accordance with accounting practices adopted in Brazil.
Overview
We are a wholly-owned subsidiary of Petrobras. Accordingly, our financial condition and results of operations are significantly affected by decisions of our parent company. Our ability to meet our outstanding debt obligations depends on a number of factors, including:
• Petrobras’ financial condition and results of operations;
• the extent to which Petrobras continues to use our services for market purchases of crude oil and oil products;
• Petrobras’ willingness to continue to make loans to us and provide us with other types of financial support;
• our ability to access financing sources, including the international capital markets and third-party credit facilities; and
• our ability to transfer our financing costs to Petrobras.
We earn income from:
• sales of crude oil and oil products to Petrobras;
• sales of crude oil and oil products to third parties and affiliates; and
• the financing of sales to Petrobras, inter-company loans to Petrobras and investments in marketable securities and other financial instruments.
Our operating expenses include:
• cost of sales, which is comprised mainly of purchases of crude oil and oil products;
• selling, general and administrative expenses; and
• financial expense, mainly from interest on our lines of credit and capital markets indebtedness, sales of future receivables and inter-company loans from Petrobras.
Purchases and Sales of Crude Oil and Oil Products
We typically purchase crude oil and oil products in transactions with payment terms of approximately 30 days. Petrobras typically pays for shipments of crude oil and oil products that we sell to it over a period of up to 330 days, which allows Petrobras sufficient time to assemble the necessary documentation under Brazilian law to commence the payment process for its shipments. During this period, we typically finance the purchase of crude oil and oil products through either funds previously provided by Petrobras or third-party trade finance arrangements. The difference between the amount we pay for crude oil and oil products and the amount Petrobras pays for that same crude oil and oil products is deferred and recognized as part of our financial income on a straight-line basis over the period in which Petrobras’ payments to us come due. We also purchase crude oil and oil products from Petrobras for sale outside Brazil. Additionally, we sell and purchase crude oil and oil products to and from third parties and related parties, mainly outside Brazil.
Results of Operations for the Nine-month Period Ended September 30, 2009, Compared to the Nine-month Period Ended September 30, 2008
Net Income
We had net income of U.S.$502 million in the first nine months of 2009 compared to a loss of U.S.$231 million in the first nine months of 2008.
Sales of Crude Oil and Oil Products and Services
Our sales of crude oil and oil products and services decreased 43.4% to U.S.$21,010 million in the first nine months of 2009 compared to U.S.$37,139 million in the first nine months of 2008. This decrease was primarily due to lower sales prices resulting from a 49% decrease in the average price of Brent crude oil, to U.S.$57 per barrel during the first nine months of 2009 compared to U.S.$111 per barrel during the first nine months of 2008. This decrease was partially offset by a 12% increase in our sales volume, primarily due to increased sales of crude oil and oil products purchased from Petrobras and subsequently sold to third parties and affiliates.
Cost of Sales
Cost of sales decreased 45.3% to U.S.$20,132 million in the first nine months of 2009 compared to U.S.$36,810 million in the first nine months of 2008. This decrease was proportional to the decrease in sales of crude oil and oil products and services and was primarily due to the same reasons, and also to lower average inventory price formation for oil and oil products acquired in periods of low international prices.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of shipping costs and fees for services, including accounting, legal and rating services. These expenses decreased 20.0% to U.S.$321 million in the first nine months of 2009 compared to U.S.$401 million in the first nine months of 2008. Shipping costs decreased 30.9% to U.S.$224 million during this period compared to U.S.$324 million in the same period of 2008, primarily due to lower international freight prices.
Other Operating Expenses
Our other operating expenses consist primarily of inventory impairment adjustments for our inventory of crude oil and oil products. We had other operating expenses of U.S.$23 million in the first nine months of 2009 compared to U.S.$253 million in the first nine months of 2008, due to a reduction in the value of our inventory resulting from lower international oil prices.
2
Financial Income
Our financial income consists of the financing of sales to Petrobras, inter-company loans to Petrobras, investments in marketable securities and other financial instruments. Our financial income increased 6.1% to U.S.$1,640 million in the first nine months of 2009 compared to U.S.$1,546 million in the first nine months of 2008. This increase was primarily due to increased in marketable securities income and derivative income for exchange traded contracts resulting from increased offshore sales and volatility in the average price of crude oil and oil products in the international market.
Financial Expense
Our financial expenses consist mainly of interest paid and accrued on our outstanding indebtedness and other fees associated with our issuance of debt. Our financial expense increased 15.2% to U.S.$1,675 million in the first nine months of 2009 compared to U.S.$1,454 million in the first nine months of 2008. This increase was primarily due to increased derivative expenses for exchange traded contracts resulting from increased offshore sales and volatility in the average price of crude oil and oil products in the international market; and increased interest expenses relating to the issuance of U.S.$2,750 million in Global notes in February and July 2009, and lines of credit in the aggregate amount of U.S.$5,600 million borrowed during this period.
Liquidity and Capital Resources
Overview
We finance our oil trading activities principally from commercial banks, including lines of credit, as well as through inter-company loans from Petrobras and the issuance of notes in the international capital markets.
As an offshore, non-Brazilian company, we are not legally obligated to receive prior approval from the Brazilian National Treasury before incurring debt or registering debt with the Central Bank. As a matter of policy, however, we only issue debt following the recommendation of any of Petrobras’ Chief Financial Officer, Executive Board or Board of Directors, depending on the aggregate principal amount and the tenor of the debt to be issued.
Sources of Funds
Our Cash Flow
At September 30, 2009, we had cash and cash equivalents of U.S.$908 million compared to U.S.$272 million at December 31, 2008. Our operating activities provided net cash of U.S.$5,110 million in the first nine months of 2009 compared to using net cash of U.S.$6,919 million in the first nine months of 2008, primarily due to a decrease in trade receivables from related parties in 2009, as a result of lower sales prices resulting from a decrease in the average prices of crude oil and oil products in the international market.
Our investing activities used net cash of U.S.$434 million in the first nine months of 2009 compared to providing net cash of U.S.$198 million in the first nine months of 2008, primarily as a result of investments in marketable securities and a decrease in issuances of loans to related parties.
Our financing activities used net cash of U.S.$4,055 million in the first nine months of 2009 compared to providing net cash of U.S.$6,318 million in the first nine months of 2008, primarily due to the payment of notes payable to Petrobras, in connection with our financing activities, including the issuance of U.S.$2,750 million in Global notes in February and July 2009, and borrowings of an aggregate amount of U.S.$5,600 million under lines of credit during the first nine months of 2009.
