SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
For the month of November, 2010
PETROBRAS INTERNATIONAL FINANCE COMPANY - PifCo
(Translation of Registrant's name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
4th Floor, Harbour Place 103 South Church Street P.O. Box
1034GT - BWI George Town, Grand Cayman
Cayman Islands
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. Form 20-F ___X___ Form 40-F _______ Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes _______ No___X____ 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. 333-163665 ) AND PETROBRAS INTERNATIONAL FINANCE COMPANY (NO. 333-163665-01).
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2010
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, 2010. You should also read our audited consolidated financial statements for the year ended December 31, 2009, 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 19, 2010, but which are not presented in this Form 6-K. The unaudited consolidated financial statements for the nine-month period ended September 30, 2010 and September 30, 2009, 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 w ith 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 purchase crude oil and oil products from Petrobras to hold in inventory and for sale outside Brazil. We also sell and purchase crude oil and oil products to and from third parties and related parties, mainly outside Brazil. As of April 2010, we are selling to Petrobras crude oil and oil products under terms that allow payment up to approximately 30 days, without a premium. We intend to discontinue these sales to Petrobras by the end of the year. Prior to April 2010, Petrobras paid us for shipments of crude oil and oil products over a period of up to 330 days, which allowed Petrobras sufficient time to assemble the necessary documentation under Brazilian law to commence the payment process for its shipments. During th is period, we typically financed the purchase of crude oil and oil products through either funds previously provided by Petrobras or third-party trade finance arrangements. Under this arrangement, the premium resulting from the difference between the amount we paid for crude oil and oil products and the amount Petrobras paid us was deferred and recognized as part of our financial income on a straight-line basis over the period in which Petrobras’ payments to us came due. Since shipments to Petrobras with payment terms over a period of up to 330 days have been discontinued, the corresponding working capital is no longer required. Our commercial operations, including those with Petrobras, are carried out under normal market conditions and at commercial prices.
Results of Operations for the Nine-month Period Ended September 30, 2010, Compared to the Nine-month Period Ended September 30, 2009
Net (Loss) Income
We had a loss of U.S.$256 million in the first nine months of 2010 compared to a net income of U.S.$502 million in the first nine months of 2009.
Sales of Crude Oil and Oil Products and Services
Our sales of crude oil and oil products and services increased 29.5% to U.S.$27,213 million in the first nine months of 2010 compared to U.S.$21,010 million in the first nine months of 2009. This increase was primarily due to higher sales prices resulting from a 35.0% increase in the average price of Brent crude oil, to U.S.$77.13 per barrel during the first nine months of 2010 compared to U.S.$57.15 per barrel during the first nine months of 2009.
Cost of Sales
Cost of sales increased 33.6% to U.S.$26,889 million in the first nine months of 2010 compared to U.S.$20,132 million in the first nine months of 2009. This increase was proportional to the increase in sales of crude oil and oil products and services and was primarily due to the same reasons, and also to higher average inventory price formation for oil and oil products acquired during periods of higher 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 increased 17.8% to U.S.$378 million in the first nine months of 2010 compared to U.S.$321 million in the first nine months of 2009. Shipping costs increased 17.4% to U.S.$263 million during the first nine months of 2010 compared to U.S.$224 million during the same period of 2009, primarily due to changes in international market trends and shipping routes.
Other Operating Expenses
Our other operating expenses consist primarily of inventory impairment adjustments for our inventory of crude oil and oil products. These expenses increased 95.6% to U.S.$45 million in the first nine months of 2010 compared to U.S.$23 million in the first nine months of 2009.
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 decreased 53.0% to U.S.$771 million in the first nine months of 2010 compared to U.S.$1,640 million in the first nine months of 2009. This decrease was primarily due to reduced income from financing of sales to Petrobras and decreased marketable securities income.
Financial Expense
Our financial expense consists of interest paid and accrued on our outstanding indebtedness, other fees associated with our issuance of debt and other financial instruments. Our financial expense decreased 44.9% to U.S.$923 million in the first nine months of 2010 compared to U.S.$1,675 million in the first nine months of 2009. This decrease was primarily due to decreased inter-company loans from Petrobras.
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, 2010, we had cash and cash equivalents of U.S.$587 million compared to U.S.$953 million at December 31, 2009. The decrease in our cash and cash equivalents wasas a result of an increase in the amount of loans to related parties.
Our operating activities provided net cash of U.S.$8,462 million in the first nine months of 2010 compared to provided net cash of U.S.$5,110 million in the first nine months of 2009, primarily due to an increase in cash received from related parties during this period as a result of our sales of crude oil and oil products.
