Table of Contents
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware (State or other jurisdiction of incorporation or organization) | 77-0196707 (I.R.S. Employer Identification Number) |
1177 Enclave Parkway, Suite 300 Houston, Texas (Address of principal executive offices) | 77077 (Zip Code) |
Title of each class | Name of each exchange on which registered | |
Common Stock, $.01 Par Value | NYSE |
Large Accelerated Filero | Accelerated Filerþ | Non-Accelerated Filero (Do not check if a smaller reporting company) | Smaller Reporting Companyo |
Page | ||||||||
1 | ||||||||
20 | ||||||||
26 | ||||||||
26 | ||||||||
27 | ||||||||
28 | ||||||||
29 | ||||||||
31 | ||||||||
52 | ||||||||
52 | ||||||||
52 | ||||||||
52 | ||||||||
53 | ||||||||
54 | ||||||||
54 | ||||||||
54 | ||||||||
54 | ||||||||
54 | ||||||||
55 | ||||||||
S-2 | ||||||||
S-44 | ||||||||
EX-21.1 | ||||||||
EX-23.1 | ||||||||
EX-23.2 | ||||||||
EX-23.3 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 | ||||||||
EX-99.1 | ||||||||
EX-99.2 |
Table of Contents
1
Table of Contents
2
Table of Contents
3
Table of Contents
4
Table of Contents
5
Table of Contents
Oil and | Natural | |||||||||||
NGLs | Gas | Total | ||||||||||
(MBls) | (MMcf) | (MBOE)(1) | ||||||||||
Proved Developed Reserves: | ||||||||||||
Domestic — Utah | 658 | 2,476 | 1,071 | |||||||||
International — Venezuela(2) | 13,074 | 18,281 | 16,121 | |||||||||
Total Proved Developed | 13,732 | 20,757 | 17,192 | |||||||||
Proved Undeveloped Reserves: | ||||||||||||
Domestic — Utah | 2,856 | 4,016 | 3,525 | |||||||||
International — Venezuela(2) | 28,610 | 31,774 | 33,906 | |||||||||
Total Proved Undeveloped | 31,466 | 35,790 | 37,431 | |||||||||
Total Proved Reserves | 45,198 | 56,547 | 54,623 | |||||||||
Probable Developed Reserves: | ||||||||||||
Domestic — Utah | 46 | 95 | 62 | |||||||||
International — Venezuela(2) | 132 | 54 | 141 | |||||||||
Total Probable Developed | 178 | 149 | 203 | |||||||||
Probable Undeveloped Reserves: | ||||||||||||
Domestic — Utah | 8,496 | 12,709 | 10,614 | |||||||||
International — Venezuela(2) | 50,909 | 15,339 | 53,466 | |||||||||
Total Probable Undeveloped | 59,405 | 28,048 | 64,080 | |||||||||
Total Probable Reserves | 59,583 | 28,197 | 64,283 | |||||||||
Possible Developed Reserves: | ||||||||||||
Domestic — Utah | 91 | 207 | 126 | |||||||||
International — Venezuela(2) | 9 | — | 9 | |||||||||
Total Possible Developed | 100 | 207 | 135 | |||||||||
Possible Undeveloped Reserves: | ||||||||||||
Domestic — Utah | 52,526 | 110,616 | 70,962 | |||||||||
International — Venezuela(2) | 111,548 | 32,371 | 116,943 | |||||||||
Total Possible Undeveloped | 164,074 | 142,987 | 187,905 | |||||||||
Total Possible Reserves | 164,174 | 143,194 | 188,040 | |||||||||
(1) | MBOE (thousand barrels of oil equivalent) is determined using the approximate heat content ratio of one barrel of crude oil or condensate to six Mcf of natural gas, which ratio does not necessarily reflect price equivalency. | |
(2) | Information represents our net 32 percent ownership interest in Petrodelta. |
6
Table of Contents
7
Table of Contents
8
Table of Contents
9
Table of Contents
10
Table of Contents
11
Table of Contents
• | Two wells, the Kettle #1-10-3-1 and the ON Moon #1-27-3-2, are completed and currently on production. |
12
Table of Contents
• | One well, the Dart #1-12-3-2, is drilled and being hydraulically fractured. | ||
• | One well, the Giles #1-19-3-2, is drilled and waiting on fracturing. | ||
• | One well, the Yergensen #1-9-3-1, was spud using a spud rig and is waiting on the drilling rig. |
13
Table of Contents
14
Table of Contents
15
Table of Contents
16
Table of Contents
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Venezuela | ||||||||||||
Crude Oil Production (MBbls)(b) | 1,826 | 1,671 | 1,174 | |||||||||
Natural Gas Production (MMcf)(a)(c) | 470 | 938 | 2,283 | |||||||||
Average Crude Oil Sales Price ($per Bbl) | $ | 70.57 | $ | 57.62 | $ | 83.22 | ||||||
Average Natural Gas Sales Price ($per Mcf) | $ | 1.54 | $ | 1.54 | $ | 1.54 | ||||||
Average Operating Expenses ($per BOE)(d) | $ | 6.01 | $ | 5.64 | $ | 10.65 | ||||||
United States | ||||||||||||
Monument Butte | ||||||||||||
Net Crude Oil Production (MBbls) | 106 | 3 | — | |||||||||
Natural Gas Production (MMcf) | 417 | 6 | — | |||||||||
Average Crude Oil Sales Price ($per Bbl) | $ | 64.85 | $ | 61.57 | $ | — | ||||||
Average Natural Gas Sales Price ($ per Mcf) | $ | 3.43 | $ | 2.77 | $ | — | ||||||
Average Operating Expenses ($ per BOE)(e) | $ | 4.26 | $ | — | $ | — | ||||||
Lower Green River/Upper Wasatch | ||||||||||||
Net Crude Oil Production (MBbls) | 34 | — | — | |||||||||
Natural Gas Production (MMcf) | 6 | — | — | |||||||||
Average Crude Oil Sales Price ($per Bbl) | $ | 69.63 | $ | — | $ | — | ||||||
Average Natural Gas Sales Price ($ per Mcf) | $ | 3.97 | $ | — | $ | — | ||||||
Average Operating Expenses ($ per BOE)(e) | $ | 25.41 | $ | — | $ | — |
(a) | Royalty-in-kind paid on gas used as fuel by Petrodelta net to our 32 percent interest was 1,015 MMcf, 1,063 MMcf and 1,226 MMcf for 2010, 2009 and 2008, respectively. | |
(b) | Crude oil sales net to our 32 percent interest after deduction of royalty. Crude oil sales for Petrodelta at 100 percent was 8,561 MBbls, 7,835 MBbls and 5,505 MBbls for 2010, 2009 and 2008, respectively. | |
(c) | Natural gas sales net to our 32 percent interest after deduction of royalty. Natural gas sales for Petrodelta at 100 percent was 2,204 MMcf, 4 397 MMcf and 10,700 MMcf for 2010, 2009 and 2008, respectively. | |
(d) | Before royalties and including workovers. Petrodelta is not subject to ad valorem or severance taxes. Average operating expenses per BOE net of royalties and workovers was $7.52, $8.46 and $10.90 for 2010, 2009 and 2008, respectively. | |
(e) | Excluding ad valorem and severance taxes. |
17
Table of Contents
Year Ended December 31, | ||||||||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||||||||
Gross | Net | Gross | Net | Gross | Net | |||||||||||||||||||
Wells Drilled: | ||||||||||||||||||||||||
Venezuela (Petrodelta) | ||||||||||||||||||||||||
Development | 16 | 5.1 | 15 | 4.8 | 9 | 2.9 | ||||||||||||||||||
Appraisal | — | — | 2 | 0.6 | — | — | ||||||||||||||||||
United States | ||||||||||||||||||||||||
Development | 8 | 2.6 | 5 | 2.1 | — | — | ||||||||||||||||||
Exploration | 3 | 1.0 | 1 | 1.0 | 1 | 1.0 | ||||||||||||||||||
Average Depth of Wells (Feet) Venezuela (Petrodelta) | ||||||||||||||||||||||||
Crude Oil | — | 6,839 | — | 6,500 | — | 6,500 | ||||||||||||||||||
United States | ||||||||||||||||||||||||
Crude Oil | — | 7,938 | — | 6,751 | — | — | ||||||||||||||||||
Natural Gas | — | — | — | 17,566 | — | 12,290 | ||||||||||||||||||
Producing Wells (1): | ||||||||||||||||||||||||
Venezuela (Petrodelta) | ||||||||||||||||||||||||
Crude Oil | 127 | 40.6 | 114 | 36.5 | 118 | 37.8 | ||||||||||||||||||
United States | ||||||||||||||||||||||||
Crude Oil | 16 | 8.3 | 2 | 0.7 | — | — |
(1) | The information related to producing wells reflects wells we drilled, wells we participated in drilling and producing wells we acquired. |
Developed | Undeveloped | |||||||||||||||
Gross | Net | Gross | Net | |||||||||||||
Venezuela — Petrodelta | 24,330 | 7,786 | 222,783 | 71,291 | ||||||||||||
China | — | — | 7,470,080 | 7,470,080 | ||||||||||||
United States: | ||||||||||||||||
West Bay | — | — | 12,808 | 6,437 | ||||||||||||
Antelope | 2,422 | 1,549 | 136,362 | 46,842 | ||||||||||||
Indonesia | — | — | 883,636 | 480,698 | ||||||||||||
Gabon | — | — | 685,470 | 456,982 | ||||||||||||
Oman | — | — | 955,600 | 955,600 | ||||||||||||
Total | 26,752 | 9,335 | 10,366,739 | 9,487,930 | ||||||||||||
18
Table of Contents
• | change in governments; | ||
• | civil unrest; | ||
• | price and currency controls; | ||
• | limitations on oil and natural gas production; | ||
• | tax, environmental, safety and other laws relating to the petroleum industry; | ||
• | changes in laws relating to the petroleum industry; | ||
• | changes in administrative regulations and the interpretation and application of such rules and regulations; and | ||
• | changes in contract interpretation and policies of contract adherence. |
19
Table of Contents
Item 1A. | Risk Factors |
20
Table of Contents
• | make it difficult for us to make payments on the debt; | ||
• | make it difficult for us to obtain financing for working capital, acquisitions or other purposes on favorable terms, if at all; | ||
• | make us more vulnerable to industry downturns and competitive pressures; | ||
• | limit our flexibility in planning for, or reacting to, changes in our business; and | ||
• | require the use of a substantial portion of working capital. |
21
Table of Contents
22
Table of Contents
• | unexpected drilling conditions; | ||
• | pressure or irregularities in formations; | ||
• | equipment failures or accidents; | ||
• | weather conditions; | ||
• | shortages in experienced labor; | ||
• | delays in receiving necessary governmental permits; | ||
• | delays in receiving partner approvals; | ||
• | shortages or delays in the delivery of equipment; | ||
• | delays in receipt of permits or access to lands; and | ||
• | government actions or changes in regulations. |
• | the amounts and types of substances and materials that may be released into the environment; | ||
• | response to unexpected releases to the environment; | ||
• | reports and permits concerning exploration, drilling, production and other operations; | ||
• | the spacing of wells; | ||
• | unitization and pooling of properties; | ||
• | calculating royalties on oil and natural gas produced under federal and state leases; and | ||
• | taxation. |
23
Table of Contents
• | fires and explosions; | ||
• | blow-outs; | ||
• | uncontrollable or unknown flows of oil, gas, formation water or drilling fluids; | ||
• | adverse weather conditions or natural disasters; | ||
• | pipe or cement failures and casing collapses; | ||
• | pipeline ruptures; | ||
• | discharges of toxic gases; | ||
• | build up of naturally occurring radioactive materials; and | ||
• | vandalism. |
• | injury or loss of life; | ||
• | severe damage or destruction of property and equipment, and oil and gas reservoirs; | ||
• | pollution and other environmental damage; | ||
• | investigatory and clean-up responsibilities; | ||
• | regulatory investigation and penalties; | ||
• | suspension of our operations; and | ||
• | repairs to resume operations. |
24
Table of Contents
• | relatively minor changes in the global supply and demand for oil; | ||
• | export quotas; | ||
• | market uncertainty; | ||
• | the level of consumer product demand; | ||
• | weather conditions; | ||
• | domestic and foreign governmental regulations and policies; | ||
• | the price and availability of alternative fuels; | ||
• | political and economic conditions in oil-producing and oil consuming countries; and | ||
• | overall economic conditions. |
25
Table of Contents
26
Table of Contents
• | Three claims were filed in July 2004 and allege a failure to withhold for technical service payments and a failure to pay taxes on the capital fee reimbursement and related interest paid by PDVSA under the Operating Service Agreement (“OSA”). Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss one of the claims and has protested with the municipality the remaining claims. | ||
• | Two claims were filed in July 2006 alleging the failure to pay taxes at a new rate set by the municipality. Harvest Vinccler has filed a protest with the Tax Court in Barcelona, Venezuela, on these claims. | ||
• | Two claims were filed in August 2006 alleging a failure to pay taxes on estimated revenues for the second quarter of 2006 and a withholding error with respect to certain vendor payments. Harvest Vinccler has filed a protest with the Tax Court in Barcelona, Venezuela, on one claim and filed a protest with the municipality on the other claim. | ||
• | Two claims were filed in March 2007 alleging a failure to pay taxes on estimated revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a protest with the municipality on these claims. |
• | One claim was filed in April 2005 alleging the failure to pay taxes at a new rate set by the municipality. Harvest Vinccler has filed a protest with the Mayor’s Office and a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss the claim. On April 10, 2008, the Tax Court suspended the case pending a response from the Mayor’s Office to the protest. If the municipality’s response is to confirm the assessment, Harvest Vinccler will defer to the competent Tax Court to enjoin and dismiss the claim. | ||
• | Two claims were filed in June 2007. One claim relates to the period 2003 through 2006 and seeks to impose a tax on interest paid by PDVSA under the OSA. The second claim alleges a failure to pay taxes on estimated revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both claims. |
27
Table of Contents
• | Two claims were filed in July 2007 seeking to impose penalties on tax assessments filed and settled in 2004. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both claims. |
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Year | Quarter | High | Low | |||||||||
2009 | First quarter | 4.69 | 2.70 | |||||||||
Second quarter | 5.66 | 3.25 | ||||||||||
Third quarter | 6.64 | 4.24 | ||||||||||
Fourth quarter | 6.39 | 4.90 | ||||||||||