Accounts Receivable
Accounts receivable from related parties decreased 10.5% to U.S.$21,631 million at September 30, 2009, from U.S.$24,155 million at December 31, 2008, primarily due to lower sales prices resulting from a decrease in the average price of Brent crude oil.
3
Our Short-Term Borrowings
Our short-term borrowings are denominated in U.S. dollars and consist of short-term lines of credit, loans from financing institutions and the short-term portion of long-term lines of credit, loans from financing institutions and sale of right to future receivables. At September 30, 2009 and at December 31, 2008, we had no short-term lines of credit or loans from financing institutions outstanding.
Our notes payable to related parties consist of notes payable to Petrobras, which decreased 43.4% to U.S.$14,359 million at September 30, 2009, from U.S.$25,353 million at December 31, 2008, as a result of the application of the proceeds from our financing activities.
Our Long-Term Borrowings
At September 30, 2009, we had long-term borrowings outstanding in financing institutions of :
• U.S.$4,564 million (U.S.$335 million current portion) in long-term lines of credit with maturity date from 2009 to 2017 compared to U.S.$631 million at December 31, 2008. Between March 24, 2009, and September 1, 2009, PifCo borrowed an aggregate amount of U.S.$5,600 million under lines of credit with Banco Santander S.A., Citibank, N.A., HSBC Bank USA, N.A., JPMorgan Chase Bank, N.A., Société Générale and Banco do Brasil S.A. The loans will mature until 2012 and bear interest at an initial rate of Libor plus spreads reflecting prevailing rates at the time of incurrence. PifCo used the Global notes, issued on July 9, 2009, to repay part of lines of credit, in an amount of U.S.$1,332 million, borrowed in the beginning of this year. At September 30, 2009, we had utilized all of our available funds from lines of credit to purchase crude oil and oil products on the international market for sale to Petrobras and to purchase Petrobras’ crude oil and oil products exports; and
• U.S.$322 million (U.S.$72 million current portion) under the loan agreement with Malha Gas Investment Co. Ltd. (M-GIC), which acts as a Facility Agent for the Japan Bank for International Cooperation (JBIC). This loan bears interest at Libor plus 0.8% per year, payable semi-annually. The principal amount will be paid semi-annually starting on December 15, 2009 through December 15, 2014.
At September 30, 2009, we also had outstanding:
• U.S.$235 million in Senior notes due 2011, bearing interest at the rate of 9.75%;
• U.S.$281 million (U.S.$68 million current portion) in connection with Petrobras’ exports prepayment program, U.S.$550 million in 6.436% Senior Trust Certificates due 2015, and U.S.$200 million in 3.748% Senior Trust Certificates due 2013;
• U.S.$6,756 million in Global notes, consisting of U.S.$374 million of Global notes due July 2013 that bear interest at the rate of 9.125% per year; U.S.$577 million of Global notes due December 2018 that bear interest at the rate of 8.375% per year; U.S.$398 million of Global notes due 2014 that bear interest at the rate of 7.75% per year; U.S.$899 million of Global notes due October 2016 that bear interest at the rate of 6.125% per year; U.S.$1,750 million of Global notes due March 2018 that bear interest at the rate of 5.875% per year; and U.S.$2,750 million in Global notes due March 2019 that bear interest at the rate of 7.875% per year. Interest on these notes is paid semi-annually and the proceeds were used for general corporate purposes, including the financing of the purchase of oil product imports, the repayment of existing trade-related debt inter-company loans and to repay a portion of the bridge loans incurred at the beginning of this year;
• U.S.$390 million (¥35 billion) in Japanese Yen Bonds issued in September 2006 and due September 2016. The issue was a private placement in the Japanese market with a partial guarantee from the Japan Bank for International Cooperation (JBIC). The bonds bear interest at the rate of 2.15% per year, payable semi-annually. On the same date, we entered into a swap agreement with Citibank, swapping the total amount of this debt to a U.S. dollar-denominated debt.
4
Our outstanding position at September 30, 2009 in irrevocable letters of credit was U.S.$613 million compared to U.S.$628 million at December 31, 2008, supporting crude oil and oil products imports. At September 30, 2009, we had standby committed facilities available in the amount of U.S.$524 million, which are not committed to any specific use. We have not drawn down amounts under these facilities, and, as of the date of this filing, we have not scheduled a date for the drawdown.
In June 2008, PifCo issued a corporate guaranty to International Finance Corporation – IFC in the amount of U.S.$40 million to guarantee a loan contracted by the affiliate company Quattor Petroquímica in connection with Petrobras’ consolidation of petrochemical assets in Southeastern Brazil. PifCo guarantee is directly proportional to the participation of Petrobras in Quattor Petroquímica. Accordingly, Quattor Petroquímica assumed the obligation to pay interest annually, in Reais, at a rate of 1% per year over the amount guaranteed by PifCo up to the maturity date of the loan in 2017, or until certain contractual conditions are reached, whichever comes first. In the event of execution of this guarantee, PifCo has been granted the right to recourse.
The following table sets forth the sources of our current and long-term debt at September 30, 2009 and December 31, 2008:
| CURRENT AND LONG-TERM DEBT | ||||||||
| September 30, 2009 | December 31, 2008 | |||||||
| (in millions of U.S. dollars) | ||||||||
| Current | Long-term | Current | Long-term | |||||
| Financing institutions | U.S.$434 | U.S.$4,886 | U.S.$143 | U.S.$989 | ||||
| Senior notes | 5 | 235 | 11 | 235 | ||||
| Sale of right to future receivables | 70 | 431 | 70 | 482 | ||||
| Assets related to export prepayment | ||||||||
| to be offset against sale of right to | ||||||||
| future receivables | - | (150) | - | (150) | ||||
| Global notes | 68 | 6,756 | 76 | 3,941 | ||||
| Japanese yen bonds | - | 390 | 2 | 386 | ||||
| U.S.$577 | U.S.$12,548 | U.S.$302 | U.S.$5,883 | |||||
The following table sets forth the sources of our capital markets debt outstanding at September 30, 2009:
CAPITAL MARKETS DEBT OUTSTANDING(1)
| Principal Amount | ||
| Debt | (in millions of U.S. dollars) | |
| 9.750% Senior notes due 2011 | 235 | |
| 3.748% Senior trust certificates due 2013 (2) | 93 | |
| 9.125% Global notes due 2013 | 374 | |
| 7.750% Global notes due 2014 | 398 | |
| 6.436% Senior trust certificates due 2015 (2) | 255 | |
| 6.125% Global notes due 2016 | 899 | |
| 2.15% Japanese yen bonds due 2016 (3) | 390 | |
| 8.375% Global notes due 2018 | 577 | |
| 5.875% Global notes due 2018 | 1,750 | |
| 7.875% Global notes due 2019 | 2,750 | |
| Total | U.S.$7,721 | |
Unless otherwise noted, all debt is issued by us, with support from Petrobras through a standby purchase agreement or a guaranty.