Our investing activities used net cash of U.S.$545 million in the first nine months of 2010 compared to using net cash of U.S.$434 million in the first nine months of 2009, primarily as a result of an increase in the amount of loans to related parties.
Our financing activities used net cash of U.S.$8,284 million in the first nine months of 2010 compared to using net cash of U.S.$4,055 million in the first nine months of 2009, primarily due to payments of loans to Petrobras.
Accounts Receivable
Accounts receivable from related parties decreased 48.8% to U.S.$8,188 million at September 30, 2010, from U.S.$15,986 million at December 31, 2009, primarily due to an increase in cash received from related parties during this period as a result of our sales of crude oil and oil products.
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, sale of right to future receivables and senior notes. At September 30, 2010, we had borrowed U.S.$2,308 million under lines of credit and loans from financing institutions, including the current portion of long-term lines of credit and senior notes compared to U.S.$1,892 million borrowed at December 31, 2009. Our short-term lines of credit at September 30, 2010 bear interest at an initial rate of Libor plus spreads reflecting prevailing rates at the time of incurrence. At September 30, 2010, we had utilized all available funds from lines of credit specifically designated f or the purchase of crude oil and oil products.
Our notes payable to related parties consist of loans from Petrobras. At December 31, 2009 we had loans in total amount of U.S.$7,862 million. There was no outstanding balance with Petrobras at September 30, 2010.
Our Long-Term Borrowings
At September 30, 2010, we had long-term borrowings outstanding in financing institutions of:
· U.S.$880 million (U.S.$2,016 million current portion) in long-term lines of credit due between 2012 and 2017 compared to U.S.$1,396 million at December 31, 2009. At September 30, 2010, 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.$251 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 has been paid semi-annually since December 15, 2009 and will mature on December 15, 2014.
At September 30, 2010, we also had outstanding:
· U.S.$212 million (U.S.$69 million current portion) in connection with Petrobras’ exports prepayment program, consisting of Senior Trust Certificates due 2015 that bear interest at the rate of 6.436% and Senior Trust Certificates due 2013 that bear interest at the rate of 3.748%;
· U.S.$10,711 million in Global Notes, due between 2013 and 2040 that bear interest at rates from 5.75% to 9.125% 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 and inter-company loans; and to repay the bridge loans incurred at the beginning of 2009; and
· U.S.$419 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.
Our outstanding position at September 30, 2010 in irrevocable letters of credit was U.S.$208 million compared to U.S.$556 million at December 31, 2009, supporting crude oil and oil products imports and services. At September 30, 2010, we had standby committed facilities available in the amount of U.S.$457 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.
The following table sets forth the sources of our current and long-term debt at September 30, 2010 and December 31, 2009:
CURRENT AND LONG-TERM DEBT
| | |
| (in millions of U.S. dollars) |
| | | | |
| | | | |
Financing institutions | U.S.$2,067 | U.S.$1,131 | U.S.$1,892 | U.S.$1,682 |
Senior Notes | 241 | - | 11 | 235 |
Sale of right to future receivables | 71 | 362 | 70 | 414 |
Assets related to export prepayment to be offset against sale of right to future receivables | - | (150) | - | (150) |
Global Notes | 116 | 10,711 | 182 | 10,710 |
Japanese Yen Bonds | - | 419 | 2 | 378 |
| U.S.$2,495 | U.S.$12,473 | U.S.$2,157 | U.S.$13,269 |
The following table sets forth the sources of our capital markets debt outstanding at September 30, 2010:
CAPITAL MARKETS DEBT OUTSTANDING(1)
Notes | | Principal Amount (in millions of U.S. dollars) |
9.750% Senior Notes due 2011 | | 235 |
3.748% Senior Trust Certificates due 2013(2) | | 70 |
9.125% Global Notes due 2013 | | 374 |
7.750% Global Notes due 2014 | | 398 |
6.436% Senior Trust Certificates due 2015(2) | | 211 |
2.15% Japanese Yen Bonds due 2016(3) | | 419 |
6.125% Global Notes due 2016 | | 899 |
8.375% Global Notes due 2018 | | 577 |
5.875% Global Notes due 2018 | | 1,750 |
7.875% Global Notes due 2019 | | 2,750 |
5.75% Global Notes due 2020 | | 2,500 |
6.875% Global Notes due 2040 | | 1,500 |
Total | | U.S.$11,683 |
Unless otherwise noted, all debt is issued by us, with support from Petrobras through 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, with support from Petrobras through a standby purchase agreement. |
Off Balance Sheet Arrangements
At September 30, 2010, 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.