2010 | First quarter | 7.80 | 4.36 | |||||||||
Second quarter | 9.00 | 7.10 | ||||||||||
Third quarter | 10.42 | 6.54 | ||||||||||
Fourth quarter | 14.02 | 10.44 |
28
Table of Contents
(December 31 of each year)
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
Harvest Natural Resources, Inc | $ | 100 | $ | 120 | $ | 141 | $ | 48 | $ | 60 | $ | 137 | ||||||||||||
Dow Jones US E&P Index | $ | 100 | $ | 105 | $ | 147 | $ | 86 | $ | 121 | $ | 145 | ||||||||||||
S&P 500 Index | $ | 100 | $ | 116 | $ | 122 | $ | 77 | $ | 97 | $ | 112 |
29
Table of Contents
Year Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007(1) | 2006(1) | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
Statement of Operations: | ||||||||||||||||||||
Total revenues | $ | 10,696 | $ | 181 | $ | — | $ | 11,217 | $ | 59,506 | ||||||||||
Operating income (loss) | (30,691 | ) | (30,959 | ) | (54,440 | ) | (19,536 | ) | 574 | |||||||||||
Net income from Unconsolidated Equity Affiliates | 66,164 | 35,757 | 34,576 | 55,297 | — | |||||||||||||||
Net income (loss) attributable to Harvest | 15,340 | (3,107 | ) | (21,464 | ) | 60,118 | (62,502 | ) | ||||||||||||
Net income (loss) attributable to Harvest per common share: | ||||||||||||||||||||
Basic | $ | 0.46 | $ | (0.09 | ) | $ | (0.63 | ) | $ | 1.65 | $ | (1.68 | ) | |||||||
Diluted | $ | 0.43 | $ | (0.09 | ) | $ | (0.63 | ) | $ | 1.59 | $ | (1.68 | ) | |||||||
Weighted average common shares outstanding | ||||||||||||||||||||
Basic | 33,541 | 33,084 | 34,073 | 36,550 | 37,225 | |||||||||||||||
Diluted | 39,331 | 33,084 | 34,073 | 37,950 | 37,225 |
As of December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007(1) | 2006(1) | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Total assets | $ | 488,244 | $ | 348,779 | $ | 362,266 | $ | 417,071 | $ | 468,365 | ||||||||||
Long-term debt, net of current maturities | 81,237 | — | — | — | 66,977 | |||||||||||||||
Total Harvest’s Stockholders’ equity(2) | 306,804 | 274,593 | 273,242 | 316,647 | 281,409 |
(1) | Activities under our former OSA in Venezuela are reflected under the equity method of accounting effective April 1, 2006. The results of Petrodelta’s operations from April 1, 2006 until December 31, 2007 are reflected in 2007 when Petrodelta was formed. | |
(2) | No cash dividends were declared or paid during the periods presented. |
30
Table of Contents
31
Table of Contents
32
Table of Contents
33
Table of Contents
34
Table of Contents
35
Table of Contents
• | Three wells, the Kettle #1-10-3-1, the ON Moon #1-27-3-2 and the Dart #1-12-3-2, were completed and on production. | ||
• | One well, the Giles #1-19-3-2, has been hydraulically fractured and completed and will be placed on production soon. |
36
Table of Contents
• | One well, the Yergensen #1-9-3-1, has been drilled and being hydraulically fractured. | ||
• | One well, the Evans #1-4-3-3, is currently drilling. | ||
• | Two wells, the Lamb #1-19-3-1 and the Yergensen #1-18-3-1, were spud using a spud rig and have been drilled to surface casing depth only and surface casing installed. |
37
Table of Contents
38
Table of Contents
• | maintain financial prudence and rigorous investment criteria; | ||
• | access capital markets; | ||
• | continue to create a diversified portfolio of assets; | ||
• | preserve our financial flexibility; | ||
• | use our experience and skills to acquire new projects; and | ||
• | keep our organizational capabilities in line with our rate of growth. |
• | Diversify our Political Risk:Acquire oil and natural gas fields in a number of countries to diversify and reduce the overall political risk of our investment portfolio. |
39
Table of Contents
• | Seek Operational and Financial Control: We desire control of major decisions for development, production, staffing and financing for each project for a period of time sufficient for us to ensure maximum returns on investments. | ||
• | Establish a Presence Through Joint Venture Partners and the Use of Local Personnel:We seek to establish a presence in the countries and areas we operate through joint venture partners to facilitate stronger governmental and business relationships. In addition, we use local personnel to help us take advantage of local knowledge and experience and to minimize costs. | ||
• | Commit Capital in a Phased Manner to Limit Total Commitments at Any One Time:We are willing to agree to minimum capital expenditures or development commitments at the outset of new projects, but we endeavor to structure such commitments to fulfill them over time under a prudent plan of development, allowing near-term operating cash flow to help fund further investment, thereby limiting our maximum cash exposure. We also seek to maximize available local financing capacity to develop the hydrocarbons and associated infrastructure. |
• | Provide Technical Expertise:We believe there is an advantage in being able to provide geological, geophysical and engineering expertise beyond what many companies or countries possess internally. | ||
• | Maintain a Prudent Financing Plan: We intend to maintain our financial flexibility by closely monitoring spending, holding sufficient cash reserves, minimizing the use of restricted cash, actively seeking opportunities to reduce our weighted average cost of capital and increase our access to debt and equity markets. | ||
• | Manage Exploration Risks. We seek to manage the higher risk of exploration by diversifying our prospect portfolio, applying state-of-the-art technology for analyzing targets and focusing on opportunities in proven active hydrocarbon systems with infrastructure. | ||
• | Establish Various Sources of Production. We seek to establish new production from our exploration and development efforts in a number of diverse markets and expect to monetize production through operations or the sale of assets. |
40
Table of Contents
December 31, 2010 | December 31, 2009 | |||||||||||||||
Lower Green | Monument | Lower Green | Monument | |||||||||||||
River/Upper | Butte | River/Upper | Butte | |||||||||||||
Wasatch | Extension | Wasatch | Extension | |||||||||||||
Barrels of oil sold | 33,932 | 106,094 | — | 2,683 | ||||||||||||
Thousand cubic feet of gas sold | 6,257 | 416,779 | — | 5,780 | ||||||||||||
Total barrels of oil equivalent | 34,975 | 175,558 | — | 3,646 | ||||||||||||
Average price per barrel | $ | 69.63 | $ | 64.85 | $ | — | $ | 61.57 | ||||||||
Average price per thousand cubic feet | $ | 3.97 | $ | 3.43 | $ | — | $ | 2.77 |
Year Ended | ||||||||||||
December 31, | Increase | |||||||||||
2010 | 2009 | (Decrease) | ||||||||||
Lease operating and production taxes | $ | 1.8 | $ | — | $ | 1.8 | ||||||
Depletion, depreciation and amortization | 3.8 | 0.4 | 3.4 | |||||||||
Exploration expense | 8.0 | 7.8 | 0.2 | |||||||||
General and administrative | 26.7 | 21.9 | 4.8 | |||||||||
Taxes other than on income | 1.0 | 1.0 | — | |||||||||
Investment earnings and other | (0.6 | ) | (1.2 | ) | 0.6 | |||||||
Interest expense | 2.7 | — | 2.7 | |||||||||
Other non-operating expense | 4.0 | — | 4.0 | |||||||||
Loss on exchange rates | 1.6 | 0.1 | 1.5 | |||||||||
Income tax expense | (0.2 | ) | 1.2 | (1.0 | ) |
41
Table of Contents
Year Ended | ||||||||||||
December 31, | Increase | |||||||||||
2009 | 2008 | (Decrease) | ||||||||||
Depletion, depreciation and amortization | $ | 0.4 | $ | 0.2 | $ | 0.2 | ||||||
Exploration expense | 7.8 | 16.4 | (8.6 | ) | ||||||||
Dry hole costs | — | 10.8 | (10.8 | ) | ||||||||
General and administrative | 21.9 | 27.2 | (5.3 | ) | ||||||||
Taxes other than on income | 1.0 | (0.2 | ) | 1.2 | ||||||||
Gain on financing transactions | — | (3.4 | ) | 3.4 | ||||||||
Investment earnings and other | (1.2 | ) | (3.8 | ) | 2.6 | |||||||
Interest expense | — | 1.7 | (1.7 | ) | ||||||||
Loss on exchange rate | 0.1 | 0.2 | (0.1 | ) | ||||||||
Income tax expense | 1.2 | — | 1.2 |
42
Table of Contents
• | During the second quarter of 2009, Petrodelta recorded additional pension expense of $15.6 million ($5.0 million net to our 32 percent interest) in the three month period ended June 30, 2009 based on an actuarial study commissioned by PDVSA which was finalized during the second quarter of 2009. During the fourth quarter of 2009, Petrodelta received a revised allocation of its pension obligation from PDVSA which reflected an update to the actuarial study based on a further refinement of assumption and a revised allocation methodology as a result of an analysis of more detailed census data specific to each mixed company not previously available. This revised allocation resulted in a decrease of $8.4 million ($2.7 million net to our 32 percent interest) to the pension and retirement plan costs as compared to those previously recorded to Petrodelta in May 2009. This change in management’s estimate related to the pension and retirement plan costs was recorded in December 2009. | ||
• | Based on cash flow projections and considering Fusion’s current liquidity, we performed a review at December 31, 2009 for impairment of our minority equity investment in Fusion. Based on this review, we concluded that Fusion’s potential business opportunities did not support its on-going cash flow requirements; and therefore, we recorded a $1.6 million charge to fully impair the carrying value of our equity investment in Fusion at December 31, 2009. |
43
Table of Contents
44
Table of Contents
45
Table of Contents
Year Ended December 31, | ||||||||||||
(in thousands except as indicated) | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net cash provided by (used in) operating activities | $ | (5,296 | ) | $ | (34,945 | ) | $ | 50,380 | ||||
Net cash used in investing activities | (59,061 | ) | (28,603 | ) | (23,055 | ) | ||||||
Net cash provided by (used in) used in financing activities | 90,743 | (1,300 | ) | (51,001 | ) | |||||||
Net increase (decrease) in cash | $ | 26,386 | $ | (64,848 | ) | $ | (23,676 | ) | ||||
Working Capital | 45,199 | 34,539 | 77,010 | |||||||||
Current Ratio | 2.6 | 3.1 | 3.0 | |||||||||
Total Cash, including restricted cash | 58,703 | 32,317 | 97,165 | |||||||||
Total Debt | 81,237 | — | — |
46
Table of Contents
Payments (in thousands) Due by Period | ||||||||||||||||||||
Less than | After 4 | |||||||||||||||||||
Contractual Obligation | Total | 1 Year | 1-2 Years | 3-4 Years | Years | |||||||||||||||
Debt: | ||||||||||||||||||||
8.25% Senior Convertible Note Due 2013 | $ | 32,000 | $ | — | $ | — | $ | 32,000 | $ | — | ||||||||||
10.00% Term Loan Facility Due 2012 | 60,000 | — | 60,000 | — | — | |||||||||||||||
Total Debt | 92,000 | — | 60,000 | — | — | |||||||||||||||
Other obligations: | ||||||||||||||||||||
Interest payments | 20,350 | 10,140 | 9,763 | 447 | — | |||||||||||||||
Asset retirement obligation | 663 | — | — | — | 663 | |||||||||||||||
Oil and gas activities(1) | 22,650 | 650 | 22,000 | — | — | |||||||||||||||
Office leases | 2,435 | 764 | 651 | 542 | 478 | |||||||||||||||
Total other obligations | 46,098 | 11,554 | 32,414 | 989 | 1,141 | |||||||||||||||
Total contractual obligations | $ | 138,098 | $ | 11,554 | $ | 92,414 | $ | 32,989 | $ | 1,141 | ||||||||||
(1) | As is common in the oil and gas industry, we have various contractual commitments pertaining to exploration, development and production activities. At December 31, 2010, we had $0.7 million of commitments related to a drilling rig and other equipment for our domestic operations. The commitment for the drilling rig of $0.6 million was met in January 2011. We also have a funding commitment of $22.0 million on the Block 64 EPSA for the drilling of two wells over a three-year period which expires in May 2012. |
47
Table of Contents
48
Table of Contents
49
Table of Contents
50
Table of Contents
51
Table of Contents
52
Table of Contents
53
Table of Contents
54
Table of Contents
Page | ||||
S-1 | ||||
S-2 | ||||
S-3 | ||||
S-4 | ||||
S-5 | ||||
S-7 | ||||
S-45 |
(b) 3. | Exhibits: |
3.1 | Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to our Form 10-Q filed on November 9, 2010, File No. 1-10762.) | ||
3.2 | Restated Bylaws as of May 17, 2007. (Incorporated by reference to Exhibit 3.1 to our Form 8-K filed on May 23, 2007, File No. 1-10762.) | ||
4.1 | Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to our Form 10-K filed on March 17, 2008, File No. 1-10762.) | ||
4.2 | Certificate of Designation, Rights and Preferences of the Series B Preferred Stock of Benton Oil and Gas Company, filed May 12, 1995. (Incorporated by reference to Exhibit 4.2 to our Form 10-Q filed on November 9, 2010, File No. 1-10762.) | ||
4.3 | Third Amended and Restated Rights Agreement, dated as of August 23, 2007, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 99.3 to our Form 8-A filed on October 23, 2007, File No. 1-10762.) | ||
4.4 | Amendment to Third Amended and Restated Rights Agreement, dated as of October 28, 2010, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4.1 to our Form 8-K filed on October 29, 2010, File No. 1-10762.) | ||
4.5 | Indenture dated as of February 17, 2010, between Harvest Natural Resources, Inc. and U.S. Bank National Association, as trustee. (Incorporated by reference to Exhibit 4.1 to our Form 8-K filed on February 18, 2010, File No. 1-10762.) | ||