(1) Does not include Junior trust certificates issued by PF Export Trust in connection with Petrobras’ exports prepayment program, because we are the beneficiary of such Junior trust certificates.
(2) Issued in connection with Petrobras’ exports prepayment program.
(3) Issued by us on September 27, 2006 in the amount of ¥ 35 billion.
5
Off Balance Sheet Arrangements
At September 30, 2009, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Subsequent Events
Financing
Global Notes
On October 30, 2009, PifCo issued an amount of U.S.$4,000 million in a multi-tranche Global notes in the international capital market, as follows:
• U.S.$2,500 million, due January 20, 2020. The Global notes bear interest at the rate of 5.75% per year, payable semiannually beginning on January 20, 2010;
• U.S.$1,500 million, due January 20, 2040. The Global notes bear interest at the rate of 6.875% per year, payable semiannually beginning on January 20, 2010.
The proceeds were used to repay the bridge loans incurred at the beginning of this year, in an amount of U.S.$3,168 million, and for general corporate purposes..
These financings had an issue cost of approximately U.S.$18 million, discount of U.S.$47 million and effective interest rates of 5.93% and 7.04% per annum, respectively. These Global notes constitute general senior unsecured and unsubordinated obligations of PifCo and are unconditionally and irrevocably guaranteed by Petrobras.
6
Petrobras International Finance Company
(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Consolidated Financial Statements
September 30, 2009 and 2008 together with Report of
Independent Registered Public Accounting Firm
Petrobras International Finance Company
and subsidiaries
(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Consolidated Financial Statements
September 30, 2009 and 2008
Contents
| Report of Independent Registered Public Accounting Firm | 3 |
| Consolidated Balance Sheets | 4 - 5 |
| Consolidated Statements of Operations | 6 |
| Consolidated Statements of Changes in Stockholder’s Deficit | 7 |
| Consolidated Statements of Cash Flows | 8 |
| Notes to the Consolidated Financial Statements | 9 - 25 |
2
Report of Independent Registered Public Accounting Firm
To the Executive Board and Stockholder of
Petrobras International Finance Company
We have reviewed the accompanying condensed consolidated balance sheet of Petrobras International Finance Company and subsidiaries as of September 30, 2009, and the related condensed consolidated statements of operations, cash flows and changes in stockholder’s deficit for the nine-month periods ended September 30, 2009 and 2008. These condensed consolidated financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.
November 27, 2009
/s/ KPMG Auditores Independentes
KPMG Auditores Independentes
Rio de Janeiro, Brazil
3
| Petrobras International Finance Company |
| and subsidiaries |
| (A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras) |
| Consolidated Balance Sheets |
| September 30, 2009 and December 31, 2008 |
| (In thousand of U.S. dollars) |
| September 30, | December 31, | |||
| Assets | 2009 | 2008 | ||
| (Unaudited) | ||||
| Current assets | ||||
| Cash and cash equivalents (Note 3) | 908,445 | 287,694 | ||
| Marketable securities (Note 4) | 2,553,494 | 2,598,764 | ||
| Trade accounts receivable | ||||
| Related parties (Note 6) | 21,630,609 | 24,155,075 | ||
| Other | 625,503 | 489,799 | ||
| Notes receivable - related parties (Note 6) | 1,195,824 | 1,152,627 | ||
| Inventories (Note 5) | 696,843 | 1,137,179 | ||
| Export prepayments - related parties (Note 6) | 383,471 | 415,843 | ||
| Restricted deposits for guarantees and other | 165,195 | 146,038 | ||
| 28,159,384 | 30,383,019 | |||
| Property and equipment | 2,151 | 2,143 | ||
| Investments in non-consolidated company(Note 1) | 2 | 3 | ||
| Other assets | ||||
| Marketable securities (Note 4) | 2,467,090 | 1,999,760 | ||
| Notes receivable - related parties (Note 6) | 419,798 | 412,127 | ||
| Export prepayment - related parties (Note 6) | 280,575 | 331,450 | ||
| Restricted deposits for guarantees and prepaid expenses | 219,384 | 174,299 | ||
| 3,386,847 | 2,917,636 | |||
| Total assets | 31,548,384 | 33,302,801 | ||
See the accompanying notes to the consolidated financial statements.
4
| Petrobras International Finance Company |
| and subsidiaries |
| (A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras) |
| Consolidated Balance Sheets |
| September 30, 2009 and December 31, 2008 |
| (In thousand of U.S. dollars, except for number of shares and per share amounts) |
| September 30, | December 31, | |||
| Liabilities and stockholder’s deficit | 2009 | 2008 | ||
| (Unaudited) | ||||
| Current liabilities | ||||
| Trade accounts payable | ||||
| Related parties (Note 6) | 2,614,205 | 1,712,070 | ||
| Other | 1,486,916 | 635,977 | ||
| Notes payable - related parties (Note 6) | 14,358,898 | 25,352,728 | ||
| Current portion of long-term debt (Note 7) | 474,348 | 197,769 | ||
| Accrued interest (Note 7) | 102,820 | 103,930 | ||
| Other current liabilities | 36,937 | 9,746 | ||
| 19,074,124 | 28,012,220 | |||
| Long-term liabilities | ||||
| Long-term debt (Note 7) | 12,547,570 | 5,883,376 | ||
| Stockholder’s deficit | ||||
| Shares authorized and issued | ||||
| Common stock - 300,050,000 shares at par value US$ 1 | 300,050 | 300,050 | ||
| Additional paid in capital | 266,394 | 266,394 | ||
| Accumulated deficit | (618,480) | (1,120,147) | ||
| Other comprehensive income: | ||||
| Loss on cash flow hedge | (21,274) | (39,092) | ||
| (73,310) | (592,795) | |||
| Total liabilities and stockholder’s deficit | 31,548,384 | 33,302,801 | ||
See the accompanying notes to the consolidated financial statements.