| | |
| Petrobras International Finance Company
(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras) Consolidated Financial Statements September 30, 2010 and 2009 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, 2010 and 2009
Contents
Table of Contents
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 its subsidiaries (“PifCo” or “the Company”) as of September 30, 2010, and the related condensed consolidated statements of operations, cash flows and changes in stockholder’s deficit for the nine-month periods ended September 30, 2010 and 2009. 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 23, 2010
/s/KPMG Auditores Independentes
KPMG Auditores Independentes
Rio de Janeiro, Brazil
Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Consolidated Balance Sheets
September 30, 2010 and December 31, 2009
(In thousand of U.S. dollars)
Assets | | September 30, 2010 | | December 31, 2009 |
| | (Unaudited) | | |
| | | | |
Current assets | | | | |
Cash and cash equivalents (Note 3) | | 586,643 | | 953,157 |
Marketable securities (Note 4) | | 2,245,007 | | 2,546,811 |
Trade accounts receivable | | | | |
Related parties (Note 6) | | 8,188,330 | | 15,986,051 |
Other | | 1,038,356 | | 553,081 |
Notes receivable - related parties (Note 6) | | 1,740,744 | | 1,213,155 |
Inventories (Note 5) | | 931,183 | | 1,223,267 |
Export prepayments - related parties (Note 6) | | 70,260 | | 382,827 |
Restricted deposits for guarantees and other | | 185,909 | | 127,401 |
| | | | |
| | 14,986,432 | | 22,985,750 |
| | | | |
Property and equipment | | 923 | | 2,012 |
| | | | |
Investments in non-consolidated company(Note 1) | | 11 | | 13 |
| | | | |
Non-current assets | | | | |
Marketable securities (Note 4) | | 2,856,007 | | 2,490,325 |
Notes receivable - related parties (Note 6) | | 428,638 | | 421,962 |
Export prepayment - related parties (Note 6) | | 211,805 | | 263,480 |
Restricted deposits for guarantees and prepaid expenses | | 190,557 | | 201,188 |
| | | | |
| | 3,687,007 | | 3,376,955 |
| | | | |
Total assets | | 18,674,373 | | 26,364,730 |
See the accompanying notes to the consolidated financial statements.
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Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Consolidated Balance Sheets
September 30, 2010 and December 31, 2009
(In thousand of U.S. dollars, except for number of shares and per share amounts)
Liabilities and stockholder’s deficit | | September 30, 2010 | | December 31, 2009 |
| | (Unaudited) | | |
| | | | |
Current liabilities | | | | |
Trade accounts payable | | | | |
Related parties (Note 6) | | 2,070,815 | | 1,684,855 |
Other | | 1,922,884 | | 1,436,399 |
Notes payable - related parties (Note 6) | | - | | 7,862,042 |
Short-term financing (Note 7) | | 1,976,275 | | 1,482,820 |
Current portion of long-term debt (Note 7) | | 391,758 | | 474,608 |
Accrued interest (Note 7) | | 127,443 | | 199,469 |
Other current liabilities | | 62,658 | | 34,555 |
| | | | |
| | 6,551,833 | | 13,174,748 |
| | | | |
Long-term liabilities | | | | |
Long-term debt (Note 7) | | 12,472,859 | | 13,268,959 |
| | | | |
| | | | |
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 | | (889,065) | | (632,755) |
Other comprehensive income | | | | |
Loss on cash flow hedge | | (27,698) | | (12,666) |
| | | | |
| | (350,319) | | (78,977) |
| | | | |
Total liabilities and stockholder’s deficit | | 18,674,373 | | 26,364,730 |
See the accompanying notes to the consolidated financial statements.
5
Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Consolidated Statements of Operations
September 30, 2010 and 2009
(In thousand of U.S. dollars, except net income per share amounts)
| | Nine-month periods ended |
| | September 30, |
| | 2010 | | 2009 |
| | | | |
Sales of crude oil, oil products and services | | | | |
Related parties (Note 6) | | 14,023,964 | | 11,462,084 |
Other | | 13,188,655 | | 9,547,863 |
| | 27,212,619 | | 21,009,947 |
Cost of sales | | | | |
Related parties (Note 6) | | (11,051,803) | | (8,533,808) |
Other | | (15,837,272) | | (11,597,881) |
Selling, general and administrative expenses | | | | |
Related parties (Note 6) | | (153,520) | | (78,872) |
Other | | (224,598) | | (242,351) |
Other operating expenses | | (45,205) | | (22,740) |
| | (27,312,398) | | (20,475,652) |
| | | | |
Operating (loss)/income | | (99,779) | | 534,295 |
| | | | |
Equity in results of non-consolidated company | | (2) | | (1) |
| | | | |
Financial income | | | | |
Related parties (Note 6) | | 482,113 | | 1,148,276 |
Derivatives on sales and financial transactions | | | | |
Related parties (Note 6) | | 2,758 | | 39,388 |
Other (Note 9) | | 117,855 | | 199,890 |
Financial investments | | 154,643 | | 240,121 |
Other | | 13,627 | | 12,346 |
| | 770,996 | | 1,640,021 |
Financial expense | | | | |
Related parties (Note 6) | | (107,466) | | (816,685) |
Derivatives on sales and financial transactions | | | | |
Related parties (Note 6) | | (3,412) | | (29,618) |
Other (Note 9) | | (115,190) | | (327,818) |
Financing | | (667,763) | | (447,491) |
Other | | (29,338) | | (53,367) |
| | (923,169) | | (1,674,979) |
| | | | |
Financial expense, net | | (152,173) | | (34,958) |
| | | | |
Exchange variation, net | | (1,527) | | 466 |
| | | | |
Other (expense)/income, net | | (2,829) | | 1,865 |
Net (loss)/income for the period | | (256,310) | | 501,667 |
| | | | |
Net (loss)/income per share for the period - US$ | | (0.85) | | 1.67 |
See the accompanying notes to the consolidated financial statements.