4.6 | First Supplemental Indenture dated as of February 17, 2010 between Harvest Natural Resources, Inc. and U.S. Bank National Association, as trustee. (Incorporated by reference to Exhibit 4.2 to our Form 8-K filed on February 18, 2010, File No. 1-10762.) |
55
Table of Contents
4.7 | Form of 8.25% Senior Convertible Notes due 2013. (Incorporated by reference to Exhibit 4.3 to our Form 8-K filed on February 18, 2010, File No. 1-10762.) | ||
4.8 | Warrant Purchase Agreement, dated as of October 28, 2010, between Harvest Natural Resources, Inc. and MSD Energy Investments Private II, LLC. (Incorporated by reference to Exhibit 4.2 to our Form 8-K filed on October 29, 2010, File No. 1-10762.) | ||
4.9 | Common Stock Purchase Warrant No. W-1, dated as of October 28, 2010, between Harvest Natural Resources, Inc. and MSD Energy Investments Private II, LLC. (Incorporated by reference to Exhibit 4.3 to our Form 8-K filed on October 29, 2010, File No. 1-10762.) | ||
4.10 | Common Stock Purchase Warrant No. W-2, dated as of October 28, 2010, between Harvest Natural Resources, Inc. and MSD Energy Investments Private II, LLC. (Incorporated by reference to Exhibit 4.4 to our Form 8-K filed on October 29, 2010, File No. 1-10762.) | ||
4.11 | Common Stock Purchase Warrant No. W-3, dated as of October 28, 2010, between Harvest Natural Resources, Inc. and MSD Energy Investments Private II, LLC. (Incorporated by reference to Exhibit 4.5 to our Form 8-K filed on October 29, 2010, File No. 1-10762.) | ||
10.1 | 2001 Long Term Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-8 filed on April 9, 2002 (Registration Statement No. 333-85900).) | ||
10.2 | Harvest Natural Resources 2004 Long Term Incentive Plan. (Incorporated by reference to Exhibit 4.5 to our Registration Statement on Form S-8 filed on May 25, 2004 (Registration Statement No. 333-115841).) | ||
10.3† | Form of Indemnification Agreement between Harvest Natural Resources, Inc. and each Director and Executive Officer of the Company. (Incorporated by reference to Exhibit 10.19 to our Form 10-K filed on February 23, 2005, File No. 1-10762.) | ||
10.4 | Form of 2004 Long Term Stock Incentive Plan Stock Option Agreement. (Incorporated by reference to Exhibit 10.20 to our Form 10-K filed on February 23, 2005, File No. 1-10762.) | ||
10.5 | Form of 2004 Long Term Stock Incentive Plan Director Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.21 to our Form 10-K filed on February 23, 2005, File No. 1-10762.) | ||
10.6 | Form of 2004 Long Term Stock Incentive Plan Employee Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.22 to our Form 10-K filed on February 23, 2005, File No. 1-10762.) | ||
10.7† | Employment Agreement dated September 12, 2005 between Harvest Natural Resources, Inc. and Karl L. Nesselrode. (Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) | ||
10.8† | Employment Agreement dated September 15, 2005 between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) | ||
10.9† | Stock Option Agreement dated September 15, 2005, between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.24 to our Form 10-K filed on February 27, 2006, File No. 1-10762.) | ||
10.10† | Stock Option Agreement dated September 15, 2005, between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.25 to our Form 10-K filed on February 27, 2006, File No. 1-10762.) |
56
Table of Contents
10.11† | Stock Option Agreement dated September 26, 2005, between Harvest Natural Resources, Inc. and Byron A. Dunn. (Incorporated by reference to Exhibit 10.26 to our Form 10-K filed on February 27, 2006, File No. 1-10762.) | ||
10.12 | Harvest Natural Resources 2006 Long Term Incentive Plan. (Incorporated by reference to Exhibit 4.5 to our Registration Statement on Form S-8 filed on June 1, 2006 [Registration Statement No. 333-134630].) | ||
10.13 | Form of 2006 Long Term Incentive Plan Stock Option Agreement. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.) | ||
10.14 | Form of 2006 Long Term Incentive Plan Director Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.) | ||
10.15 | Form of 2006 Long Term Incentive Plan Employee Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.) | ||
10.16† | Stock Unit Award Agreement dated September 15, 2005 between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.) | ||
10.17† | Stock Unit Award Agreement dated March 2, 2006 between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.6 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.) | ||
10.18 | Form of 2006 Long Term Incentive Plan Stock Option Agreement — Five Year Vesting, Seven Year Term. (Incorporated by reference to Exhibit 10.33 to our Form 10-K filed on March 13, 2007, File No. 1-10762.) | ||
10.19 | Amendment to Harvest Natural Resources 2006 Long Term Incentive Plan adopted July 19, 2006. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on May 3, 2007, File No. 1-10762.) | ||
10.20† | Employment Agreement dated May 7, 2007 between Harvest Natural Resources, Inc. and Keith L. Head. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on July 25, 2007, File No. 1-10762.) | ||
10.21† | Stock Option Agreement dated May 7, 2007 between Harvest Natural Resources, Inc. and Keith L. Head. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on July 25, 2007, File No. 1-10762.) | ||
10.22† | Employee Restricted Stock Agreement dated May 7, 2007 between Harvest Natural Resources, Inc. and Keith L. Head. (Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on July 25, 2007, File No. 1-10762.) | ||
10.23 | Contract for Conversion to a Mixed Company between Corporación Venezolana del Petróleo, S.A., Harvest-Vinccler, S.C.A. and HNR Finance B.V. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on November 1, 2007, File No. 1-10762.) | ||
10.24† | Employment Agreement dated April 14, 2008 between Harvest Natural Resources, Inc. and Patrick R. Oenbring. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on May 1, 2008, File No. 1-10762.) | ||
10.25† | Stock Option Agreement dated April 14, 2008 between Harvest Natural Resources, Inc. and Patrick R. Oenbring. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on May 1, 2008, File No. 1-10762.) |
57
Table of Contents
10.26† | Employee Restricted Stock Agreement dated April 14, 2008 between Harvest Natural Resources, Inc. and Patrick R. Oenbring. (Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on May 1, 2008, File No. 1-10762.) | ||
10.27† | Employment Agreement dated May 19, 2008 between Harvest Natural Resources, Inc. and Stephen C. Haynes. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on August 7, 2008, File No. 1-10762.) | ||
10.28† | Stock Option Agreement dated May 19, 2008 between Harvest Natural Resources, Inc. and Stephen C. Haynes. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on August 7, 2008, File No. 1-10762.) | ||
10.29† | Employee Restricted Stock Agreement dated May 19, 2008 between Harvest Natural Resources, Inc. and Stephen C. Haynes. (Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on August 7, 2008, File No. 1-10762.) | ||
10.30† | Employment Agreement dated May 19, 2008 between Harvest Natural Resources, Inc. and G. Michael Morgan. (Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed on August 7, 2008, File No. 1-10762.) | ||
10.31† | Stock Option Agreement dated May 19, 2008 between Harvest Natural Resources, Inc. and G. Michael Morgan. (Incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on August 7, 2008, File No. 1-10762.) | ||
10.32† | Employee Restricted Stock Agreement dated May 19, 2008 between Harvest Natural Resources, Inc. and G. Michael Morgan. (Incorporated by reference to Exhibit 10.6 to our Form 10-Q filed on August 7, 2008, File No. 1-10762.) | ||
10.33 | Placement Agent Agreement dated February 10, 2010, by and among Harvest Natural Resources, Inc., as issuer, and Lazard Capital Markets LLC and Madison Williams and Company LLC, as placement agents, relating to the 8.25% Senior Convertible Notes due 2013. (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on February 11, 2010, File No. 1-10762.) | ||
10.34 | Form of Standard Subscription Agreement, to be entered into by and among Harvest Natural Resources, Inc. and certain purchasers signatory thereto. (Incorporated by reference to Exhibit 10.2 to our Form 8-K filed on February 11, 2010, File No. 1-10762.) | ||
10.35 | Form of Subscription Agreement, to be entered into by and among Harvest Natural Resources, Inc. and certain purchasers signatory thereto. (Incorporated by reference to Exhibit 10.3 to our Form 8-K filed on February 11, 2010, File No. 1-10762.) | ||
10.36 | 2010 Long Term Incentive Plan. (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 9, 2010, File No. 1-10762.) | ||
10.37 | Form of 2010 Long Term Incentive Plan Employee Restricted Stock Award Agreement. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on August 9, 2010, File No. 1-10762.) | ||
10.38 | Form of 2010 Long Term Incentive Plan Stock Option Award Agreement. (Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on August 9, 2010, File No. 1-10762.) | ||
10.39 | Form of 2010 Long Term Incentive Plan Director Restricted Stock Award Agreement. (Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed on August 9, 2010, File No. 1-10762.) |
58
Table of Contents
10.40 | Credit Agreement, dated as of October 28, 2010, between Harvest Natural Resources, Inc. and MSD Energy Investments Private II, LLC. (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on October 29, 2010, File No. 1-10762.) | ||
10.41 | Guaranty, dated as of October 28, 2010, by Harvest (US) Holdings, Inc., Harvest Natural Resources, Inc. (UK) and Harvest Offshore China Company in favor of MSD Energy Investments Private II, LLC. (Incorporated by reference to Exhibit 10.2 to our Form 8-K filed on October 29, 2010, File No. 1-10762.) | ||
10.42 | Term Note, dated as of October 28, 2010, of Harvest Natural Resources, Inc. in favor of MSD Energy Investments Private II, LLC. (Incorporated by reference to Exhibit 10.3 to our Form 8-K filed on October 29, 2010, File No. 1-10762.) | ||
21.1 | List of subsidiaries. | ||
23.1 | Consent of PricewaterhouseCoopers LLP. | ||
23.2 | Consent of Ryder Scott Company, LP. | ||
23.3 | Consent of HLB PGFA Perales, Pistone & Asociados — Caracas, Venezuela. | ||
31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 executed by James A. Edmiston, President and Chief Executive Officer. | ||
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 executed by Stephen C. Haynes, Vice President, Chief Financial Officer and Treasurer. | ||
32.1 | Certification accompanying Annual Report on Form 10-K pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by James A. Edmiston, President and Chief Executive Officer. | ||
32.2 | Certification accompanying Annual Report on Form 10-K pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by Stephen C. Haynes, Vice President, Chief Financial Officer and Treasurer. | ||
99.1 | Reserve report dated February 24, 2011 between Harvest (US) Holdings, Inc. and Ryder Scott Company. | ||
99.2 | Reserve report dated February 24, 2011 between HNR Finance B.V. and Ryder Scott Company. |
† | Identifies management contracts or compensating plans or arrangements required to be filed as an exhibit hereto pursuant to Item 15(a) and (b) of Form 10-K. |
59
Table of Contents
Houston, Texas
March 16, 2011
S-1
Table of Contents
December 31, | ||||||||
2010 | 2009 | |||||||
(in thousands, except per share data) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 58,703 | $ | 32,317 | ||||
Accounts and notes receivable, net | ||||||||
Oil and gas revenue receivable | 1,907 | 166 | ||||||
Joint interest and other | 2,325 | 8,047 | ||||||
Note receivable | 3,420 | 3,265 | ||||||
Advances to equity affiliate | 1,706 | 4,927 | ||||||
Prepaid expenses and other | 4,793 | 2,214 | ||||||
TOTAL CURRENT ASSETS | 72,854 | 50,936 | ||||||
OTHER ASSETS | 2,477 | 3,613 | ||||||
INVESTMENT IN EQUITY AFFILIATES | 287,933 | 233,989 | ||||||
PROPERTY AND EQUIPMENT: | ||||||||
Oil and gas properties (successful efforts method) | 126,781 | 58,543 | ||||||
Other administrative property | 3,209 | 3,085 | ||||||
129,990 | 61,628 | |||||||
Accumulated depreciation and amortization | (5,010 | ) | (1,387 | ) | ||||
124,980 | 60,241 | |||||||
$ | 488,244 | $ | 348,779 | |||||
LIABILITIES AND EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Joint interest and royalty payable | $ | 675 | $ | — | ||||
Accounts payable, trade and other | 2,530 | 696 | ||||||
Accounts payable — carry obligation | 8,395 | — | ||||||
Accrued expenses | 15,087 | 9,920 | ||||||
Accrued interest | 896 | 4,691 | ||||||
Income taxes payable | 72 | 1,090 | ||||||
TOTAL CURRENT LIABILITIES | 27,655 | 16,397 | ||||||
OTHER LONG TERM LIABILITIES | 1,834 | 333 | ||||||
LONG TERM DEBT | 81,237 | — | ||||||
ASSET RETIREMENT LIABILITY | 663 | 50 | ||||||
COMMITMENTS AND CONTINGENCIES (See Note 4) | — | — | ||||||
EQUITY | ||||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Preferred stock, par value $0.01 a share; authorized 5,000 shares; outstanding, none | — | — | ||||||
Common stock, par value $0.01 a share; authorized 80,000 shares at December 31, 2010 and 2009; issued 40,103 shares and 39,495 shares at December 31, 2010 and 2009, respectively | 401 | 395 | ||||||
Additional paid-in capital | 230,362 | 213,337 | ||||||
Retained earnings | 141,584 | 126,244 | ||||||
Treasury stock, at cost, 6,475 shares and 6,448 shares at December 31, 2010 and 2009, respectively | (65,543 | ) | (65,383 | ) | ||||