5
| Petrobras International Finance Company |
| and subsidiaries |
| (A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras) |
| Consolidated Statements of Operations |
| September 30, 2009 and 2008 |
| (In thousand of U.S. dollars, except net income per share amounts) |
| (Unaudited) |
| Nine-month periods ended | ||||
| September 30, | ||||
| 2009 | 2008 | |||
| Sales of crude oil, oil products and services | ||||
| Related parties (Note 6) | 11,462,084 | 21,179,672 | ||
| Other | 9,547,863 | 15,959,571 | ||
| 21,009,947 | 37,139,243 | |||
| Cost of sales | ||||
| Related parties (Note 6) | (8,533,808) | (11,815,037) | ||
| Other | (11,597,881) | (24,994,823) | ||
| Selling, general and administrative expenses | ||||
| Related parties (Note 6) | (78,872) | (231,779) | ||
| Other | (242,351) | (169,631) | ||
| Other operating expenses | (22,740) | (252,820) | ||
| (20,475,652) | (37,464,090) | |||
| Operating income/(loss) | 534,295 | (324,847) | ||
| Equity in results of non-consolidated company | (1) | - | ||
| Financial income | ||||
| Related parties (Note 6) | 1,148,276 | 1,195,007 | ||
| Hedge results on sales and financial transactions | ||||
| Related parties (Note 6) | 39,388 | - | ||
| Other (Note 9) | 199,890 | 171,149 | ||
| Financial investments | 240,121 | 161,813 | ||
| Other | 12,346 | 18,020 | ||
| 1,640,021 | 1,545,989 | |||
| Financial expense | ||||
| Related parties (Note 6) | (816,685) | (983,752) | ||
| Hedge results on sales and financial transactions | ||||
| Related parties (Note 6) | (29,618) | (8,230) | ||
| Other (Note 9) | (327,818) | (134,760) | ||
| Financing | (447,491) | (313,267) | ||
| Other | (53,367) | (14,139) | ||
| (1,674,979) | (1,454,148) | |||
| Financial, net | (34,958) | 91,841 | ||
| Exchange variation, net | 466 | (248) | ||
| Other income/(expense), net | 1,865 | 1,898 | ||
| Net income/(loss) for the period | 501,667 | (231,356) | ||
| Net income/(loss) per share for the period - US$ | 1.67 | (0.77) | ||
See the accompanying notes to the consolidated financial statements.
6
| Petrobras International Finance Company |
| and subsidiaries |
| (A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras) |
| Consolidated Statements of Changes in Stockholder’s Deficit |
| September 30, 2009 and 2008 |
| (In thousand of U.S. dollars) |
| (Unaudited) |
| Nine-month periods ended | ||||
| September 30, | ||||
| 2009 | 2008 | |||
| Common stock | 300,050 | 300,050 | ||
| Additional paid in capital | ||||
| Balance at January 1 | 266,394 | 53,926 | ||
| Additional paid in capital increase | - | 212,468 | ||
| Balance at end of the period | 266,394 | 266,394 | ||
| Accumulated deficit | ||||
| Balance at January 1 | (1,120,147) | (347,549) | ||
| Net income/(loss) for the period | 501,667 | (231,356) | ||
| Balance at end of the period | (618,480) | (578,905) | ||
| Other comprehensive income | ||||
| Loss on cash flow hedge | ||||
| Balance at January 1 | (39,092) | (9,424) | ||
| Change in the period | 17,818 | (2,305) | ||
| Balance at end of the period | (21,274) | (11,729) | ||
| Total stockholder’s deficit | (73,310) | (24,190) | ||
See the accompanying notes to the consolidated financial statements.
7
| Petrobras International Finance Company |
| and subsidiaries |
| (A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras) |
| Consolidated Statements of Cash Flows |
| September 30, 2009 and 2008 |
| (In thousand of U.S. dollars) |
| (Unaudited) |
| Nine-month periods ended | ||||
| September 30, | ||||
| 2009 | 2008 | |||
| Cash flows from operating activities | ||||
| Net income/(loss) for the period | 501,667 | (231,356) | ||
| Adjustments to reconcile net income/(loss) to net cash used in operations | ||||
| Depreciation, amortization of prepaid expenses and debt amortization | 39,705 | 7,230 | ||
| Loss on inventory (Note 5) | (144,866) | 252,820 | ||
| Equity in results of non-consolidated company | 1 | - | ||
| Decrease (increase) in assets | ||||
| Trade accounts receivable | ||||
| Related parties | 2,524,466 | (12,872,497) | ||
| Other | (135,692) | 37,010 | ||
| Export prepayments - related parties | (1,564,527) | (958,000) | ||
| Receipt of export prepayments - related parties | 1,647,774 | 1,000,691 | ||
| Other assets | 467,037 | 298,583 | ||
| Increase (decrease) in liabilities | ||||
| Trade accounts payable | ||||
| Related parties | 902,135 | 4,549,479 | ||
| Other | 850,939 | 977,373 | ||
| Other liabilities | 21,598 | 19,865 | ||
| Net cash provided by/(used in) operating activities | 5,110,237 | (6,918,802) | ||
| Cash flows from investing activities | ||||
| Marketable securities, net | (422,060) | (373,483) | ||
| Notes receivable - related parties, net | (11,436) | 573,144 | ||
| Property and equipment | (530) | (1,869) | ||
| Net cash (used in)/provided by investing activities | (434,026) | 197,792 | ||
| Cash flows from financing activities | ||||
| Short-term financing, net of issuance and repayments | - | (5,201) | ||
| Proceeds from issuance of long-term debt | 8,324,245 | 836,420 | ||
| Principal payments of long-term debt | (1,477,140) | (665,475) | ||
| Short-term loans - related parties, net | (10,902,565) | 6,152,590 | ||
| Net cash (used in)/provided by financing activities | (4,055,460) | 6,318,334 | ||
| Increase/(decrease) in cash and cash equivalents | 620,751 | (402,676) | ||
| Cash and cash equivalents at beginning of the year | 287,694 | 674,915 | ||
| Cash and cash equivalents at end of the period | 908,445 | 272,239 | ||
| Non cash financing activities | ||||
| Capital contribution due to acquisition and sale of Platform P-37 through loans | - | 212,468 | ||
| Transfer to Brasoil of notes receivable and payable | - | 8,231,299 | ||
See the accompanying notes to the consolidated financial statements.
8
| Petrobras International Finance Company |
| and subsidiaries |
| (A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras) |
| Notes to the Consolidated Financial Statements |
| (In thousand of U.S. dollars, except as otherwise indicated) |
1. The Company and its Operations
Petrobras International Finance Company - (“PifCo” or the “Company”) was incorporated in the Cayman Islands on September 24, 1997 and operates as a wholly-owned subsidiary of Petrobras.
PifCo purchases crude oil and oil products from third parties and sells them at a premium to Petrobras on a deferred payment basis. PifCo also purchases crude oil and oil products from Petrobras and sells them outside Brazil. Accordingly, intercompany activities and transactions, and therefore the Company's financial position and results of operations are affected by decisions made by Petrobras. Additionally, the Company sells oil and oil products to and from third parties and related parties mainly outside Brazil. Commercial operations are carried out under normal market conditions and at commercial prices. PifCo also engages in international capital market borrowings as a part of the Petrobras financial and operating strategy.