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Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Consolidated Statements of Changes in Stockholder’s Deficit
September 30, 2010 and 2009
(In thousand of U.S. dollars)
| | Nine-month periods ended |
| | September 30, |
| | 2010 | | 2009 |
| | | | |
Common stock | | 300,050 | | 300,050 |
| | | | |
Additional paid in capital | | | | |
Balance at January 1 | | 266,394 | | 266,394 |
| | | | |
Balance at the end of the period | | 266,394 | | 266,394 |
| | | | |
Accumulated deficit | | | | |
Balance at January 1 | | (632,755) | | (1,120,147) |
Net (loss)/income for the period | | (256,310) | | 501,667 |
| | | | |
Balance at the end of the period | | (889,065) | | (618,480) |
| | | | |
Other comprehensive income | | | | |
Loss on cash flow hedge | | | | |
Balance at January 1 | | (12,666) | | (39,092) |
Change in the period | | (15,032) | | 17,818 |
| | | | |
Balance at the end of the period | | (27,698) | | (21,274) |
| | | | |
Total stockholder’s deficit | | (350,319) | | (73,310) |
See the accompanying notes to the consolidated financial statements.
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Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Consolidated Statements of Cash Flows
September 30, 2010 and 2009
(In thousand of U.S. dollars)
| | Nine-month periods ended |
| | September 30, |
| | 2010 | | 2009 |
Cash flows from operating activities | | | | |
Net (loss)/income for the period | | (256,310) | | 501,667 |
Adjustments to reconcile net (loss)/income to net cash from operating activities: | | | | |
Depreciation, amortization of prepaid expenses and debt amortization | | 22,600 | | 39,705 |
Loss on inventory | | 13,188 | | (144,866) |
Equity in results of non-consolidated company | | 2 | | 1 |
Decrease (increase) in assets: | | | | |
Trade accounts receivable | | | | |
Related parties | | 7,797,721 | | 2,524,466 |
Other | | (485,569) | | (135,692) |
Export prepayments - related parties | | - | | (1,564,527) |
Receipt of export prepayments - related parties | | 364,242 | | 1,647,774 |
Other assets | | 184,180 | | 467,037 |
Increase (decrease) in liabilities: | | | | |
Trade accounts payable | | | | |
Related parties | | 385,960 | | 902,135 |
Other | | 486,485 | | 850,939 |
Other liabilities | | (50,070) | | 21,598 |
| | | | |
Net cash provided by operating activities | | 8,462,429 | | 5,110,237 |
| | | | |
Cash flows from investing activities | | | | |
Marketable securities, net | | (63,878) | | (422,060) |
Notes receivable - related parties, net | | (482,304) | | (11,436) |
Property and equipment | | 801 | | (530) |
| | | | |
Net cash used in investing activities | | (545,381) | | (434,026) |
| | | | |
Cash flows from financing activities | | | | |
Short-term financing, net of issuance and repayments | | (6,545) | | - |
Proceeds from issuance of long-term debt | | - | | 8,324,245 |
Principal payments of long-term debt | | (421,694) | | (1,477,140) |
Short-term loans - related parties, net | | (7,855,323) | | (10,902,565) |
| | | | |
Net cash used in financing activities | | (8,283,562) | | (4,055,460) |
| | | | |
(Decrease)/Increase in cash and cash equivalents | | (366,514) | | 620,751 |
Cash and cash equivalents at the beginning of the year | | 953,157 | | 287,694 |
| | | | |
Cash and cash equivalents at the end of the period | | 586,643 | | 908,445 |
| | | | |
See the accompanying notes to the consolidated financial statements.