TOTAL HARVEST STOCKHOLDERS’ EQUITY | 306,804 | 274,593 | ||||||
NONCONTROLLING INTEREST | 70,051 | 57,406 | ||||||
TOTAL EQUITY | 376,855 | 331,999 | ||||||
$ | 488,244 | $ | 348,779 | |||||
S-2
Table of Contents
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(in thousands, except per share data) | ||||||||||||
Revenues | ||||||||||||
Oil sales | $ | 9,243 | $ | 165 | $ | — | ||||||
Gas sales | 1,453 | 16 | — | |||||||||
10,696 | 181 | — | ||||||||||
Expenses | ||||||||||||
Lease operating costs and production taxes | 1,846 | — | — | |||||||||
Depletion, depreciation and amortization | 3,817 | 436 | 201 | |||||||||
Exploration expense | 8,016 | 7,824 | 16,402 | |||||||||
Dry hole costs | — | — | 10,828 | |||||||||
General and administrative | 26,660 | 21,854 | 27,215 | |||||||||
Taxes other than on income | 1,048 | 1,026 | (206 | ) | ||||||||
41,387 | 31,140 | 54,440 | ||||||||||
Loss from Operations | (30,691 | ) | (30,959 | ) | (54,440 | ) | ||||||
Other Non-Operating Income (Expense) | ||||||||||||
Gain on Financing Transactions | — | — | 3,421 | |||||||||
Investment earnings and other | 557 | 1,168 | 3,849 | |||||||||
Interest expense | (2,689 | ) | (5 | ) | (1,730 | ) | ||||||
Other non-operating expense | (3,952 | ) | — | — | ||||||||
Loss on exchange rates | (1,588 | ) | (83 | ) | (186 | ) | ||||||
(7,672 | ) | 1,080 | 5,354 | |||||||||
Loss from Consolidated Companies Before Income Taxes | (38,363 | ) | (29,879 | ) | (49,086 | ) | ||||||
Income Tax Expense (Benefit) | (184 | ) | 1,182 | 25 | ||||||||
Loss from Consolidated Companies | (38,179 | ) | (31,061 | ) | (49,111 | ) | ||||||
Net Income from Unconsolidated Equity Affiliates | 66,164 | 35,757 | 34,576 | |||||||||
Net Income (Loss) | 27,985 | 4,696 | (14,535 | ) | ||||||||
Less: Net Income Attributable to Noncontrolling Interest | 12,645 | 7,803 | 6,929 | |||||||||
Net Income (Loss) Attributable to Harvest | $ | 15,340 | $ | (3,107 | ) | $ | (21,464 | ) | ||||
Net Income (Loss) Attributable to Harvest Per Common Share: | ||||||||||||
Basic | $ | 0.46 | $ | (0.09 | ) | $ | (0.63 | ) | ||||
Diluted | $ | 0.43 | (0.09 | ) | $ | (0.63 | ) | |||||
S-3
Table of Contents
(in thousands)
Common | Additional | Non- | ||||||||||||||||||||||||||
Shares | Common | Paid-in | Retained | Treasury | Controlling | Total | ||||||||||||||||||||||
Issued | Stock | Capital | Earnings | Stock | Interest | Equity | ||||||||||||||||||||||
Balance at January 1, 2008 | 38,513 | $ | 385 | $ | 201,938 | $ | 150,815 | $ | (36,491 | ) | $ | 57,546 | $ | 374,193 | ||||||||||||||
Issuance of common shares: | ||||||||||||||||||||||||||||
Exercise of stock options | 547 | 5 | 1,560 | — | — | — | 1,565 | |||||||||||||||||||||
Employee stock-based compensation | 68 | 1 | 5,370 | — | — | — | 5,371 | |||||||||||||||||||||
Purchase of treasury shares | — | — | — | — | (28,877 | ) | — | (28,877 | ) | |||||||||||||||||||
Distribution to noncontrolling Interests | — | — | — | — | — | (14,872 | ) | (14,872 | ) | |||||||||||||||||||
Net Income (Loss) | — | — | — | (21,464 | ) | — | 6,929 | (14,535 | ) | |||||||||||||||||||
Balance at December 31, 2008 | 39,128 | 391 | 208,868 | 129,351 | (65,368 | ) | 49,603 | 322,845 | ||||||||||||||||||||
Issuance of common shares: | ||||||||||||||||||||||||||||
Exercise of stock options | 205 | 2 | 384 | — | — | — | 386 | |||||||||||||||||||||
Employee stock-based compensation | 162 | 2 | 4,085 | — | — | — | 4,087 | |||||||||||||||||||||
Purchase of Treasury Shares | — | — | — | — | (15 | ) | — | (15 | ) | |||||||||||||||||||
Net Income (Loss) | — | — | — | (3,107 | ) | — | 7,803 | 4,696 | ||||||||||||||||||||
Balance at December 31, 2009 | 39,495 | 395 | 213,337 | 126,244 | (65,383 | ) | 57,406 | 331,999 | ||||||||||||||||||||
Issuance of common shares: | ||||||||||||||||||||||||||||
Exercise of stock options | 419 | 4 | 1,670 | — | — | — | 1,674 | |||||||||||||||||||||
Employee stock-based compensation | 189 | 2 | 4,233 | — | — | — | 4,235 | |||||||||||||||||||||
Discount on debt | — | — | 11,122 | — | — | — | 11,122 | |||||||||||||||||||||
Purchase of treasury shares | — | — | — | — | (160 | ) | — | (160 | ) | |||||||||||||||||||
Net Income | — | — | — | 15,340 | — | 12,645 | 27,985 | |||||||||||||||||||||
Balance at December 31, 2010 | 40,103 | $ | 401 | $ | 230,362 | $ | 141,584 | $ | (65,543 | ) | $ | 70,051 | $ | 376,855 | ||||||||||||||
S-4
Table of Contents
(in thousands)
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(in thousands) | ||||||||||||
Cash Flows From Operating Activities: | ||||||||||||
Net income (loss) | $ | 27,985 | $ | 4,696 | $ | (14,535 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||
Depletion, depreciation and amortization | 3,817 | 436 | 201 | |||||||||
Amortization of debt financing costs | 793 | — | — | |||||||||
Write off of deferred financing costs | 2,795 | — | — | |||||||||
Amortization of discount on debt | 359 | — | — | |||||||||
Dry hole costs | — | — | 10,828 | |||||||||
Gain on financing transactions | — | — | (3,421 | ) | ||||||||
Net income from unconsolidated equity affiliates | (66,164 | ) | (35,757 | ) | (34,576 | ) | ||||||
Non-cash compensation related charges | 4,234 | 4,087 | 6,061 | |||||||||
Dividend received from equity affiliate | 12,220 | — | 72,530 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts and notes receivable | 3,826 | 92 | 548 | |||||||||
Advances to equity affiliate | 3,221 | (1,195 | ) | 12,620 | ||||||||
Prepaid expenses and other | (2,579 | ) | (1,055 | ) | (5,632 | ) | ||||||
Joint interest and royalty payable | 675 | — | — | |||||||||
Accounts payable | 1,835 | (966 | ) | (2,957 | ) | |||||||
Accounts payable, related party | — | — | (10,093 | ) | ||||||||
Advance from equity affiliate | — | — | 20,750 | |||||||||
Accrued expenses | 5,738 | (6,629 | ) | (1,073 | ) | |||||||
Accrued interest | (4,534 | ) | — | (445 | ) | |||||||
Other long term liabilities | 1,501 | 333 | — | |||||||||
Income taxes payable | (1,018 | ) | 1,013 | (426 | ) | |||||||
Net Cash Provided By (Used In) Operating Activities | (5,296 | ) | (34,945 | ) | 50,380 | |||||||
Cash Flows from Investing Activities: | ||||||||||||
Additions of property and equipment | (59,619 | ) | (28,022 | ) | (26,317 | ) | ||||||
Investments in equity affiliates | — | — | (2,161 | ) | ||||||||
Decrease in restricted cash | — | — | 6,769 | |||||||||
Investment costs | 558 | (581 | ) | (1,346 | ) | |||||||
Net Cash Used In Investing Activities | (59,061 | ) | (28,603 | ) | (23,055 | ) | ||||||
Cash Flows from Financing Activities: | ||||||||||||
Net proceeds from issuances of common stock | 1,674 | 386 | 1,565 | |||||||||
Proceeds from issuance of long-term debt | 92,000 | — | — | |||||||||
Purchase of treasury stock | — | — | (29,416 | ) | ||||||||
Financing costs | (2,931 | ) | (1,686 | ) | (1,075 | ) | ||||||
Payments of note payable | — | — | (7,211 | ) | ||||||||
Dividend paid to minority interest | — | — | (14,864 | ) | ||||||||
Net Cash Provided By (Used In) Financing Activities | 90,743 | (1,300 | ) | (51,001 | ) | |||||||
Net Increase (Decrease) in Cash and Cash Equivalents | 26,386 | (64,848 | ) | (23,676 | ) | |||||||
Cash and Cash Equivalents at Beginning of Year | 32,317 | 97,165 | 120,841 | |||||||||
Cash and Cash Equivalents at End of Year | $ | 58,703 | $ | 32,317 | $ | 97,165 | ||||||
Supplemental Disclosures of Cash Flow Information: | ||||||||||||
Cash paid during the year for interest expense (net of capitalization) | $ | 1,380 | $ | 5 | $ | 768 | ||||||
Cash paid during the year for income taxes | $ | 834 | $ | 169 | $ | 456 | ||||||
S-5
Table of Contents
S-6
Table of Contents
S-7
Table of Contents
S-8
Table of Contents
S-9
Table of Contents
2010 | 2009 | |||||||
Proved property costs | $ | 27,355 | $ | 1,646 | ||||
Unproved property costs | 94,026 | 54,111 | ||||||
Oilfield inventories | 5,400 | 2,786 | ||||||
Other administrative property | 3,209 | 3,085 | ||||||
129,990 | 61,628 | |||||||
Accumulated depletion, impairment and depreciation | (5,010 | ) | (1,387 | ) | ||||
$ | 124,980 | $ | 60,241 | |||||
S-10
Table of Contents
S-11
Table of Contents
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Asset retirement obligations beginning of period | $ | 50 | $ | — | ||||
Liabilities recorded during the period | 382 | 50 | ||||||
Liabilities settled during the period | — | — | ||||||
Revisions in estimated cash flows | 197 | — | ||||||
Accretion expense | 34 | — | ||||||
Asset retirement obligations end of period | $ | 663 | $ | 50 | ||||
• | All oil and gas reserves volumes presented as of and for the year ended December 31, 2010 and 2009 were prepared using the updated reserves rules and are not on a basis comparable with prior periods. The change in comparability occurred because the FASB’s final rule requires the use of the unweighted 12-month average of the first-day-of-the-month reference price for the prior twelve month period and permits the use of reliable technologies to support reserve estimates. Under the previous reserve estimation rules, which are no longer in effect, our reserves would have been calculated using end of period prices. |
S-12
Table of Contents
• | The impairment review of our proved oil and gas properties used undiscounted estimated future net cash flows models for our estimated proved developed reserves which were calculated using the FASB’s final rule. |
S-13
Table of Contents
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Senior convertible notes, unsecured, with interest at 8.25% See description below | $ | 32,000 | $ | — | ||||
Term loan facility with interest at 10% See description below | 60,000 | — | ||||||
92,000 | — | |||||||
Discount on term loan facility See description below | (10,763 | ) | — | |||||
Less current portion | — | — | ||||||
$ | 81,237 | $ | — | |||||
S-14
Table of Contents
2011 | $ | — | ||
2012 | 60,000 | |||
2013 | 32,000 | |||
$ | 92,000 | |||
S-15
Table of Contents
• | Three claims were filed in July 2004 and allege a failure to withhold for technical service payments and a failure to pay taxes on the capital fee reimbursement and related interest paid by PDVSA under the Operating Service Agreement (“OSA”). Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss one of the claims and has protested with the municipality the remaining claims. |
S-16
Table of Contents
• | Two claims were filed in July 2006 alleging the failure to pay taxes at a new rate set by the municipality. Harvest Vinccler has filed a protest with the Tax Court in Barcelona, Venezuela, on these claims. | ||
• | Two claims were filed in August 2006 alleging a failure to pay taxes on estimated revenues for the second quarter of 2006 and a withholding error with respect to certain vendor payments. Harvest Vinccler has filed a protest with the Tax Court in Barcelona, Venezuela, on one claim and filed a protest with the municipality on the other claim. | ||
• | Two claims were filed in March 2007 alleging a failure to pay taxes on estimated revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a protest with the municipality on these claims. |
• | One claim was filed in April 2005 alleging the failure to pay taxes at a new rate set by the municipality. Harvest Vinccler has filed a protest with the Mayor’s Office and a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss the claim. On April 10, 2008, the Tax Court suspended the case pending a response from the Mayor’s Office to the protest. If the municipality’s response is to confirm the assessment, Harvest Vinccler will defer to the competent Tax Court to enjoin and dismiss the claim. | ||
• | Two claims were filed in June 2007. One claim relates to the period 2003 through 2006 and seeks to impose a tax on interest paid by PDVSA under the OSA. The second claim alleges a failure to pay taxes on estimated revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both claims. | ||
• | Two claims were filed in July 2007 seeking to impose penalties on tax assessments filed and settled in 2004. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both claims. |
S-17
Table of Contents
2010 | 2009 | 2008 | ||||||||||
Franchise taxes | $ | 196 | $ | 182 | $ | (951 | ) | |||||
Payroll and other taxes | 852 | 833 | 745 | |||||||||
$ | 1,048 | $ | 1,026 | $ | (206 | ) | ||||||
2010 | 2009 | |||||||
Deferred tax assets: | ||||||||
Operating loss carryforwards | $ | 26,849 | $ | 15,599 | ||||
Alternative minimum tax credit | 1,222 | — | ||||||
Stock options | 1,330 | 1,426 | ||||||
Return to accrual adjustment | 4,720 | — | ||||||
Restricted stock | 256 | — | ||||||
Delay rentals | 176 | — | ||||||
Valuation allowance | (28,343 | ) | (17,025 | ) | ||||
Net deferred tax asset | 6,210 | — | ||||||
Deferred tax liability: | ||||||||
Geological and geophysical/seismic | (505 | ) | — | |||||
Intangible drilling costs | (5,705 | ) | — | |||||
Net deferred tax asset (liability) | $ | — | $ | — | ||||
2010 | 2009 | 2008 | ||||||||||
Income (loss) before income taxes United States | $ | (24,743 | ) | $ | (22,357 | ) | $ | (34,760 | ) | |||
Foreign | (13,620 | ) | (7,522 | ) | (14,326 | ) | ||||||
Total | $ | (38,363 | ) | $ | (29,879 | ) | $ | (49,086 | ) | |||
2010 | 2009 | 2008 | ||||||||||
Current: | ||||||||||||
United States | $ | (1,210 | ) | $ | 39 | $ | (128 | ) | ||||
Foreign | 1,042 | 1,143 | 153 | |||||||||