The following is a brief description of each of the Company’s wholly-owned subsidiaries:
Petrobras Singapore Private Limited
Petrobras Singapore Private Limited (“PSPL”), based in Singapore, was incorporated in April 2006 to trade crude oil and oil products in connection with the trading activities in Asia.
In 2008, PSPL has taken a 50% participation in PM Bio Trading Private Limited, a joint venture with Mitsui & Co. LTD established in Singapore to trade ethanol and to perform other related activities with a main focus in the japanese market. PM Bio Trading Private Limited is scheduled to commence its operations in 2010.
Petrobras Finance Limited
Petrobras Finance Limited (“PFL”), based in the Cayman Islands, in connection with the Company’s structured finance export prepayment program, whereby PFL purchases fuel oil from Petrobras and sells this product in the international market, including sales to designated customers, in order to generate receivables to cover the sale of future receivables debt.
9
1. The Company and its Operations(Continued)
Petrobras Europe Limited
Petrobras Europe Limited (“PEL”), based in the United Kingdom, consolidates Petrobras’ European trade and finance activities. These activities consist of advising on and negotiating the terms and conditions for crude oil and oil products supplied to PifCo, PSPL, Petrobras Paraguay, Petrobras International Braspetro B.V. – PIB BV and Petrobras, as well as marketing Brazilian crude oil and other derivative products exported to the geographic areas in which the Company operates. PEL plays an advisory role in connection with these activities and undertakes no commercial or financial risk.
Bear Insurance Company Limited
Bear Insurance Company Limited (“BEAR”), based in Bermuda, contracts insurance for Petrobras and its subsidiaries.
2. Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (US GAAP). Although certain information normally included in consolidated financial statements prepared in accordance with US GAAP has been condensed or omitted, the disclosures are adequate to make the information presented not misleading. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008 and the notes thereto.
The consolidated financial statements as of September 30, 2009 and for the nine-month periods ended September 30, 2009 and 2008, included in this report are unaudited. However, they reflect all normal recurring adjustments that are necessary for a fair presentation of such consolidated financial statements. The results for interim periods are not necessarily indicative of trends or of results to be expected for a full year.
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2. Basis of Financial Statement Presentation (Continued)
The preparation of these consolidated financial statements requires the use of estimates and assumptions that determine the amounts of the assets, liabilities, revenues and expenses reported in the consolidated financial statements, as well as amounts included in the notes thereto.
Events subsequent to September 30, 2009, were evaluated until the time of the Form 6-K filing with the Securities and Exchange Commission on November 27, 2009. Refer to Note 2 (c) for discussion of Codification Topic 855, Subsequent Events.
a.Foreign currency translation
The Company’s functional currency is the U.S. dollar. All monetary assets and liabilities denominated in a currency other than the U.S. dollar are remeasured into the U.S. dollar using the current exchange rates. The effect of variations in the foreign currencies is recorded in the consolidated statement of operations as financial expense or income.
b.Reclassification
Certain reclassifications have been made to prior year financial statements to confirm to current year presentation.
c.Recently adopted accounting standards
Codification
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-01 in June 2009. This Update, also issued as FASB Statement of Financial Accounting Standards (SFAS) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” is effective for financial statements issued after September 15, 2009. Update 2009-01 requires that the FASB’s Accounting Standards Codification (ASC) become the sole source of authoritative U.S. generally accepted accounting principles recognized by the FASB for nongovernmental entities. The Codification is meant to simplify user access to all authoritative GAAP by reorganizing GAAP pronouncements into roughly 90 accounting topics within a consistent structure.
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c.Recently adopted accounting standards (Continued)
Codification (Continued)
All previous level (a)-(d) US GAAP standards issued by a standard setter are superseded. Level (a)-(d) US GAAP refers to the previous accounting hierarchy. All other accounting literature not included in the Codification is nonauthoritative.
Following this Statement, the Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The Board will not consider Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates will serve only to update the Codification. PifCo adopted this Update effective July 1, 2009.
Fair Value Measurements
Effective January 1, 2009, the Company implemented SFAS No 157, “Fair Value Measurements” for nonfinancial assets and nonfinancial liabilities measured at fair value, except those that are recognized or disclosed on a recurring basis (at least annually). This Statement was codified into Topic ASC 820 “Fair Value Measurement and Disclosures”. There was no impact to the Company’s consolidated financial statements from the implementation of this Topic for nonfinancial assets and liabilities, other than additional disclosures.
Subsequent Events
Effective April 1, 2009, the Company adopted SFAS 165, “Subsequent Events”. This Statement was codified into FASB ASC Topic 855, “Subsequent Events”. Topic 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Topic 855 did not change significantly the current practice previously provided in auditing literature, except for introducing the concept of financial statements being available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This Statement is not expected to result in any significant changes in the subsequent events reported by the Company. Refer to Note 1 for the Topic 855 related disclosure for the quarter ended September 30, 2009.
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3. Cash and Cash Equivalents
| September 30, | December 31, | |||
| 2009 | 2008 | |||
| (Unaudited) | ||||
| Cash and banks | 28,087 | 92,857 | ||
| Time deposits and short-term investment | 880,358 | 194,837 | ||
| 908,445 | 287,694 | |||
4. Marketable Securities
| Total | ||||||||||
| Interest rate | September 30, | December 31, | ||||||||
| Security (ii) | Maturity | per annum | 2009 (i) | 2008 (i) | ||||||
| (Unaudited) | ||||||||||
| Available for Sale (iii) | Clep | 2014 | 8% | 802,940 | 759,319 | |||||
| Available for Sale (iii) | Marlim | 2011 | 7.4% + IGPM(*) | 352,634 | 258,046 | |||||
| Held to Maturity | Charter | 2024 | 4% | 899,303 | 884,311 | |||||
| Held to Maturity | NTS | 2010-2014 | 2.53%/4.19% | 614,781 | 595,013 | |||||
| Held to Maturity | NTN | 2010-2014 | 2.53%/2,69%/4.19% | 649,198 | 533,426 | |||||
| Held to Maturity | Mexilhão | 2010 | 4.56% | 466,312 | 443,878 | |||||
| Held to Maturity | Gasene | 2009-2010 | 0.81% up to 2.54% | 382,021 | 332,512 | |||||
| Held to Maturity | PDET | 2019 | 2.51% | 357,334 | 355,984 | |||||
| Held to Maturity | TUM | 2010 | 1.47% up to 3.98% | 496,061 | 436,035 | |||||
| 5,020,584 | 4,598,524 | |||||||||
| Less: Current balances | (2,553,494) | (2,598,764) | ||||||||
| 2,467,090 | 1,999,760 | |||||||||
| (*) | IGPM - General Market Price Index, calculated by the Brazilian Institute of Economics (IBRE) of the Getulio Vargas Foundation (FGV). | |
| (i) | The balances include interest and principal. | |
| (ii) | Securities held by the fund respective to the special purposes companies, established to support Petrobras infrastructure projects, are not US exchange traded securities. | |
| (iii) | Changes in fair value related to the securities classified as available for sale in accordance with Codification Topic 320 are diminimus and were included in the Statement of Operations as financial income or expense. |
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5. Inventories
| September 30 | December 31, | |||
| 2009 | 2008 | |||
| (Unaudited) | ||||
| Crude oil | 444,826 | 733,161 | ||
| Oil products and other | 252,017 | 331,827 | ||
| LNG | - | 72,191 | ||
| 696,843 | 1,137,179 | |||
Inventory is stated at the lower of cost or market. At September 30, 2009 the value of inventory was not impaired and at December 31, 2008 inventory was impaired by US$ 144,866, due to declines in international oil prices, which was classified as other operating expenses in the statement of operations. The Company adopted the realizable value for inventory impairment purposes.