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Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Notes to the Consolidated Financial Statements (Continued)
(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 Petrobras to hold in inventory and for sale outside Brazil. Additionally, the Company sells and purchases crude oil and oil products to and from third parties and related parties, mainly outside Brazil. PifCo also purchases crude oil and oil products from third parties and sells to Petrobras under terms that allow payment in up to approximately 30 days, without a premium. Prior to April 2010, Petrobras paid for shipments of crude oil and oil products from PifCo over a period of up to 330 days,including a premium that was recognized on a deferred payment basis.
Accordingly, intercompany activities and transactions, and therefore the Company's financial position and results of operations, are affected by decisions made by Petrobras. Commercial operations, including those with Petrobras, are carried out under normal market conditions and at commercial prices. PifCo also engages in international capital market borrowings as a part of 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 trading activities in Asia.
In 2008, PSPL took 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 by 2012.
See the accompanying notes to the consolidated financial statements.
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Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Notes to the Consolidated Financial Statements (Continued)
(In thousand of U.S. dollars, except as otherwise indicated)
1. The Company and its Operations (Continued)
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. Certain sales were through subsidiaries of Petrobras.
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, Petrobras Paraguay, Petrobras International Braspetro B.V. – PIB BV and Petrobras, as well as marketing Brazilian crude oil and oil 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, 2009 and the notes thereto.
See the accompanying notes to the consolidated financial statements.
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Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Notes to the Consolidated Financial Statements (Continued)
(In thousand of U.S. dollars, except as otherwise indicated)
2. Basis of Financial Statement Presentation (Continued)
The consolidated financial statements as of September 30, 2010 and for the nine-month periods ended September 30, 2010 and 2009, 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.
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, 2010, were evaluated until the time of the filing of the Form 6-K with the Securities and Exchange Commission.
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. Recently adopted accounting standards
Transfers and Servicing (ASC 860), Accounting for Transfers of Financial Assets (ASU 2009-16)
The FASB issued ASU 2009-16 in December 2009. This standard removes the concept of a Qualifying Special Purpose Entity (“QSPE”) and the exception for QSPE consolidation and clarifies the requirements for financial asset transfers eligible for sale accounting. ASU 2009-16 was adopted in January 1, 2010, and did not impact on the Company’s results of operations, financial position or liquidity.
See the accompanying notes to the consolidated financial statements.
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Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Notes to the Consolidated Financial Statements (Continued)
(In thousand of U.S. dollars, except as otherwise indicated)
2. Basis of Financial Statement Presentation (Continued)
b. Recently adopted accounting standards (Continued)
Consolidation (ASC 810), Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities (ASU 2009-17)
The FASB issued ASU 2009-17 in December 2009. This standard became effective for the Company January 1, 2010. ASU 2009-17 requires the enterprise to qualitatively assess if it is the primary beneficiary of a variable-interest entity (“VIE”), and, if so, the VIE must be consolidated. Additionally, this Statementrequires continuous assessments of whether an enterprise is the primary beneficiary of a VIE. ASU 2009-17 was adopted in January 1, 2010, and did not impact on the Company’s results of operations, financial position or liquidity.
3. Cash and Cash Equivalents
| September 30, | | December 31, |
| 2010 | | 2009 |
| (Unaudited) | | |
| | | |
Cash and banks | 32,896 | | 1,445 |
Time deposits and short-term investment | 553,747 | | 951,712 |
| 586,643 | | 953,157 |
Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Notes to the Consolidated Financial Statements (Continued)
(In thousand of U.S. dollars, except as otherwise indicated)
4. Marketable Securities
| | | | | | | | Total |
| | | | | | Interest rate | | September 30, | | December 31, |
| | Security (ii) | | Maturity | | per annum | | 2010 (i) | | 2009 (i) |
| | | | | | | | (Unaudited) | | |
| | | | | | | | | | |
Available for Sale (iii) | | Clep | | 2014 | | 8% | | 863,335 | | 817,896 |
Available for Sale (iii) | | Marlim | | 2011 | | 7.4% + IGPM(*) | | 423,311 | | 366,246 |
Held to Maturity | | Charter | | 2024 | | 3.85% | | 841,293 | | 908,491 |
Held to Maturity | | NTS | | 2011-2014 | | 1.55%/1.94% | | 605,964 | | 601,845 |
Held to Maturity | | NTN | | 2011-2014 | | 1.55%/1.94% | | 637,227 | | 631,499 |
Held to Maturity | | Mexilhão | | 2011 | | 2.12% | | 474,728 | | 471,081 |
Held to Maturity | | Gasene | | 2022 | | 2.74% | | 386,947 | | 382,424 |
Held to Maturity | | PDET | | 2019 | | 2.25% | | 365,502 | | 359,576 |
Held to Maturity | | TUM | | 2011 | | 1.27% | | 502,707 | | 498,078 |
| | | | | | | | 5,101,014 | | 5,037,136 |
Less: Current balances | | | | | | | | (2,245,007) | | (2,546,811) |
| | | | | | | | 2,856,007 | | 2,490,325 |
| (*) | 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 are 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 are diminimus and were included in the Statement of Operations as financial income. |
5. Inventories
| September 30, 2010 | | December 31, 2009 |
| (Unaudited) | | |
| | | |
Crude oil | 661,849 | | 847,901 |
Oil products and other | 234,321 | | 345,732 |
Ethanol | 35,013 | | 29,634 |
| 931,183 | | 1,223,267 |
Inventories are stated at the lower of cost or net realizable market value. At September 30, 2010 and December 31, 2009 the inventories were reduced in US$ 126 and US$ 318, respectively, due to declines in international oil prices, which have been classified as other operating expenses in the statement of operations. The Company adopted the net realizable value for inventories impairment purposes.