(167 | ) | 1,182 | 25 | |||||||||
Deferred: | ||||||||||||
Foreign | (16 | ) | — | — | ||||||||
$ | (184 | ) | $ | 1,182 | $ | 25 | ||||||
S-18
Table of Contents
2010 | 2009 | 2008 | ||||||||||
Computed tax expense (benefit) at the statutory rate | $ | (13,427 | ) | $ | (10,458 | ) | $ | (17,180 | ) | |||
Effect of foreign source income and rate differentials on foreign income | 6,000 | 3,775 | 5,167 | |||||||||
Change in valuation allowance | 11,111 | 9,184 | 6,059 | |||||||||
Tax on undistributed earnings | — | — | 5,446 | |||||||||
Deemed income inclusion under Subpart F | — | — | 968 | |||||||||
Permanent differences | 2,062 | — | — | |||||||||
Foreign disregarded entities | — | 21 | (268 | ) | ||||||||
Return to accrual adjustment | (4,720 | ) | (1,093 | ) | (166 | ) | ||||||
Income tax refund | (1,210 | ) | — | — | ||||||||
Other | — | (247 | ) | (1 | ) | |||||||
Total income tax expense | $ | (184 | ) | $ | 1,182 | $ | 25 | |||||
S-19
Table of Contents
S-20
Table of Contents
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||||||||||||||||||||||||||
Average | Remaining | Aggregate | Average | Remaining | Aggregate | Average | Remaining | Aggregate | ||||||||||||||||||||||||||||||||||||||||
Exercise | Contractual | Intrinsic | Exercise | Contractual | Intrinsic | Exercise | Contractual | Intrinsic | ||||||||||||||||||||||||||||||||||||||||
Shares | Price | Life | Value | Shares | Price | Life | Value | Shares | Price | Life | Value | |||||||||||||||||||||||||||||||||||||
Outstanding at beginning of the year: | 3,363 | $ | 9.35 | 3,783 | $ | 8.54 | 4,172 | $ | 7.80 | |||||||||||||||||||||||||||||||||||||||
Options granted | 467 | 7.10 | 118 | 4.60 | 444 | 10.28 | ||||||||||||||||||||||||||||||||||||||||||
Options exercised | (419 | ) | (4.01 | ) | (205 | ) | (2.11 | ) | (548 | ) | (2.86 | ) | ||||||||||||||||||||||||||||||||||||
Options cancelled | (185 | ) | (9.62 | ) | (333 | ) | (2.95 | ) | (285 | ) | (11.34 | ) | ||||||||||||||||||||||||||||||||||||
Outstanding at end of the year | 3,226 | 9.70 | 3.7 | 8,522 | 3,363 | 9.35 | 4.2 | 1,312 | 3,783 | 8.54 | 5.3 | 1,846 | ||||||||||||||||||||||||||||||||||||
Exercisable at end of the year | 1,784 | 10.27 | 3.8 | 3,954 | 2,066 | 9.09 | 0.8 | 1,230 | 2,147 | 7.23 | 1.4 | 1,846 | ||||||||||||||||||||||||||||||||||||
For options granted during: | 2010 | 2009 | 2008 | |||||||||
Weighted average fair value | $ | 4.23 | $ | 4.60 | $ | 5.85 | ||||||
Weighted averaged expected life | 7 | 7 | 7 | |||||||||
Valuation assumptions: | ||||||||||||
Expected volatility | 57.6 | % | 68.9 | % | 46.6-49.7 | % | ||||||
Risk-free interest rate | 2.7 | % | 3.5 | % | 3.0-3.9 | % | ||||||
Expected dividend yield | 0 | % | 0 | % | 0 | % | ||||||
Expected annual forfeitures | 3 | % | 3 | % | 3 | % |
2010 | 2009 | 2008 | ||||||||||||||||||||||
Weighted-Average | Weighted-Average | Weighted-Average | ||||||||||||||||||||||
Nonvested | Grant-Date | Nonvested | Grant-Date | Nonvested | Grant-Date | |||||||||||||||||||
Options | Fair Value | Options | Fair Value | Options | Fair Value | |||||||||||||||||||
Nonvested at beginning of the year | 1,297 | $ | 5.50 | 1,636 | $ | 5.74 | 1,800 | $ | 5.84 | |||||||||||||||
Granted | 467 | 4.23 | 118 | 3.13 | 444 | 5.63 | ||||||||||||||||||
Vested | (322 | ) | (5.09 | ) | (447 | ) | (5.75 | ) | (607 | ) | (5.88 | ) | ||||||||||||
Forfeited | — | — | (10 | ) | (6.54 | ) | (1 | ) | (5.62 | ) | ||||||||||||||
Nonvested at end of the year | 1,442 | 5.18 | 1,297 | 5.50 | 1,636 | 5.74 | ||||||||||||||||||
S-21
Table of Contents
2010 | 2009 | 2008 | ||||||||||
(in thousands) | ||||||||||||
Segment Revenues | ||||||||||||
Oil and gas sales: | ||||||||||||
United States and other | $ | 10,696 | $ | 181 | $ | — | ||||||
Total oil and gas sales | 10,696 | 181 | — | |||||||||
Segment Income (Loss) Attributable to Harvest | ||||||||||||
Venezuela | 62,050 | 39,696 | 33,020 | |||||||||
Indonesia | (7,108 | ) | (5,124 | ) | (8,966 | ) | ||||||
United States and other | (39,602 | ) | (37,679 | ) | (45,518 | ) | ||||||
Net income (loss) attributable to Harvest | $ | 15,340 | $ | (3,107 | ) | $ | (21,464 | ) | ||||
December 31, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Operating Segment Assets | ||||||||
Venezuela | $ | 292,023 | $ | 249,484 | ||||
Indonesia | 16,254 | 5,893 | ||||||
United States and other | 229,518 | 132,913 | ||||||
537,795 | 388,290 | |||||||
Intersegment eliminations | (49,551 | ) | (39,511 | ) | ||||
$ | 488,244 | $ | 348,779 | |||||
S-22
Table of Contents
S-23
Table of Contents
S-24
Table of Contents
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(in thousands) | ||||||||||||
Revenues: | ||||||||||||
Oil sales | $ | 604,173 | $ | 451,473 | $ | 458,113 | ||||||
Gas sales | 3,398 | 6,778 | 16,506 | |||||||||
Royalty | (204,688 | ) | (156,799 | ) | (168,790 | ) | ||||||
402,883 | 301,452 | 305,829 | ||||||||||
Expenses: | ||||||||||||
Operating expenses | 44,749 | 48,311 | 52,946 | |||||||||
Workovers | 8,910 | — | 24,663 | |||||||||
Depletion, depreciation and amortization | 40,429 | 33,666 | 25,509 | |||||||||
General and administrative | 15,508 | 9,750 | 5,974 | |||||||||
Windfall profits tax | 14,116 | 882 | 56,377 | |||||||||
123,712 | 92,609 | 165,469 | ||||||||||
Income from Operations | 279,171 | 208,843 | 140,360 | |||||||||
Gain of exchange rate | 84,448 | — | — | |||||||||
Investment earnings and other | 3,179 | 4 | — | |||||||||
Interest expense | (26,767 | ) | (3,617 | ) | (2,329 | ) | ||||||
Income before Income Tax | 340,031 | 205,230 | 138,031 | |||||||||
Current income tax expense | 189,780 | 105,868 | 69,374 | |||||||||
Deferred income tax expense (benefit) | 72,568 | (43,922 | ) | (52,560 | ) | |||||||
Net Income | 77,683 | 143,284 | 121,217 | |||||||||
Adjustment to reconcile to reported Net Income from Unconsolidated Equity Affiliate: | ||||||||||||
Deferred income tax expense (benefit) | (91,877 | ) | 38,516 | 34,827 | ||||||||
Net Income Equity Affiliate | 169,560 | 104,768 | 86,390 | |||||||||
Equity interest in unconsolidated equity affiliate | 40 | % | 40 | % | 40 | % | ||||||
Income before amortization of excess basis in equity affiliate | 67,824 | 41,907 | 34,556 | |||||||||
Amortization of excess basis in equity affiliate | (1,414 | ) | (1,356 | ) | (1,155 | ) | ||||||
Conform depletion expense to GAAP | (246 | ) | 183 | 2,533 | ||||||||
Net income from unconsolidated equity affiliate | $ | 66,164 | $ | 40,734 | $ | 35,934 | ||||||
S-25
Table of Contents
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Current assets | $ | 535,225 | $ | 404,825 | ||||
Property and equipment | 321,816 | 265,442 | ||||||
Other assets | 67,755 | 141,245 | ||||||
Current liabilities | 406,339 | 345,812 | ||||||
Other liabilities | 39,224 | 33,600 | ||||||
Net equity | 479,233 | 432,100 |
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(in thousands) | ||||||||||||
Operating Revenues | $ | 10,931 | $ | 11,089 | $ | 13,063 | ||||||
Net Loss | $ | (2,378 | ) | $ | (4,798 | ) | $ | (1,290 | ) | |||
Equity interest in unconsolidated equity affiliate | 49 | % | 49 | % | 49 | % | ||||||
Net loss from unconsolidated equity affiliate | (1,165 | ) | (2,351 | ) | (632 | ) | ||||||
Amortization of fair value of intangibles | — | (995 | ) | (726 | ) | |||||||
Impairment of investment | — | (1,631 | ) | — | ||||||||
Net loss from unconsolidated equity affiliate | $ | (1,165 | ) | $ | (4,977 | ) | $ | (1,358 | ) | |||
December 31, | December, 31 | |||||||
2010 | 2009 | |||||||
Current assets | $ | 1,925 | $ | 2,726 | ||||
Total assets | 23,780 | 30,205 | ||||||
Current liabilities | 7,447 | 8,024 | ||||||
Total liabilities | 7,479 | 12,242 |
S-26
Table of Contents
S-27
Table of Contents
S-28
Table of Contents
S-29
Table of Contents
S-30
Table of Contents
S-31
Table of Contents
S-32
Table of Contents
Quarter Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
(amounts in thousands, except per share data) | ||||||||||||||||
Year ended December 31, 2010 | ||||||||||||||||
Revenues | $ | 3,124 | $ | 2,914 | $ | 1,919 | $ | 2,739 | ||||||||
Expenses | (7,773 | ) | (9,771 | ) | (11,078 | ) | (12,765 | ) | ||||||||
Non-operating loss | (1,812 | ) | (572 | ) | (92 | ) | (5,196 | ) | ||||||||
Loss from consolidated companies before income taxes | (6,461 | ) | (7,429 | ) | (9,251 | ) | (15,222 | ) | ||||||||
Income tax expense (benefit) | (19 | ) | 152 | 699 | (1,016 | ) (a) | ||||||||||
Loss from consolidated companies | (6,442 | ) | (7,581 | ) | (9,950 | ) | (14,206 | ) | ||||||||
Net income from unconsolidated equity affiliates | 38,367 | 8,915 | 6,148 | 12,734 | ||||||||||||
Net income (loss) | 31,925 | 1,334 | (3,802 | ) | (1,472 | ) | ||||||||||
Less: Net income attributable to noncontrolling interest | 7,335 | 1,630 | 1,189 | 2,491 | ||||||||||||
Net income (loss) attributable to Harvest | $ | 24,590 | $ | (296 | ) | $ | (4,991 | ) | $ | (3,963 | ) | |||||
Net income (loss) attributable to Harvest per common share: | ||||||||||||||||
Basic | $ | 0.74 | $ | (0.01 | ) | $ | (0.15 | ) | $ | (0.12 | ) | |||||
Diluted | $ | 0.64 | $ | (0.01 | ) | $ | (0.15 | ) | $ | (0.12 | ) | |||||
Quarter Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
(amounts in thousands, except per share data) | ||||||||||||||||
Year ended December 31, 2009 | ||||||||||||||||
Revenues | $ | — | $ | — | $ | — | $ | 181 | ||||||||
Expenses | (7,825 | ) | (10,217 | ) | (7,286 | ) | (5,812 | ) | ||||||||
Non-operating income | 331 | 296 | 224 | 229 | ||||||||||||
Loss from consolidated companies before income taxes | (7,494 | ) | (9,921 | ) | (7,062 | ) | (5,402 | ) | ||||||||
Income tax expense | 889 | 147 | 109 | 37 | ||||||||||||
Loss from consolidated companies | (8,383 | ) | (10,068 | ) | (7,171 | ) | (5,439 | ) | ||||||||
Net income from unconsolidated equity affiliates | 4,410 | 7,476 | 9,890 | 13,981 | ||||||||||||
Net income (loss) | (3,973 | ) | (2,592 | ) | 2,719 | 8,542 | ||||||||||
Less: Net income attributable to noncontrolling interest | 803 | 1,597 | 1,936 | 3,467 | ||||||||||||
Net income (loss) attributable to Harvest | $ | (4,776 | ) | $ | (4,189 | ) | $ | 783 | $ | 5,075 | ||||||
Net income (loss) attributable to Harvest per common share: | ||||||||||||||||
Basic | $ | (0.15 | ) | $ | (0.13 | ) | $ | 0.02 | $ | 0.15 | ||||||
Diluted | $ | (0.15 | ) | $ | (0.13 | ) | $ | 0.02 | $ | 0.15 | ||||||
S-33
Table of Contents
TABLE I — | Total costs incurred in oil and natural gas acquisition, exploration and development activities (in thousands): |
United States | ||||||||||||||||||||
Oman | Gabon | Indonesia | and Other | Total | ||||||||||||||||
Year Ended December 31, 2010 | ||||||||||||||||||||
Acquisition costs | $ | — | $ | — | $ | 2,703 | $ | 21,757 | $ | 24,460 | ||||||||||
Exploration costs | 1,698 | 2,763 | 10,468 | 27,576 | 42,505 | |||||||||||||||
Development costs | — | — | — | 7,667 | 7,667 | |||||||||||||||
$ | 1,698 | $ | 2,763 | $ | 13,171 | $ | 57,000 | $ | 74,632 | |||||||||||
Year Ended December 31, 2009 | ||||||||||||||||||||
Acquisition costs | $ | 3,757 | $ | 941 | $ | 1,800 | $ | 28,170 | $ | 34,668 | ||||||||||
Exploration costs | 459 | 225 | 1,793 | 2,563 | 5,040 | |||||||||||||||
Development costs | — | — | — | 1,547 | 1,547 | |||||||||||||||
$ | 4,216 | $ | 1,166 | $ | 3,593 | $ | 32,280 | $ | 41,255 | |||||||||||
Year Ended December 31, 2008 | ||||||||||||||||||||
Acquisition costs | $ | — | $ | 5,792 | $ | 71 | $ | 13,302 | $ | 19,165 | ||||||||||
Exploration costs | — | 3,016 | 7,647 | 14,020 | 24,683 | |||||||||||||||
$ | — | $ | 8,808 | $ | 7,718 | $ | 27,322 | $ | 43,848 | |||||||||||
TABLE II — | Capitalized costs related to oil and natural gas producing activities (in thousands): |
United States | ||||||||||||||||||||
Oman | Gabon | Indonesia | and Other | Total | ||||||||||||||||
Year Ended December 31, 2010 | ||||||||||||||||||||
Proved property costs | $ | — | $ | — | $ | — | $ | 27,355 | $ | 27,355 | ||||||||||
Unproved property costs | 4,216 | 9,177 | 9,459 | 71,173 | 94,025 | |||||||||||||||
Oilfield Inventories | — | — | 1,435 | 3,965 | 5,400 | |||||||||||||||
Less accumulated depletion | — | — | — | (3,327 | ) | (3,327 | ) | |||||||||||||
$ | 4,216 | $ | 9,177 | $ | 10,894 | $ | 99,166 | $ | 123,453 | |||||||||||
Year Ended December 31, 2009 | ||||||||||||||||||||
Proved property costs | $ | — | $ | — | $ | — | $ | 1,646 | $ | 1,646 | ||||||||||
Unproved property costs | 3,757 | 6,869 | 670 | 42,815 | 54,111 | |||||||||||||||
Oilfield Inventories | — | — | 1,369 | 1,417 | 2,786 | |||||||||||||||
Less accumulated depletion | — | — | — | (29 | ) | (29 | ) | |||||||||||||
$ | 3,757 | $ | 6,869 | $ | 2,039 | $ | 45,849 | $ | 58,514 | |||||||||||
Year Ended December 31, 2008 | ||||||||||||||||||||
Unproved property costs | $ | — | $ | 5,927 | $ | 239 | $ | 16,162 | $ | 22,328 | ||||||||||
Total | 2010 | 2009 | 2008 | Prior | ||||||||||||||||
Property acquisition costs | $ | 94,025 | $ | 37,184 | $ | 35,307 | $ | 18,371 | $ | 3,163 | ||||||||||
S-34
Table of Contents
TABLE III — Results of operations for oil and natural gas producing activities (in thousands): |
Year Ended December 31, | ||||||||
2010 | 2009 | |||||||
Revenue: | ||||||||
Oil and natural gas revenues | $ | 10,696 | $ | 181 | ||||
Expenses: | ||||||||
Operating, selling and distribution expenses and taxes other than on income | 1,846 | 15 | ||||||