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6.Related Parties
| Petróleo Brasileiro S.A. - Petrobras | Petrobras International Braspetro B.V. - PIB BV and its Subsidiaries | Downstream Participações S.A. and its subsidiaries | Other | September 30, 2009 | December 31, 2008 | |||||||
| (Unaudited) | ||||||||||||
| Current assets | ||||||||||||
| Marketable securities (iv) | - | - | - | 2,553,494 | 2,553,494 | 2,598,764 | ||||||
| Accounts receivable, principally for sales (i) (v) | 20,662,063 | 279,423 | 689,023 | 100 | 21,630,609 | 24,155,075 | ||||||
| Notes receivable | - | 1,188,241 | - | 7,583 | 1,195,824 | 1,152,627 | ||||||
| Export prepayment | 69,541 | - | - | 313,930 | 383,471 | 415,843 | ||||||
| Other | - | 229 | - | - | 229 | 1,822 | ||||||
| Investments in non-consolidated company | 2 | 2 | 3 | |||||||||
| Other assets | ||||||||||||
| Marketable securities (iv) | - | - | - | 2,467,090 | 2,467,090 | 1,999,760 | ||||||
| Notes receivable | - | 419,798 | - | - | 419,798 | 412,127 | ||||||
| Export prepayment | 280,575 | - | - | - | 280,575 | 331,450 | ||||||
| Current liabilities | ||||||||||||
| Trade accounts payable | 2,335,295 | 191,069 | 21,048 | 66,793 | 2,614,205 | 1,712,070 | ||||||
| Notes payable (ii) | 14,358,898 | - | - | - | 14,358,898 | 25,352,728 | ||||||
| Other | 6,827 | - | 6,827 | 235 | ||||||||
| For the nine-month | ||||||||||||
| periods ended | ||||||||||||
| September 30, | September 30, | |||||||||||
| Consolidated Statement of operations | 2009 | 2008 | ||||||||||
| Sales of crude oil and oil products and services | 7,549,950 | 2,489,732 | 1,351,006 | 71,396 | 11,462,084 | 21,179,672 | ||||||
| Purchases (iii) | (6,761,165) | (1,406,978) | (347,563) | (18,102) | (8,533,808) | (11,815,037) | ||||||
| Selling, general and administrative expense | (62,676) | (15,748) | (51) | (397) | (78,872) | (231,779) | ||||||
| Financial income | 1,058,558 | 97,434 | 25,865 | 5,807 | 1,187,664 | 1,195,007 | ||||||
| Financial expense | (816,678) | (29,621) | (4) | - | (846,303) | (991,982) | ||||||
| Equity in results of non-consolidated company | - | - | - | (1) | (1) | - | ||||||
Commercial operations between PifCo and its subsidiaries and affiliated companies are carried out under normal market conditions and at commercial prices, except for the sales of oil and oil products to Petrobras, which have an extended settlement period consistent with PifCo’s formation as a financing entity, and include finance charges accrued during the extended payment period.
Certain affiliates of PifCo and PFL, which are subsidiaries of Petrobras, serve as agents in connection with export sales to certain customers under the export prepayment program. Those transactions have been classified as related party transactions for purposes of these financial statements.
The transactions were realized to support the financial and operational strategy of the Company's Parent Company, Petróleo Brasileiro S.A. - Petrobras.
(i) Accounts receivable from related parties relate principally to crude oil sales made by the Company to Petrobras, with extended payment terms of up to 330 days.
(ii) Current Liabilities - Notes payable relate to loans executed between the Company and Petrobras, with annual interest rates ranging from 4.20% to 4.27% .
(iii) Purchases from related parties are presented in the cost of sales section of the statement of operations.
(iv) See Note (4).
(v) Unearned income in connection with finance charges accrued during the extended payment period on commercial operations granted by PifCo to related parties are presented as assets under accounts receivable - related parties.
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7. Financing
| Unaudited | ||||||||
| September 30, 2009 | December 31, 2008 | |||||||
| Current | Long-term | Current | Long-term | |||||
| Financial institutions (i) | 433,314 | 4,886,337 | 142,599 | 989,181 | ||||
| Senior notes | 5,363 | 235,350 | 11,099 | 235,350 | ||||
| Sale of right to future receivables | 70,170 | 430,575 | 69,657 | 481,450 | ||||
| Assets related to export prepayment to be offset | ||||||||
| against sale of right to future receivables | - | (150,000) | - | (150,000) | ||||
| Global notes (ii) | 68,252 | 6,755,513 | 76,165 | 3,941,135 | ||||
| Japanese yen bonds | 69 | 389,795 | 2,179 | 386,260 | ||||
| 577,168 | 12,547,570 | 301,699 | 5,883,376 | |||||
| Financing | - | 12,547,570 | - | 5,883,376 | ||||
| Current portion of long-term debt | 474,348 | - | 197,769 | - | ||||
| Accrued interests | 102,820 | - | 103,930 | - | ||||
| 577,168 | 12,547,570 | 301,699 | 5,883,376 | |||||
(i) Between March 24, 2009, and September 1, 2009, PifCo borrowed an aggregate amount of US$ 5,600,000 under lines of credit with Santander, Citibank, N.A., HSBC Bank USA, N.A., JPMorgan Chase Bank, N.A., Société Générale and Banco do Brasil S.A. The loans will mature from 2011 until 2012 and bear interest at an initial rate of Libor plus spreads reflecting prevailing rates at the time of incurrence. The proceeds are being used by PifCo to purchase crude oil and oil products on the international market for sale to Petrobras and to purchase Petrobras crude oil and oil products exports.