See the accompanying notes to the consolidated financial statements.
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Petrobras International Finance Company and subsidiaries
(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Notes to the Consolidated Financial Statements (Continued)
(In thousand of U.S. dollars, except as otherwise indicated)
6. Related Parties
| | | | Petrobras International | | | | | | | | |
| | Petróleo Brasileiro | | Braspetro B.V. - | | Downstream Participações S.A. | | | | | | |
| | S.A. - | | PIB BV and its | | and its | | | | September 30, | | December 31, |
| | Petrobras | | Subsidiaries | | subsidiaries | | Other | | 2010 | | 2009 |
| | | | | | | | | | (Unaudited) | | |
Current assets | | | | | | | | | | | | |
Marketable securities (i) | | - | | - | | - | | 2,245,007 | | 2,245,007 | | 2,546,811 |
Accounts receivable, principally for sales (ii) | | 7,846,976 | | 339,615 | | 1,477 | | 262 | | 8,188,330 | | 15,986,051 |
Notes receivable | | - | | 1,732,881 | | - | | 7,863 | | 1,740,744 | | 1,213,155 |
Export prepayment | | 70,260 | | - | | - | | - | | 70,260 | | 382,827 |
Other | | - | | 12 | | - | | - | | 12 | | 3,994 |
| | | | | | | | | | | | |
Investments in non-consolidated company | | - | | - | | - | | 11 | | 11 | | 13 |
| | | | | | | | | | | | |
Non-current assets | | | | | | | | | | | | |
Marketable securities (i) | | - | | - | | - | | 2,856,007 | | 2,856,007 | | 2,490,325 |
Notes receivable | | - | | 428,638 | | - | | - | | 428,638 | | 421,962 |
Export prepayment | | 211,805 | | - | | - | | - | | 211,805 | | 263,480 |
| | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | | |
Trade accounts payable | | 1,909,106 | | 154,288 | | 530 | | 6,891 | | 2,070,815 | | 1,684,855 |
Notes payable | | - | | - | | - | | - | | - | | 7,862,042 |
Other | | - | | 238 | | - | | - | | 238 | | 2,768 |
| | | | | | | | | | | | |
| | | | | | | | | | For the nine-month
periods ended |
Consolidated Statement of operations | | | | | | | | | | September 30, 2010 | | September 30, 2009 |
Sales of crude oil and oil products and services | | 8,885,585 | | 3,427,449 | | 1,378,101 | | 332,829 | | 14,023,964 | | 11,462,084 |
Purchases (iii) | | (8,568,835) | | (2,194,139) | | (245,544) | | (43,285) | | (11,051,803) | | (8,533,808) |
Selling, general and administrative expense | | (96,150) | | (59,485) | | 2,007 | | 108 | | (153,520) | | (78,872) |
Equity in results of non-consolidated company | | - | | - | | - | | (2) | | (2) | | (1) |
Financial income | | 423,201 | | 61,077 | | - | | 593 | | 484,871 | | 1,187,664 |
Financial expense | | (107,466) | | (3,412) | | - | | - | | (110,878) | | (846,303) |
Commercial operations between PifCo and its subsidiaries and affiliated companies,including those with Petrobras, are carried out under normal market conditions and at commercial prices. Prior to April 2010,sales of crude oil and oil products to Petrobras were settled over a period of up to 330 days, and included financing charges accrued during these extended payment periods.
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.
All transactions with related parties support the financial and operational strategy of PifCo’s parent company, Petrobras.
(i) | See Note (4). |
(ii) | Accounts receivable from related parties consist primarily of crude oil sales made by the Company to Petrobras, some of which include extended payment terms of up to 330 days. |
(iii) | Purchases from related parties are presented in the cost of sales in the consolidated statements of operations. |
See the accompanying notes to the consolidated financial statements.