Exploration expense | 8,016 | 7,824 | ||||||
Depletion | 3,298 | 29 | ||||||
Income tax expense | — | — | ||||||
Total expenses | 13,160 | 7,868 | ||||||
Results of operations from oil and natural gas producing activities | $ | (2,464 | ) | $ | (7,687 | ) | ||
TABLE IV — | Quantities of Oil and Natural Gas Reserves |
S-35
Table of Contents
2010 | 2009 | |||||||||||||||
Oil and NGL | Gas | Oil and NGL | Gas | |||||||||||||
(MBbls) | (MMcf) | (MBbls) | (MMcf) | |||||||||||||
Proved Reserves | ||||||||||||||||
United States | ||||||||||||||||
Proved Reserves at January 1 | 226 | 1,126 | — | — | ||||||||||||
Revisions | 147 | 914 | — | — | ||||||||||||
Acquisitions | 15 | 12 | 229 | 1,132 | ||||||||||||
Extensions | 3,267 | 4,863 | — | — | ||||||||||||
Production | (140 | ) | (423 | ) | (3 | ) | (6 | ) | ||||||||
Proved Reserves at December 31 | 3,515 | 6,492 | 226 | 1,126 | ||||||||||||
As of December 31 | ||||||||||||||||
United States | ||||||||||||||||
Proved | ||||||||||||||||
Developed | 659 | 2,476 | 131 | 653 | ||||||||||||
Undeveloped | 2,856 | 4,016 | 95 | 473 | ||||||||||||
Total Proved | 3,515 | 6,492 | 226 | 1,126 | ||||||||||||
S-36
Table of Contents
United States | ||||||||
(in thousands) | ||||||||
December 31, 2010 | December 31, 2009 | |||||||
Future cash inflows from sales of oil and gas | $ | 250,712 | $ | 14,626 | ||||
Future production costs | (75,602 | ) | (3,674 | ) | ||||
Future development costs | (62,246 | ) | (1,171 | ) | ||||
Future income tax expenses | (37,262 | ) | (3,147 | ) | ||||
Future net cash flows | 75,602 | 6,634 | ||||||
Effect of discounting net cash flows at 10% | (45,632 | ) | (1,911 | ) | ||||
Standardized measure of discounted future net cash flows | $ | 29,970 | $ | 4,723 | ||||
United States | ||||||||
(in thousands) | ||||||||
2010 | 2009 | |||||||
Standardized Measure at January 1 | $ | 4,723 | $ | — | ||||
Sales of oil and natural gas, net of related costs | (8,850 | ) | (166 | ) | ||||
Revisions to estimates of proved reserves: | ||||||||
Net changes in prices, net of production costs | 2,766 | — | ||||||
Quantities | 3,734 | — | ||||||
Purchase and sale of reserves in place | 387 | — | ||||||
Extensions, discoveries and improved recovery, net of future costs | 36,211 | 6,978 | ||||||
Accretion of discount | 535 | — | ||||||
Development costs incurred | 2,427 | — | ||||||
Changes in estimated development costs | (1,256 | ) | — | |||||
Net change in income taxes | (10,707 | ) | (2,089 | ) | ||||
Standardized Measure at December 31 | $ | 29,970 | $ | 4,723 | ||||
S-37
Table of Contents
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Development costs | $ | 29,976 | $ | 26,605 | $ | 17,144 | ||||||
Exploration costs | — | — | — | |||||||||
$ | 29,976 | $ | 26,605 | $ | 17,744 | |||||||
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Proved property costs | $ | 139,702 | $ | 108,696 | $ | 79,807 | ||||||
Unproved property costs | 1,365 | 163 | 3,036 | |||||||||
Oilfield inventories | 9,630 | 10,748 | 7,892 | |||||||||
Less accumulated depletion and impairment | (43,856 | ) | (27,089 | ) | (16,966 | ) | ||||||
$ | 106,841 | $ | 92,518 | $ | 73,769 | |||||||
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Revenue: | ||||||||||||
Oil and natural gas revenues | $ | 194,423 | $ | 146,640 | $ | 151,878 | ||||||
Royalty | (65,500 | ) | (50,176 | ) | (54,013 | ) | ||||||
128,923 | 96,464 | 97,865 | ||||||||||
Expenses: | ||||||||||||
Operating, selling and distribution expenses and taxes other than on income | 22,359 | 15,742 | 42,876 | |||||||||
Depletion | 12,387 | 10,123 | 5,903 | |||||||||
Income tax expense | 47,089 | 35,300 | 23,530 | |||||||||
Total expenses | 81,835 | 61,165 | 72,309 | |||||||||
Results of operations from oil and natural gas producing activities | $ | 47,088 | $ | 35,299 | $ | 25,556 | ||||||
S-38
Table of Contents
S-39
Table of Contents
Minority | ||||||||||||
Proved Reserves-Crude oil, condensate, | Interest in | 32% | ||||||||||
and natural gas liquids (MBbls) | HNR Finance | Venezuela | Net Total | |||||||||
As of December 31, 2010 | ||||||||||||
Proved Reserves at January 1, 2010 | 47,419 | (9,483 | ) | 37,936 | ||||||||
Revisions | (230 | ) | 45 | (185 | ) | |||||||
Extensions | 7,199 | (1,440 | ) | 5,759 | ||||||||
Production | (2,283 | ) | 457 | (1,826 | ) | |||||||
Proved Reserves at end of the year | 52,105 | (10,421 | ) | 41,684 | ||||||||
As of December 31, 2010 | ||||||||||||
Proved | ||||||||||||
Developed | 16,342 | (3,268 | ) | 13,074 | ||||||||
Undeveloped | 35,763 | (7,153 | ) | 28,610 | ||||||||
Total Proved | 52,105 | (10,421 | ) | 41,684 | ||||||||
As of December 31, 2009 | ||||||||||||
Proved Reserves at January 1, 2009 | 42,809 | (8,561 | ) | 34,248 | ||||||||
Revisions | (875 | ) | 175 | (700 | ) | |||||||
Extensions | 7,574 | (1,515 | ) | 6,059 | ||||||||
Production | (2,089 | ) | 418 | (1,671 | ) | |||||||
Proved Reserves at end of the year | 47,419 | (9,483 | ) | 37,936 | ||||||||
As of December 31, 2009 | ||||||||||||
Proved | ||||||||||||
Developed | 14,242 | (2,848 | ) | 11,394 | ||||||||
Undeveloped | 33,177 | (6,635 | ) | 26,542 | ||||||||
Total Proved | 47,419 | (9,483 | ) | 37,936 | ||||||||
As of December 31, 2008 | ||||||||||||
Proved Reserves at January 1, 2008 | 47,261 | (9,452 | ) | 37,809 | ||||||||
Revisions | (2,984 | ) | 597 | (2,387 | ) | |||||||
Production | (1,468 | ) | 294 | (1,174 | ) | |||||||
Proved Reserves at end of the year | 42,809 | (8,561 | ) | 34,248 | ||||||||
As of December 31, 2008 | ||||||||||||
Proved | ||||||||||||
Developed | 13,415 | (2,683 | ) | 10,732 | ||||||||
Undeveloped | 29,394 | (5,878 | ) | 23,516 | ||||||||
Total Proved | 42,809 | (8,561 | ) | 34,248 | ||||||||
S-40
Table of Contents
Minority | ||||||||||||
Interest in | 32% | |||||||||||
Proved Reserves-Natural gas (MMcf) | HNR Finance | Venezuela | Net Total | |||||||||
As of December 31, 2010 | ||||||||||||
Proved Reserves at January 1, 2010 | 62,710 | (12,542 | ) | 50,168 | ||||||||
Revisions | (843 | ) | 169 | (674 | ) | |||||||
Extensions | 2,192 | (438 | ) | 1,754 | ||||||||
Production | (1,491 | ) | 298 | (1,193 | ) | |||||||
Proved Reserves at end of the year | 62,568 | (12,513 | ) | 50,055 | ||||||||
As of December 31, 2010 | ||||||||||||
Proved | ||||||||||||
Developed | 22,850 | (4,569 | ) | 18,281 | ||||||||
Undeveloped | 39,718 | (7,944 | ) | 31,774 | ||||||||
Total Proved | 62,568 | (12,513 | ) | 50,055 | ||||||||
As of December 31, 2009 | ||||||||||||
Proved Reserves at January 1, 2009 | 67,804 | (13,561 | ) | 54,243 | ||||||||
Revisions | (5,862 | ) | 1,172 | (4,690 | ) | |||||||
Extensions | 1,941 | (388 | ) | 1,553 | ||||||||
Production | (1,173 | ) | 235 | (938 | ) | |||||||
Proved Reserves at end of the year | 62,710 | (12,542 | ) | 50,168 | ||||||||
As of December 31, 2009 | ||||||||||||
Proved | ||||||||||||
Developed | 24,015 | (4,803 | ) | 19,212 | ||||||||
Undeveloped | 38,695 | (7,739 | ) | 30,956 | ||||||||
Total Proved | 62,710 | (12,542 | ) | 50,168 | ||||||||
As of December 31, 2008 | ||||||||||||
Proved Reserves at January 1, 2008 | 43,084 | (8,617 | ) | 34,467 | ||||||||
Additions | 27,574 | (5,515 | ) | 22,059 | ||||||||
Production | (2,854 | ) | 571 | (2,283 | ) | |||||||
Proved Reserves at end of the year | 67,804 | (13,561 | ) | 54,243 | ||||||||
As of December 31, 2008 | ||||||||||||
Proved | ||||||||||||
Developed | 30,168 | (6,034 | ) | 24,134 | ||||||||
Undeveloped | 37,636 | (7,527 | ) | 30,109 | ||||||||
Total Proved | 67,804 | (13,561 | ) | 54,243 | ||||||||
S-41
Table of Contents
Minority | ||||||||||||
Interest in | ||||||||||||
HNR Finance | Venezuela | Net Total | ||||||||||
(in thousands) | ||||||||||||
December 31, 2010 | ||||||||||||
Future cash inflows from sales of oil and gas | $ | 3,748,419 | $ | (749,684 | ) | $ | 2,998,735 | |||||
Future production costs | (870,498 | ) | 174,100 | (696,398 | ) | |||||||
Future development costs | (296,744 | ) | 59,349 | (237,395 | ) | |||||||
Future income tax expenses | (1,241,452 | ) | 248,290 | (993,162 | ) | |||||||
Future net cash flows | 1,339,725 | (267,945 | ) | 1,071,780 | ||||||||
Effect of discounting net cash flows at 10% | (608,526 | ) | 121,705 | (486,821 | ) | |||||||
Standardized measure of discounted future net cash flows | $ | 731,199 | $ | (146,240 | ) | $ | 584,959 | |||||
December 31, 2009 | ||||||||||||
Future cash inflows from sales of oil and gas | $ | 2,772,840 | $ | (554,568 | ) | $ | 2,218,272 | |||||
Future production costs | (630,225 | ) | 126,045 | (504,180 | ) | |||||||
Future development costs | (282,306 | ) | 56,461 | (225,845 | ) | |||||||
Future income tax expenses | (886,622 | ) | 177,324 | (709,298 | ) | |||||||
Future net cash flows | 973,687 | (194,738 | ) | 778,949 | ||||||||
Effect of discounting net cash flows at 10% | (473,317 | ) | 94,663 | (378,654 | ) | |||||||
Standardized measure of discounted future net cash flows | $ | 500,370 | $ | (100,075 | ) | $ | 400,295 | |||||
December 31, 2008 | ||||||||||||
Future cash inflows from sales of oil and gas | $ | 1,576,312 | $ | (315,262 | ) | $ | 1,261,050 | |||||
Future production costs | (557,043 | ) | 111,409 | (445,634 | ) | |||||||
Future development costs | (306,500 | ) | 61,300 | (245,200 | ) | |||||||
Future income tax expenses | (355,746 | ) | 71,149 | (284,597 | ) | |||||||
Future net cash flows | 357,023 | (71,404 | ) | 285,619 | ||||||||
Effect of discounting net cash flows at 10% | (217,822 | ) | 43,564 | (174,258 | ) | |||||||
Standardized measure of discounted future net cash flows | $ | 139,201 | $ | (27,840 | ) | $ | 111,361 | |||||
S-42
Table of Contents
Net Venezuela | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Standardized Measure at January 1 | $ | 400,295 | $ | 111,361 | $ | 523,378 | ||||||
Sales of oil and natural gas, net of related costs | (107,689 | ) | (80,725 | ) | (54,988 | ) | ||||||
Revisions to estimates of proved reserves: | ||||||||||||
Net changes in prices, net of production taxes | 190,119 | 408,054 | (673,320 | ) | ||||||||
Quantities | (18,284 | ) | (25,424 | ) | (119,678 | ) | ||||||
Extensions, discoveries and improved recovery, net of future costs | 248,917 | 187,636 | 50,515 | |||||||||
Accretion of discount | 78,403 | 24,940 | 106,481 | |||||||||
Net change in income taxes | (181,186 | ) | (262,214 | ) | 457,582 | |||||||
Development costs incurred | 29,965 | 26,756 | 7,791 | |||||||||
Changes in estimated development costs | (29,465 | ) | (429 | ) | 13,128 | |||||||
Timing differences and other | (26,116 | ) | 10,340 | (199,528 | ) | |||||||
Standardized Measure at December 31 | $ | 584,959 | $ | 400,295 | $ | 111,361 | ||||||
S-43
Table of Contents
HARVEST NATURAL RESOURCES, INC. (Registrant) | ||||
Date: March 16, 2011 | By: | /s/ James A. Edmiston | ||
James A. Edmiston | ||||
Chief Executive Officer | ||||
Signature | Title | |
/s/ James A. Edmiston | Director, President and Chief Executive Officer (Principal Executive Officer) | |
/s/ Stephen C. Haynes | Vice President — Finance, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) | |
/s/ Stephen D. Chesebro’ | Chairman of the Board and Director | |
/s/ Igor Effimoff | Director | |
/s/ H. H. Hardee | Director | |
/s/ R. E. Irelan | Director | |
/s/ Patrick M. Murray | Director | |
/s/ J. Michael Stinson | Director |
S-44
Table of Contents
Additions | ||||||||||||||||||||
Balance at | Charged to | Charged to Other | Deductions From | Balance at End of | ||||||||||||||||
Beginning of Year | Income | Accounts | Reserves | Year | ||||||||||||||||
At December 31, 2010 | ||||||||||||||||||||
Amounts deducted from applicable assets | ||||||||||||||||||||
Deferred tax valuation allowance | $ | 17,025 | $ | 11,318 | $ | — | $ | — | $ | 28,343 | ||||||||||
Investment at cost | 1,350 | — | — | — | 1,350 | |||||||||||||||
At December 31, 2009 | ||||||||||||||||||||
Amounts deducted from applicable assets | ||||||||||||||||||||
Accounts receivable | $ | 2,757 | $ | — | $ | 2,757 | $ | — | $ | — | ||||||||||
Deferred tax valuation allowance | 7,841 | 9,184 | — | — | 17,025 | |||||||||||||||
Investment at cost | 1,350 | — | — | — | 1,350 | |||||||||||||||
At December 31, 2008 | ||||||||||||||||||||
Amounts deducted from applicable assets | ||||||||||||||||||||
Accounts receivable | $ | 2,757 | $ | — | $ | — | $ | — | $ | 2,757 | ||||||||||
Deferred tax valuation allowance | 1,782 | 6,059 | — | — | 7,841 | |||||||||||||||
Investment at cost | 1,350 | — | — | — | 1,350 |
S-45
Table of Contents
S-46
Table of Contents
Venezolana del Petróleo, S.A.)
Financial Statements at December 31, 2010
and 2009
and Independent Auditor’s Report
S-47
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Pages | ||||
S-49-50 | ||||
FINANCIAL STATEMENTS AS OF DECEMBER 31 2010 AND 2009 | ||||
S-51 | ||||
S-52 | ||||
S-53 | ||||
S-54 | ||||
S-55 | ||||
S-56 | ||||
S-56 | ||||
S-58 | ||||
S-59 | ||||
S-73 | ||||
S-75 | ||||
S-76 | ||||
S-77 | ||||
S-83 | ||||
S-85 | ||||
S-86 | ||||
S-86 | ||||
S-86 | ||||
S-87 | ||||
S-87 | ||||
S-89 | ||||
S-90 | ||||
S-91 | ||||
S-92 | ||||
S-93 | ||||
S-95 | ||||
S-96 | ||||
S-98 | ||||
S-98 | ||||
S-102 | ||||
S-102 | ||||
S-103 |
S-48
Table of Contents
Carabobo. Venezuela. Telfs: 58-241 8253518 / 8255337 Fax: 8259828. RIF: J-30785734-0
S-49
Table of Contents
(Subsidiary owned 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
C.P.C. Nº 9.578
Valencia, Venezuela.