PifCo used the Global Notes, issued on July 9, 2009, to repay part of lines of credit, in an amount of US$ 1,332,025, borrowed in the beginning of this year.
(ii) On February 11, 2009, the Company issued Global Notes of US$ 1,500,000 due March 2019 in the international capital market. The Notes bear interest at the rate of 7.875% per annum, payable semiannually, beginning on September 15, 2009. The funds are being used for general corporate purposes, including the financing of the 2009-2013 Petrobras Business Plan.
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7. Financing (Continued)
This financing had estimated issue cost of US$ 6,280, discount of US$ 25,755 and effective interest rate of 8.187% per annum. These Global Notes constitute general senior unsecured and unsubordinated obligations of PifCo. Petrobras unconditionally and irrevocably guarantees the full and punctual payment.
(iii) On July 9, 2009, the Company issued Global Notes in the amount of US$ 1,250,000 in the international capital market, due March 15, 2019. The Global Notes bear interest at the rate of 7.875% per annum, payable semiannually, beginning on September 15, 2009. The Global Notes are consolidated, form a single series and are fully fungible with PifCo’s outstanding US$ 1,500,000 7.875% Global Notes due 2019, issued on February 11, 2009. The funds were used to repay of the bridge loans incurred at the beginning of this year, in accordance with the 2009-2013 Petrobras Business Plan.
This financing had an estimated issue cost of US$ 5,000, a premium of US$ 87,025 and an effective interest rate of 6.933% per annum. These Global Notes constitute general senior unsecured and unsubordinated obligations of PifCo and are unconditionally and irrevocably guaranteed by Petrobras.
Long-term maturities
| September 30, | ||
| 2009 | ||
| 2010 | 52,914 | |
| 2011 | 3,560,003 | |
| 2012 | 1,261,798 | |
| 2013 | 536,429 | |
| 2014 | 553,874 | |
| 2015 | 72,200 | |
| Thereafter | 6,510,352 | |
| 12,547,570 | ||
17
8. Commitments and Contingencies
(a) Oil purchase contract
In an effort to ensure procurement of oil products for the Company’s customers, the Company currently has several short and long-term normal purchase contracts with maturity dates up to 2017, which collectively obligate it to purchase a minimum of approximately 213,685 barrels of crude oil and oil products per day at market prices.
(b) Purchase option - Platforms
The Company has maintained the right to exercise the call option on the existing Subchartered Asset Option Agreement granted by PNBV and has maintained the obligation to purchase the vessels in case PNBV exercises the Put Option, upon the occurrence of an event of default, under the same Option Agreement, for the Platforms P-8, P-15, P-32. PifCo also has an obligation to purchase the platforms after the expiration of the Charter terms.
In relation to P-47, PifCo has maintained the right to exercise the call option on the existing Subchartered Asset Option Agreement granted by PNBV and has maintained the obligation to purchase the vessel in case PNBV exercises the Put Option, upon the occurrence of an event of default or of the expiration of the Charter.
PifCo may designate any affiliate or subsidiary to perform its obligations under this agreement.
(c) Loans agreement
The Company’s outstanding position at September 30, 2009 in irrevocable letters of credit was US$ 612,500, as compared to US$ 627,946 at December 31, 2008, supporting crude oil and oil products imports.
Additionally, the Company had standby committed facilities available in the amount of US$ 523,500 (US$ 546,270 at December 31, 2008), which are not committed to any specific use. PifCo has no drawn down amounts related to these facilities and does not have a scheduled date for the drawdown.
18
8. Commitments and Contingencies (Continued)
(c) Loans agreement (Continued)
In June 2008, PifCo issued a corporate guarantee to International Finance Corporation – IFC in the amount of US$ 40,000 to back a loan contracted by affiliate company Quattor Petroquímica in connection with Petrobras strategy to consolidate petrochemical assets in the southeast region of Brazil. PifCo guarantee is directly proportional to the participation of Petrobras in Quattor Petroquímica. Accordingly, Quattor Petroquímica assumed the obligation to pay interest annually, in Reais, at a rate of 1% p. a. over the amount guaranteed by PifCo up to the maturity date of the loan in 2017, or until certain contractual conditions are reached, whichever comes first. In the event of execution of this guarantee, PifCo has been granted the right to recourse.
9. Financial Instruments and Risk Management
PifCo’s policy for the risk management of the price of oil and oil products consists basically in protecting the margins in some specific short-term positions. Future contracts, swaps and options are the instruments used in these economic hedge operations which are tied to actual physical transactions. Positive and negative results are offset by the reverse results of the actual physical market transaction and they are recorded in the statement of operations as financial income and financial expense. The Company’s derivative instruments are recorded in the consolidated balance sheet at their fair value.
For exchange-traded contracts, fair value is based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models or quoted prices for instruments with similar characteristics. The transaction price is used as the initial fair value of the contracts.
The commodity derivative contracts are reflected at fair value as either assets or liabilities on the Company’s consolidated balance sheets recognizing gain or losses in earnings, using market to market accounting, in the period of change.
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9. Financial Instruments and Risk Management (Continued)
As of September 30, 2009, the Company had the following outstanding commodity derivative contracts that were entered into:
| Notional amount in thousands of bbl* | ||||
| Commodity Contracts | ||||
| September 30, | December 31, | |||
| Maturity 2009 | 2009 | 2008 | ||
| Futures and Forwards contracts | ||||
| Crude oil and oil Products | 1.671 | (2.704) | ||
| Options contracts | ||||
| Crude Oil and Oil Products | (1.300) | - | ||
* A negative notional amount represents a short position and a positive notional amount represents a long position.
Cash Flow Hedge
In September 2006, the Company contracted a hedge known as a cross currency swap for coverage of the bonds issued in Yens in order to fix the Company’s costs in this operation in dollars. In a cross currency swap there is an exchange of interest rates in different currencies. The exchange rate of the Yen for the US dollar is fixed at the beginning of the transaction and remains fixed during its existence. The Company does not intend to settle these contracts before the end of the term.
The Company has elected to designate its cross currency swap as cash flow hedge. Both at the inception of a hedge and on an ongoing basis, a cash flow hedge must be expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge. Derivative instruments designated as cash flow hedges are reflected as either assets or liabilities on the Company’s consolidated balance sheets. Change in fair value, to the extent the hedge is effective, are reported in accumulated other comprehensive income until the forecasted transaction occurs.
Effectiveness tests are conducted quarterly in order to measure how the changes in the fair value or the cash flow of the hedge items are being absorbed by the hedge mechanisms. The effectiveness calculation indicated that the cross currency swap is highly effective in offsetting the variation in the cash flow of the bonds issued in Yens.