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Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Notes to the Consolidated Financial Statements (Continued)
(In thousand of U.S. dollars, except as otherwise indicated)
7. Financing
| Unaudited | | |
| September 30, 2010 | | December 31, 2009 |
| Current | | Long-term | | Current | | Long-term |
| | | | | | | |
Financial institutions | 2,067,238 | | 1,130,724 | | 1,891,662 | | 1,682,543 |
Global notes | 116,553 | | 10,711,065 | | 181,656 | | 10,709,621 |
Senior notes | 240,712 | | - | | 11,099 | | 235,350 |
Sale of right to future receivables | 70,898 | | 361,805 | | 70,347 | | 413,480 |
Assets related to export prepayment to be offset against sale of right to future receivables | - | | (150,000) | | - | | (150,000) |
Japanese yen bonds | 75 | | 419,265 | | 2,133 | | 377,965 |
| | | | | | | |
| 2,495,476 | | 12,472,859 | | 2,156,897 | | 13,268,959 |
| | | | | | | |
Financing | 1,976,275 | | 12,472,859 | | 1,482,820 | | 13,268,959 |
Current portion of long-term debt | 391,758 | | - | | 474,608 | | - |
Accrued interests | 127,443 | | - | | 199,469 | | - |
| | | | | | | |
| 2,495,476 | | 12,472,859 | | 2,156,897 | | 13,268,959 |
At September 30, 2010 and December 31, 2009 the Company’s long-term debt was US$ 12,472,859and US$ 13,268,959respectively, and had estimated fair values of approximately US$ 14,418,700 and US$ 14,445,600, respectively.
Long-term maturities
| | September 30, |
| | 2010 |
| | |
2011 | | 53,184 |
2012 | | 761,798 |
2013 | | 536,407 |
2014 | | 553,874 |
2015 | | 72,200 |
2016 | | 1,348,081 |
Thereafter | | 9,147,315 |
| | 12,472,859 |
Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Notes to the Consolidated Financial Statements (Continued)
(In thousand of U.S. dollars, except as otherwise indicated)
8. Commitments and Contingencies
(a) Oil purchase contract
In an effort to ensure supplies of oil products for PifCo’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 460,401 barrels of crude oil and oil products per day at market prices.
(b) Purchase option - Platforms
The Company has maintained the right to exercise a call option on the existing Subchartered Asset Option Agreement granted by PNBV, and has maintained an obligation to purchase the vessels in the event that PNBV exercises its Put Option, upon the occurrence of an event of default, under the same Option Agreement, for Platforms P-8, P-15, P-32. PifCo also has an obligation to purchase these platforms after the expiration of the Charters.
In relation to P-47, PifCo has maintained the right to exercise a call option on the existing Subchartered Asset Option Agreement granted by PNBV, and has maintained an obligation to purchase the vessel in the event that PNBV exercises its 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) Loan agreements
The Company’s outstanding position at September 30, 2010 in irrevocable letters of credit was US$ 207,616, as compared to US$ 556,162 at December 31, 2009, supporting crude oil and oil products imports and services.
Additionally, the Company had standby committed facilities available in the amount of US$ 456,524, (US$ 518,500 at December 31, 2009) which are not committed to any specific use. PifCo has not drawn down amounts related to these facilities and does not have a scheduled date for the drawdown.
Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Notes to the Consolidated Financial Statements (Continued)
(In thousand of U.S. dollars, except as otherwise indicated)
9. Derivative Instruments, Hedging and Risk Management Activities
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.
Commodity derivatives 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 marked-to-market accounting, in the period of change.
As of September 30, 2010, the Company had the following outstanding commodity derivative contracts that were entered into:
Commodity Contracts | Notional amount in thousands of bbl* as of |
Maturity 2010 | September 30, 2010 | | December 31, 2009 |
| | | |
Futures and Forwards contracts | (4,084) | | (3,447) |
Options contracts | (750) | | - |
* A negative notional amount represents a sale position.
Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Notes to the Consolidated Financial Statements (Continued)
(In thousand of U.S. dollars, except as otherwise indicated)
9. Derivative Instruments, Hedging and Risk Management Activities (Continued)
Cash Flow Hedge
In September 2006, the Company contracted a hedge known as a cross currency swap for coverage of the bonds issued in Yen 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 to the U.S. dollar was fixed at the beginning of the transaction and has remained fixed since that time. The Company does not intend to settle these contracts before the end of their terms.
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, is reported in accumulated other comprehensive income until the cash flows of the hedged item 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 Yen.