Carabobo. Venezuela. Telfs: 58-241 8253518 / 8255337 Fax: 8259828. RIF: J-30785734-0
S-50
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
December 31st, | ||||||||||||||||||
Note | 2010 | 2009 | 2010 | 2009 | ||||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||||
Assets | �� | |||||||||||||||||
Property, plant and equipment, net | 8 | 321,816 | 265,442 | 1,383,809 | 570,700 | |||||||||||||
Deferred income tax | 7-(f) | 60,205 | 143,898 | 258,881 | 309,381 | |||||||||||||
Recoverable tax credits | 7-(k) | 8,072 | 10,753 | 34,710 | 23,119 | |||||||||||||
Total non-current assets | 390,093 | 420,093 | 1,677,400 | 903,200 | ||||||||||||||
Prepaid expenses and other assets | 10 | 407 | 559 | 1,750 | 1,202 | |||||||||||||
Inventories | 11 | 24,997 | 21,472 | 107,487 | 46,165 | |||||||||||||
Accounts receivable | 12 | 506,356 | 368,979 | 2,177,331 | 793,305 | |||||||||||||
Cash and cash equivalents | 13 | 3,465 | 3,062 | 14,900 | 6,583 | |||||||||||||
Total current asset | 535,225 | 394,072 | 2,301,468 | 847,255 | ||||||||||||||
Total assets | 925,318 | 814,165 | 3,978,868 | 1,750,455 | ||||||||||||||
Equity | ||||||||||||||||||
Equity, see statements of changes in equity | 14 | 479,233 | 432,100 | 2,060,702 | 929,015 | |||||||||||||
Liabilities | ||||||||||||||||||
Provision for abandonment cost | 9 y 16 | 29,798 | 24,416 | 128,131 | 52,494 | |||||||||||||
Provision for retirement benefits | 16 | 8,439 | 9,184 | 36,288 | 19,746 | |||||||||||||
Deferred income tax | 7-(f) | 1,509 | 2,653 | 6,488 | 5,704 | |||||||||||||
Total non-current liabilities | 39,746 | 36,253 | 170,907 | 77,944 | ||||||||||||||
Accounts payable | 15 | 52,095 | 105,332 | 224,009 | 226,464 | |||||||||||||
Dividends payable | 14 | 18,330 | 31,126 | 78,819 | 66,921 | |||||||||||||
Accruals and other liabilities | 16 | 171,415 | 154,863 | 737,085 | 332,955 | |||||||||||||
Income tax payable | 7 | 164,499 | 54,491 | 707,346 | 117,156 | |||||||||||||
Total current liabilities | 406,339 | 345,812 | 1,747,259 | 743,496 | ||||||||||||||
Total liabilities | 446,085 | 382,065 | 1,918,166 | 821,440 | ||||||||||||||
Total equity and liabilities | 925,318 | 814,165 | 3,978,868 | 1,750,455 | ||||||||||||||
S-51
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Years ended December 31st, | ||||||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||
Note | U.S. Dollars | Bolivars | ||||||||||||||||||||||||
Income | ||||||||||||||||||||||||||
Sales of crude oil | 604,173 | 451,473 | 458,113 | 2,597,945 | 970,667 | 984,943 | ||||||||||||||||||||
Sales of gas | 3,413 | 6,778 | 16,506 | 14,676 | 14,573 | 35,488 | ||||||||||||||||||||
21 | 607,586 | 458,251 | 474,619 | 2,612,621 | 985,240 | 1,020,431 | ||||||||||||||||||||
Cost and expenses | ||||||||||||||||||||||||||
Operational expenses | 17 | (53,659 | ) | (48,311 | ) | (77,609 | ) | (230,734 | ) | (103,869 | ) | (166,859 | ) | |||||||||||||
Depletion, depreciation and amortization | 8 | (39,167 | ) | (32,571 | ) | (24,778 | ) | (168,418 | ) | (70,028 | ) | (53,273 | ) | |||||||||||||
Sales, general and administrative expenses | (16,213 | ) | (10,841 | ) | (6,705 | ) | (69,716 | ) | (23,308 | ) | (14,416 | ) | ||||||||||||||
Royalties | 7 – (g) | (218,819 | ) | (157,681 | ) | (225,167 | ) | (940,922 | ) | (339,014 | ) | (484,109 | ) | |||||||||||||
Operating income | 279,728 | 208,847 | 140,360 | 1,202,831 | 449,021 | 301,774 | ||||||||||||||||||||
Other income and expense | ||||||||||||||||||||||||||
Financial income | 18 | 84,448 | 3 | 268 | 363,126 | 7 | 577 | |||||||||||||||||||
Financial expenses | 18 | (26,767 | ) | (3,439 | ) | (2,371 | ) | (115,098 | ) | (7,394 | ) | (5,098 | ) | |||||||||||||
Other income | 3,179 | — | — | 13,669 | — | — | ||||||||||||||||||||
Other expense | (557 | ) | (181 | ) | (226 | ) | (2,395 | ) | (389 | ) | (486 | ) | ||||||||||||||
Profit before tax | 340,031 | 205,230 | 138,031 | 1,462,133 | 441,245 | 296,767 | ||||||||||||||||||||
Income tax expense | 7 - (a) | (262,348 | ) | (61,946 | ) | (16,814 | ) | (1,128,096 | ) | (133,184 | ) | (36,150 | ) | |||||||||||||
Net profit | 77,683 | 143,284 | 121,217 | 334,037 | 308,061 | 260,617 | ||||||||||||||||||||
Other comprehensive income | ||||||||||||||||||||||||||
Translation adjustment | 14 | — | — | — | 929,015 | — | — | |||||||||||||||||||
Total comprehensive income for the year | 77,683 | 143,284 | 121,217 | 1,263,052 | 308,061 | 260,617 | ||||||||||||||||||||
S-52
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Retained earnings | ||||||||||||||||||||||||||||
Legal reserve | ||||||||||||||||||||||||||||
Capital | Shareholder | Share | and other | |||||||||||||||||||||||||
Note | stock | contribution | premium | reserves | Distributable | Total | ||||||||||||||||||||||
Balances at December 31, 2007 | 465 | 6,512 | 212,451 | 47 | 181,325 | 400,800 | ||||||||||||||||||||||
Total comprehensive income for the year | — | — | — | — | 121,217 | 121,217 | ||||||||||||||||||||||
Shareholders contribution capitalization | 14 | 6,512 | (6,512 | ) | — | — | — | — | ||||||||||||||||||||
Appropriation to legal reserve | 14 | — | — | — | 651 | (651 | ) | — | ||||||||||||||||||||
Dividends declared | 14 | — | — | — | — | (181,325 | ) | (181,325 | ) | |||||||||||||||||||
Balances at December 31, 2008 | 6,977 | — | 212,451 | 698 | 120,566 | 340,692 | ||||||||||||||||||||||
Total comprehensive income for the year | — | — | — | — | 143,284 | 143,284 | ||||||||||||||||||||||
Appropriation to other reserves | 14 | — | — | — | 141,245 | (141,245 | ) | — | ||||||||||||||||||||
Dividends declared | 14 | — | — | — | — | (51,876 | ) | (51,876 | ) | |||||||||||||||||||
Balances at December 31, 2009 | 6,977 | — | 212,451 | 141,943 | 70,729 | 432,100 | ||||||||||||||||||||||
Total comprehensive income for the year | — | — | — | — | 77,683 | 77,683 | ||||||||||||||||||||||
Transfer from other reserves | 14 | — | — | — | (82,549 | ) | 82,549 | — | ||||||||||||||||||||
Dividends declared | 14 | — | — | — | — | (30,550 | ) | (30,550 | ) | |||||||||||||||||||
Balances at December 31, 2010 | 6,977 | — | 212,451 | 59,394 | 200,411 | 479,233 | ||||||||||||||||||||||
S-53
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Retained earnings | ||||||||||||||||||||||||||||||||
Legal reserve | Accumulated | |||||||||||||||||||||||||||||||
Capital | Shareholder | Share | and other | translation | ||||||||||||||||||||||||||||
Note | stock | contribution | premium | reserves | Distributable | adjustment | Total | |||||||||||||||||||||||||
Balances at December 31, 2007 | 1,000 | 14,000 | 456,770 | 100 | 389,846 | — | 861,716 | |||||||||||||||||||||||||
Total comprehensive income for the year | — | — | — | — | 260,617 | — | 260,617 | |||||||||||||||||||||||||
Shareholders contribution capitalization | 14 | 14,000 | (14,000 | ) | — | — | — | — | — | |||||||||||||||||||||||
Appropriation to legal reserve | 14 | — | — | — | 1,400 | (1,400 | ) | — | — | |||||||||||||||||||||||
Dividends declared | 14 | — | — | — | — | (389,846 | ) | — | (389,846 | ) | ||||||||||||||||||||||
Balances at December 31, 2008 | 15,000 | — | 456,770 | 1,500 | 259,217 | — | 732,487 | |||||||||||||||||||||||||
Total comprehensive income for the year | — | — | — | — | 308,061 | — | 308,061 | |||||||||||||||||||||||||
Appropriation to other reserves | 14 | — | — | — | 303,677 | (303,677 | ) | — | — | |||||||||||||||||||||||
Dividends declared | 14 | — | — | — | — | (111,533 | ) | — | (111,533 | ) | ||||||||||||||||||||||
Balances at December 31, 2009 | 15,000 | — | 456,770 | 305,177 | 152,068 | — | 929,015 | |||||||||||||||||||||||||
Total comprehensive income for the year | — | — | — | — | 334,037 | 929,015 | 1,263,052 | |||||||||||||||||||||||||
Transfer from other reserves | 14 | — | — | — | (51,284 | ) | 51,284 | — | — | |||||||||||||||||||||||
Dividends declared | 14 | — | — | — | — | (131,365 | ) | — | (131,365 | ) | ||||||||||||||||||||||
Balances at December 31, 2010 | 15,000 | — | 456,770 | 253,893 | 406,024 | 929,015 | 2,060,702 | |||||||||||||||||||||||||
S-54
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Years ended December 31st, | ||||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||||||||||
Cash flow from operating activities | ||||||||||||||||||||||||
Net profit | 77,683 | 143,284 | 121,217 | 334,037 | 308,059 | 260,617 | ||||||||||||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities - | ||||||||||||||||||||||||
Depletion, depreciation and amortization | 40,429 | 33,188 | 25,508 | 173,845 | 71,354 | 54,843 | ||||||||||||||||||
Income tax expense | 189,780 | — | — | 816,054 | — | — | ||||||||||||||||||
Financial expense transferred from related party | 19,475 | — | — | 83,743 | — | — | ||||||||||||||||||
Provision for abandonment cost | (2,043 | ) | (3,603 | ) | (10,866 | ) | (8,785 | ) | (7,746 | ) | (23,362 | ) | ||||||||||||
Deferred income tax | 72,568 | (43,922 | ) | (52,560 | ) | 312,042 | (94,432 | ) | (113,004 | ) | ||||||||||||||
Financial cost on provision for abandonment cost | 3,339 | 1,639 | 2,344 | 14,358 | 3,524 | 5,039 | ||||||||||||||||||
Financial income for variation in the exchange rate | (84,439 | ) | — | — | (363,088 | ) | — | |||||||||||||||||
Tax credit financial cost | 3,951 | 1,792 | — | 16,989 | 3,853 | — | ||||||||||||||||||
Revenues from asset disincorporation | (2,892 | ) | — | — | (12,436 | ) | — | — | ||||||||||||||||
Net changes in operating assets - | ||||||||||||||||||||||||
Accounts receivable | (154,936 | ) | (113,738 | ) | (133,756 | ) | (666,225 | ) | (244,537 | ) | (287,575 | ) | ||||||||||||
Material and supplies Inventories | 3,493 | (8,923 | ) | (10,833 | ) | 15,020 | (19,185 | ) | (23,291 | ) | ||||||||||||||
Prepaid expenses and other assets | 152 | 20,918 | (20,604 | ) | 654 | 44,974 | (44,299 | ) | ||||||||||||||||
Net changes in operating liabilities | ||||||||||||||||||||||||
Accounts payable | (38,033 | ) | 16,228 | 321,555 | (163,542 | ) | 34,890 | 691,343 | ||||||||||||||||
Income taxes paid | (52,526 | ) | 54,491 | (153,037 | ) | (225,863 | ) | 117,157 | (329,030 | ) | ||||||||||||||
Accruals and other liabilities | 69,775 | (3,480 | ) | 132,090 | 300,035 | (7,482 | ) | 283,994 | ||||||||||||||||
Total adjustments | 68,093 | (45,410 | ) | 99,841 | 292,801 | (97,631 | ) | 214,658 | ||||||||||||||||
Net cash provided by operating activities | 145,776 | 97,874 | 221,058 | 626,838 | 210,430 | 475,275 | ||||||||||||||||||
Net cash used in investing activities: | ||||||||||||||||||||||||
Acquisition of property, plant and equipment | (101,799 | ) | (81,425 | ) | (39,347 | ) | (437,736 | ) | (175,064 | ) | (84,596 | ) | ||||||||||||
Disincorporation of assets | 21 | — | — | 91 | — | — | ||||||||||||||||||
Net cash used in investing activities | (101,778 | ) | (81,425 | ) | (39,347 | ) | (437,645 | ) | (175,064 | ) | (84,596 | ) | ||||||||||||
Net cash provided by (used in) financing activities: | ||||||||||||||||||||||||
Paid dividends | (43,346 | ) | (20,750 | ) | (181,325 | ) | (186,388 | ) | (44,613 | ) | (389,849 | ) | ||||||||||||
Net cash used in financing activities | (43,346 | ) | (20,750 | ) | (181,325 | ) | (186,388 | ) | (44,613 | ) | (389,849 | ) | ||||||||||||
Effect for variation in the exchange rate in cash and cash equivalents | (249 | ) | — | — | (1,071 | ) | — | — | ||||||||||||||||
Effect for variation in the exchange rate in the foreign currency | — | — | — | 6,583 | — | — | ||||||||||||||||||
Net cash increase | 403 | (4,301 | ) | 386 | 8,317 | (9,247 | ) | 830 | ||||||||||||||||
Cash and cash equivalents at the beginning of the period | 3,062 | 7,363 | 6,977 | 6,583 | 15,830 | 15,000 | ||||||||||||||||||
Cash and cash equivalents at the end of the period | 3,465 | 3,062 | 7,363 | 14,900 | 6,583 | 15,830 | ||||||||||||||||||
S-55
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
(1) | Reporting Entity |
Petrodelta. S.A. was incorporated and is domiciled in the Bolivarian Republic of Venezuela Venezuela. Its main offices are located at Avenida Alirio Ugarte Pelayo, Edificio Harvest Vinccler, Ala Norte, Planta Baja in Maturín, Monagas State. Its legal address is: Avenida Veracruz con Calle Cali, Urbanización Las Mercedes, Edificio Pawa, Piso 5, Caracas, Distrito Capital. |
Petrodelta, S.A. (the Company) was incorporated in Venezuela in October 2007, as published in Official Gazette No. 38,786. Its business objective is primary exploration to discover oil reserves, extraction of oil in its natural state, and its subsequent collection, transportation and storage pursuant to Article No. 9 of the Venezuelan Hydrocarbon Law (LOH). The Company operates within an area of approximately 1,000 square kilometers in the Uracoa, Bombal and Tucupita fields (formerly the Monagas Sur Unit) and in the El Salto, El Isleño and Temblador fields in the Monagas and Delta Amacuro states in Venezuela (the assigned operating area). |
The Company was created as a result of the process for conversion into mixed-capital companies of the Operating Agreement signed on July 31, 1992 between PDVSA Petróleo, S.A. (PDVSA Petróleo) (formerly Lagoven, S.A.), Harvest Natural Resources, Inc. (Harvest) (formerly Benton Oil and Gas Company) and Venezolana de Inversiones y Construcciones Clérico, C.A. (Vinccler). As part of this process, on March 31, 2006, PDVSA Petróleo, S.A., Corporación Venezolana del Petróleo, S.A. (CVP) and Harvest Vinccler, S.C.A. (HVSCA), the agreement operator and a related company of Harvest and Vinccler, signed a memorandum of understanding for conversion into a mixed company. In June 2007, the National Assembly of the Bolivarian Republic of Venezuela approved the incorporation of the mixed company Petrodelta, S.A. In August 2006, the National Assembly approved the inclusion of the Temblador, El Isleño and El Salto areas into the Monagas Sur Unit for further development of the Company’s primary activities. An agreement for conversion into a mixed company was signed between CVP and HNR Finance B.V. (HNR Finance) in September 2007. The Company will operate for 20 years as from October 2007 when the decree for transfer of field operations was published in the Official Gazette. |
Petrodelta, S.A. is 60%-owned by CVP, a wholly owned subsidiary of Petróleos de Venezuela, S.A. (PDVSA), and 40%-owned by HNR Finance. |
On March 10, 2011, the Board of Directors of the Company approved the issuance of the financial statements under International Financial Reporting Standards and submitted said financial statements to the Shareholders of the Company for approval purposes. Once the aforementioned financial statements are duly approved and issued, no amendment of which applies. The financial statements as of December 31, 2009 were approved by the Shareholders of the Company on February 26, 2010. |
Company management considers that it operates in a single business segment (hydrocarbons) in one country, the Bolivarian Republic of Venezuela, in conformity with its social statutes. |
During the transition period from April 1, 2006 to December 31, 2007, Harvest Vinccler, S.C.A. (HVSCA) was in charge of managing and developing the Company’s activities and provided its financial and operational structure for this purpose. The Company’s operating costs during this period were paid by HVSCA and CVP and subsequently charged to PDVSA Petróleo, which, in turn, billed the Company. These costs were recognized in the statements of comprehensive |
S-56
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
income for the respective periods and include, but are not limited to, general, administrative, operating and capital expenses required to continue activities in the assigned operating area. At December 31, 2009 the Company had not received all information regarding production during the conversion period for the Temblador field in order to invoice all volumes produced in that field during that period. As Temblador production was handled in PDVSA system, PDVSA had allocated only partial, estimated production to Petrodelta. As a result, Petrodelta had not, and still has not, received full credit for the Temblador field production. Discussions are ongoing to reach to an agreement. During the third quarter 2009, Petrodelta completed the facilities and pipelines to segregate approximately 80 percent of the Temblador field’s production out of PDVSA’s system. |