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9.Financial Instruments and Risk Management (Continued)
Cash Flow Hedge (Continued)
As of September 30, 2009, the Company had the following cross currency swap, which was entered into:
Cross Currency Swaps
| Notional Amount | ||||
| Maturing in 2016 | % | in thousand (JPY) | ||
| Fixed to fixed | 35,000,000 | |||
| Average Pay Rate (USD) | 5.69 | |||
| Average Receive Rate (JPY) | 2.15 |
At September 30, 2009, the over the counter foreign exchange derivative contract, presented a maximum estimated loss per day (VAR – Value at Risk), calculated at a reliability level of 95%, of approximately US$ 35,391.
PifCo designates at inception whether the derivative contract will be considered hedging or non-hedging for Codification Topic 815 accounting purposes. Non-hedging derivatives that are considered economic hedges, but not designated in a hedging relationship for accounting purposes, are recorded as other current assets or liabilities, with changes in fair value recorded as financial income or financial expense.
The effect of derivative instruments on the statement of financial position for the period ended 30, September 2009.
| September 30, 2009 | December 31, 2008 | |||||||||||||||
| Asset Derivatives | Liability Derivatives | Asset Derivatives | Liability Derivatives | |||||||||||||
| Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||
| Derivatives designated as | ||||||||||||||||
| hedging instruments under | ||||||||||||||||
| Codification Topic 815 | ||||||||||||||||
| Foreign exchange contracts Cross currency swap | Other current assets | 70,658 | - | Other current assets | 47,278 | - | ||||||||||
| Derivatives not designated as | ||||||||||||||||
| hedging instruments under | ||||||||||||||||
| Codification Topic 815 | ||||||||||||||||
| Commodity contracts | Other current assets | 15,069 | Other current liabilities | 18,698 | Other current assets | 38,513 | Other current liabilities | 1,101 | ||||||||
| Total Derivatives | 85,727 | 18,698 | 85,791 | 1,101 | ||||||||||||
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9. Financial Instruments and Risk Management (Continued)
Cash Flow Hedge (Continued)
| Amount of Gain or (Loss) Reclassified | ||||||||||
| Amount of Gain Recognized in OCI | from Accumulated OCI into Income | |||||||||
| (Effective Portion) | (Effective Portion) | |||||||||
| Derivatives in Codification Topic 815 - Cash Flow Hedging Relationship | September 30, 2009 | September 30, 2008 | Location of Gain or (Loss)Reclassified from Accumulated OCI into Income (effective portion) | September 30, 2009 | September 30, 2008 | |||||
| Foreign exchange contracts | 14,605 | 6,428 | Hedge on sales and financial transactions, net | 3,213 | (8,733) | |||||
| Amount of Gain or (Loss) Recognized in | ||||||
| Income | ||||||
| Derivatives Not Designated as Hedging Instruments under Codification Topic 815 | Location of Gain or (Loss) Recognized in Income | September 30, 2009 | September 30, 2008 | |||
| Commodity contracts | Financial income | 239,278 | 171,149 | |||
| Financial expense | (357,436) | (142,990) | ||||
| Total | (118,158) | 28,159 | ||||
PifCo had written put options in the past that allows the holder of the options to sell a floating number of heavy fuel oil volumes at a minimum price of US$14/barrel. Such option had served as an economic hedge on related future sales of receivables under the structured finance export prepayment program; the intent of which was to ensure that physical barrels delivered under the structured finance export prepayment program generate sufficient cash proceeds to repay related financial obligations. Given the low strike price relative to the market the fair value of these options is immaterial at September 30, 2009 and 2008.
22
9. Financial Instruments and Risk Management (Continued)
Fair Value
Fair values are derived either from quoted market prices available, or, in their absence, the present value of expected cash flows. The fair values reflect the cash that would have been received or paid if the instruments were settled at year end. Fair values of cash and cash equivalents, trade receivables, short-term debt and trade payables approximate their carrying values.
At September 30, 2009 and December 31, 2008 the Company’s long-term debt was US$ 12,547,570and US$ 5,883,376respectively, and had estimated fair values of approximately US$ 13,430,000 and US$ 5,625,000, respectively.
The Company’s long-term asset related to the export prepayment program was US$ 280,575 and US$ 331,450 at September 30, 2009 and December 31, 2008, respectively, and had fair values of approximately US$ 285,400 and US$ 335,100, respectively.
The disclosure requirements of Codification Topic 820 were applied to the Company’s derivative instruments and certain marketable securities recognized in accordance with Codification Topic 320.
The Company’s commodities derivatives and marketable securities fair values were recognized in accordance with exchanged quoted prices as the balance sheet date for identical assets and liabilities in active markets, and, therefore, were classified as level 1.
The fair values of cross currency swaps were calculated using observable interest rates in JPY and USD for the full term of the contracts, and, therefore, were classified as level 2.
23
9. Financial Instruments and Risk Management (Continued)
Fair Value (Continued)
The fair value hierarchy for our financial assets and liability accounted for at fair value on a recurring basis at September 30, 2009, was:
| September 30, | ||||||
| Level 1 | Level 2 | 2009 | ||||
| Assets | ||||||
| Marketable securities - available for sale | 1,155,574 | - | 1,155,574 | |||
| Derivatives | 15,069 | 70,658 | 85,727 | |||
| Liability | ||||||
| Derivatives | (18,698) | - | (18,698) | |||
10. Subsequent Events
Financing
Global Notes
On October 30, 2009, PifCo issued an amount of US$ 4,000,000 in a multi-tranche Global Notes in the international capital market, as follows:
(i) US$ 2,500,000, due January 20, 2020. The Global Notes bear interest at the rate of 5.75% per year, payable semiannually beginning on January 20, 2010;
(ii) US$ 1,500,000, due January 20, 2040. The Global Notes bear interest at the rate of 6.875% per year, payable semiannually beginning on January 20, 2010.
The proceeds were used to repay the bridge loans incurred at the beginning of this year, in an amount of US$ 3,167,975, and for general corporate purposes.
24
These financings had an issue cost of approximately US$ 18,000, discount of US$ 46,720 and effective interest rates of 5.93% and 7.04% per annum, respectively. These Global Notes constitute general senior unsecured and unsubordinated obligations of PifCo and are unconditionally and irrevocably guaranteed by Petrobras.
* * *
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| PETROBRAS INTERNATIONAL FINANCE COMPANY-PifCo | ||
| By: | /S/ Daniel Lima de Oliveira | |
Daniel Lima de Oliveira Chairman of the Board | ||
This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates offuture economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.