As of September 30, 2010, the Company had entered into the following cross currency swap:
Cross Currency Swaps | | | | |
| | | | |
Maturing in 2016 | | % | | Notional Amount (in thousand JPY) |
| | | | |
Fixed to fixed | | | | 35,000,000 |
Average Pay Rate (USD) | | 5.69 | | |
Average Receive Rate (JPY) | | 2.15 | | |
AtSeptember 30, 2010, the cross currency swap presented a maximum estimated loss per day (VAR – Value at Risk), calculated at a reliability level of 95%, of approximately US$ 5,424.
Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Notes to the Consolidated Financial Statements (Continued)
(In thousand of U.S. dollars, except as otherwise indicated)
9. Derivative Instruments, Hedging and Risk Management Activities (Continued)
Cash Flow Hedge (Continued)
The effect of derivative instruments on the statement of financial position for the period ended 30, September 2010.
| September 30, 2010 | | December 31, 2009 |
| 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 | Other current assets | | 93,704 | | | | - | | Other current assets | | 64,819 | | | | - |
| | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments under Codification Topic 815 | | | | | | | | | | | | | | | |
Commodity contracts | Other current assets | | 23,611 | | Other current liabilities | | 39,127 | | Other current assets | | 23,143 | | Other current liabilities | | 22,997 |
Total Derivatives | | | 117,315 | | | | 39,127 | | | | 87,962 | | | | 22,997 |
| | Amount of Loss Recognized in OCI on Derivative (Effective Portion) | | | | Amount of Gain Reclassified from Accumulated OCI into Income (Effective Portion) | | Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Derivatives in Codification Topic 815 - Cash Flow Hedging Relationship | | September 30, 2010 | | September 30, 2009 | | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | September 30, 2010 | | September 30, 2009 | | September 30, 2010 | | September 30, 2009 |
Foreign exchange contracts | | 20,459 | | 14,605 | | Financial expense, net | | (35,491) | | 3,213 | | 1,590 | | 760 |
| | | | Amount of Gain or (Loss) Recognized in Income on Derivative |
Derivatives Not Designated as Hedging Instruments under Codification Topic 815 | | Location of Gain or (Loss) Recognized in Income on Derivative | | September 30, 2010 | | September 30, 2009 |
| | | | | | |
Commodity contracts | | Financial income | | 119,023 | | 238,518 |
| | Financial expense | | (118,602) | | (357,436) |
Total | | | | 421 | | (118,918) |
Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Notes to the Consolidated Financial Statements (Continued)
(In thousand of U.S. dollars, except as otherwise indicated)
9. Derivative Instruments, Hedging and Risk Management Activities (Continued)
Cash Flow Hedge (Continued)
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$14/barrel. Such option had served as an economic hedge on related future sales of receivables under the structured finance export prepayment program; the intent of which was to ensure that physical barrels delivered under the structured finance export prepayment program generate sufficient cash proceeds to repay related financial obligations. Given the low strike price relative to the market the fair value of these options is immaterial at September 30, 2010 and 2009.
Fair Value
Fair values are derived either from quoted market prices available, or, in their absence, the present value of expected cash flows. The fair values reflect the cash that would have been received or paid if the instruments were settled at year end. Fair values of cash and cash equivalents, trade receivables, short-term portion of long-term debt and trade payables approximate their carrying values.
The Company’s long-term asset related to the export prepayment program was US$ 211,805 and US$ 263,480 at September 30, 2010 and December 31, 2009, respectively, and had fair values of approximately US$ 225,400 and US$ 270,500, 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.
Table of Contents
Petrobras International Finance Companyand subsidiaries(A wholly-owned subsidiary of Petróleo Brasileiro S.A. - Petrobras)
Notes to the Consolidated Financial Statements (Continued)
(In thousand of U.S. dollars, except as otherwise indicated)
9. Derivative Instruments, Hedging and Risk Management Activities (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, 2010, was:
| Level 1 | | Level 2 | | September 30, 2010 |
Assets | | | | | |
Marketable securities - available for sale | 1,286,646 | | - | | 1,286,646 |
Foreign exchange derivatives | - | | 93,704 | | 93,704 |
Commodity derivatives | 23,611 | | - | | 23,611 |
Total assets | 1,310,257 | | 93,704 | | 1,403,961 |
| | | | | |
Liability | | | | | |
Commodity derivatives | 39,127 | | - | | 39,127 |
Total liabilities | 39,127 | | - | | 39,127 |
| | | | | |
* * *
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 23, 2010
| PETROBRAS INTERNATIONAL FINANCE COMPANY-PifCo |
|
| By: | /S/ Daniel Lima de Oliveira
|
| | Daniel Lima de Oliveira Chairman of the Board |
FORWARD-LOOKING STATEMENTS
This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates offuture economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur . The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.