During the years ended December 31, 2010 and 2009, the Company has operated with employees assigned by its shareholders or their related companies since it has no direct employees. At December 31, 2010 and 2009, the Company had 432 and 356 employees, respectively, assigned by its shareholders or their related companies. |
During the year ended December 31, the Company drilled 16 (2010) and 18 (2009) development wells, produced approximately 8.6 (2010) and 7.8 (2009) million barrels of oil and sold 2.2 (2010) and 4.4 (2009) billion cubic feet of natural gas. | ||
Applicable regulations |
The Company’s main activities are regulated by the Venezuelan Hydrocarbon Law (LOH), effective from January 2002. Gas-related operations are regulated by the Venezuelan Gaseous Hydrocarbon Law of September 1999 and its Regulations of June 2000, as per the bylaws and common rights norms applicable. |
Below are the main regulations included in the LOH: |
a) | A 30% royalty on volumes of hydrocarbon extracted. |
b) | A Partial Reform of the Extraction Tax was enacted and published in Official Gazette No. 38,443 of May 24, 2006, establishing a rate equivalent to one-third of the value of all liquid hydrocarbons extracted from any reservoir, calculated on the same basis as royalties. The taxpayer has the right to deduct from the extraction tax any sum payable as royalties (30%), including the additional royalty paid for special advantages (3.33%). |
c) | A surface tax equivalent to 100 tax units for each square kilometer or fraction thereof per year for licensed areas that are not under production. This tax will increase by 2% during the first five years, and by 5% during all subsequent years. Company management considers that there are no nonproductive areas. |
d) | An internal consumption tax equivalent to 10% of the value of each cubic meter of hydrocarbon derivatives produced and consumed as fuel in internal operations, calculated on the final selling price. Company management considers that, other than associated gas, no hydrocarbon derivatives are consumed. |
S-57
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Hydrocarbon purchase sale agreement |
The Company signed a hydrocarbon purchase sale agreement with PDVSA Petróleo, whereby the Company undertakes to sell to the latter all hydrocarbons produced within the delimited operating area that are not being used in its operations. The Company may assign or transfer this agreement, or any rights and obligations thereunder, to another company in accordance with Article No. 27 of the LOH. This agreement is for 20 years. |
(2) | Basis of Preparation |
(a) | Statement of compliance |
The financial statements as of December 31, 2010 and 2009 are prepared in accordance with International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB) and their interpretations, issued by the International Financial Reporting Interpretations Committee (IFRIC) of the IASB. | |||
The financial statements for the year ended December 31, 2009 have been prepared and are presented for purposes of comparison with the financial statements for the year ended December 31, 2010. | |||
The statements of comprehensive income, changes in equity accounts and of cash flows for the year ended December 31, 2008 and their respective disclosures, are presented for purposes of additional information required by the Corporate Management of PDVSA. | |||
(b) | Basis of measurement | ||
The financial statements have been prepared on the historic cost basis, except for certain assets and liabilities measured at fair value. Assets measured and stated at fair value are: recoverable tax credits, accounts receivable and cash. | |||
The methods used for measuring fair value are discussed in Note 5. | |||
(c) | Functional and presentation currency | ||
The financial statements are presented in U.S. Dollars (U.S. Dollar or US$) and bolivars (bolivar or Bs.). The Company’s functional currency is the U.S. Dollar, since the main economic environment in which the Company operates is the international market for crude oil and its products. In addition, a significant portion of its revenues, as well as most costs, expenses and investments are denominated in U.S. Dollars. | |||
The financial statements in bolivars are presented for statutory purposes. | |||
All financial information presented in U.S. dollars and bolivars has been rounded in thousands. |
S-58
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
(d) | Use of estimates, risks and uncertainty | ||
The preparation of financial statements in conformity with IFRS requires management to make estimates, judgments and assumptions that affect the application of accounting policies and the amounts of assets, liabilities, income and expense. The Company applies its best estimates and judgments; however, actual results may differ from initial estimates. | |||
Estimates and assumptions are reviewed periodically, and revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. | |||
Significant areas of judgment in the application of accounting policies, which significantly affect financial statement amounts is described in the following notes: |
- | Note 8 - depletion, depreciation and amortization | ||
- | Note 9 - provision for abandonment costs | ||
- | Note 19 - Valuation of financial instruments |
Information on areas of uncertainty affecting management’s estimates which significantly affect financial statement amounts in future periods are described in the following notes: |
- | Note 3 -t- measurement of contract-based retirement benefit obligations and other post-retirement benefits other than pensions, which are being calculated by PDVSA for subsequent billing to the Company. | ||
- | Note 7 -f- deferred income tax | ||
- | Note 20 - Liabilities, contingencies and accruals in respect of environmental issues |
The Company’s operations may be affected by the political, legislative, regulatory and legal environment, both at the national and international level. In addition, significant changes in prices or availability of crude oil and its products may have an impact on the Company’s results of operations in any given year. |
(3) | Summary of Significant Accounting Policies |
The accounting policies used for the preparation of these financial statements have been applied consistently for all periods presented. |
(a) | Transactions in currencies other than the U.S. Dollar |
Transactions in currencies other than the U.S. Dollar are translated into the Company’s functional currency using the exchange rate in effect at the transaction date. Monetary assets and liabilities denominated in currencies other than the U.S. Dollar are translated into U.S. Dollars using the exchange rate prevailing at the date of the statement of financial |
S-59
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
position. Exchange gains or losses on monetary items in currencies other than the U.S. Dollar are presented in the statements of comprehensive income. Nonmonetary assets and liabilities in currencies other than the U.S. Dollar stated at fair value are retranslated to the functional currency using the exchange rate prevailing at the date fair value was determined. All other nonmonetary items denominated in foreign currency and measured at historical cost are converted at the exchange rate at the date of the transaction. |
(b) | Translation to the presentation currency |
The Company’s financial statements are translated into bolivars, a currency other than the functional currency, in accordance with International Accounting Standard No. 21The Effects of Changes in Foreign Exchange Rates.This standard requires each entity to determine its functional currency based on an analysis of the primary economic environment in which the entity operates, which is normally the one in which it primarily generates and expends cash. |
The financial statements are translated into bolivars based on the following criteria: |
- | Assets and liabilities of each statement of financial position at the exchange rates in effect at the date of such statement. |
- | Income and expenses in the statements of comprehensive income at the exchange rate at the date of transaction. |
- | All exchange gain and losses generated as a result of the retranslation just described are recognized in the statements of comprehensive income as other comprehensive income and accumulated as a separate component of equity. |
- | Equity accounts are translated at the exchange rate in effect at the date of each related transaction, except for retained earnings which are translated at the weighted-average rate for the relevant year. |
(c) | Financial instruments |
Non-derivative financial instruments consist of cash and cash equivalents, recoverable tax credits, accounts receivable, accounts payable to suppliers, provisions and other liabilities (see Note 3-i and Note 5). | |||
Non-derivate financial instruments classified as at fair value through profit or loss are initially recognized at fair value, plus any direct transaction costs. | |||
A financial instrument is recorded when the Company engages or commits to the contractual clauses thereof. Financial assets are reversed if the Company’s contractual rights over the asset’s cash flows expire or if the Company transfers the financial asset to another entity without retaining control or a significant portion of the asset’s risks and rewards. Regular purchases and sales of financial assets are accounted for at trade date, which is generally the date on which the Company commits to purchase or sell the asset. Financial liabilities are derecognized when the Company’s specific contractual obligation expires or is paid. |
S-60
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
During the years ended December 31, 2010 and 2009, the Company conducted no transactions with derivative instruments. | |||
The balance of assets and liabilities are offset and the net amount shown in the statement of financial position when and only when, the Company has a legal right to offset amounts and intends to settle on a net basis or to realize the asset and settle the liability simultaneously. | |||
(d) | Property, plant and equipment | ||
Recognition and measurement | |||
Property, plant and equipment are stated at cost, net of accumulated depreciation and impairment losses (See Note 8). The successful efforts accounting method is used for exploration and production activities of crude oil and natural gas, taking into consideration what is established underIFRS 6 Exploration For and Evaluation of Mineral Rightsin relation to accounting for exploration and evaluation expenditures, including the recognition of exploration and evaluation assets. All costs for development wells, related plant and equipment, and property used for oil recovery are capitalized. Costs of exploratory wells are capitalized until it is determined whether they are commercially feasible; otherwise, such costs are charged to operating expenses. Other exploratory expenditures, including geological and geophysical costs, are expensed as incurred. | |||
The cost of property, plant and equipment includes disbursements that are directly attributable to the acquisition of such assets and the amounts associated with asset retirement obligations (See Note 8). | |||
Finance costs of projects requiring major investments, and costs incurred for specific financing of projects, are recognized as part of property, plant and equipment, when can be directly related to the construction or acquisition of a capable asset. Capitalization of such costs is suspended during periods when the development of construction activity is interrupted, and capitalization ends when necessary activities are substantially complete for the utilization of a capable asset. An asset is considered capable, when it requires a period of substantially time necessary before is ready for use. | |||
The cost of assets built by the Company includes materials and direct labor, as well as any other direct cost attributable to bringing the asset to working condition. Costs for dismantling and removal from the construction site are also included. | |||
All disbursements relating to construction or purchase of property, plant and equipment in the stage prior to implementation are stated at cost as work in progress. Once the assets are ready for use, they are transferred to the respective component of property, plant and equipment and depreciation or amortization commences. | |||
Gain or loss generated by the sale, retirement or disposal of an asset from property, plant and equipment, is determined by the difference between the amount received from sale, retirement or disposal, if any, and the net carrying value in the books of the Company, and is recognized as other income or expense, net in the statements of comprehensive income. |
S-61
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Certain materials and supplies accounted for as inventory and considered strategic since they will be used as spare parts for two years operation in the production facilities and in specific investment projects are reported under property, plant and equipment. | |||
Subsequent costs | |||
Costs for major maintenance or general repairs, as well as replacement of significant parts or property, plant and equipment are capitalized when identified as a separate component of the asset to which such maintenance, repair and replacement corresponds and are depreciated between one maintenance period and the other. Disbursements for minor maintenance, repairs and renewals incurred to maintain facilities in operating conditions are expensed. | |||
Depletion, depreciation and amortization | |||
Depletion, depreciation and amortization of capitalized costs related to wells and facilities for the production of crude oil and gas are determined by the units of production method by field, based on proved developed reserves. The rates used are reviewed annually based on an analysis of reserves and are applied retroactively at the beginning of the year. Capitalized costs of other plant and equipment are depreciated over their estimated useful lives, mainly using the straight-line method with an average useful life of 15 years for administrative buildings and between 3 and 5 years for the remaining assets. Ordinary withdrawals are eliminated against the respective accumulated depreciation; net gains or losses from extraordinary withdrawals are included in the statements of comprehensive income. | |||
When parts of a property, plant and equipment asset have different useful lives, they are recorded separately as a significant component of that asset. | |||
Depreciation methods and average useful lives of property, plant and equipment are reviewed annually. Land is not depreciated. | |||
(e) | Costs associated with asset retirement obligations | ||
The Company capitalizes estimated costs associated with obligations from retirement of assets used for exploration and crude oil and natural gas production activities, based on the future retirement plan for those assets. Cost is capitalized as part of the related long-lived asset and is amortized over its useful life with a charge to operating costs. | |||
(f) | Inventories | ||
Inventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the normal course of business, less costs to complete and estimated selling costs. | |||
The cost of inventories of crude oil and its products is determined using the average cost method. |
S-62
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Materials and supplies are valued mainly at average cost, less an allowance for possible losses, and are classified into two groups: current assets and non-current assets. | |||
(g) | Accounts receivable | ||
Accounts receivable are accounted for according to price formulas established in the hydrocarbon purchase sale agreement between the mixed companies and PDVSA Petróleo, whereby the former undertake to sell and PDVSA Petróleo undertakes to buy all hydrocarbons produced that are not being used in their operations within the delimited operating areas. At December 31, 2010 and 2009, the Company does not expect to incur losses on uncollectible accounts and, therefore, has not set aside a provision in this connection other than those described in the hydrocarbon purchase sale agreement with PDVSA Petróleo. | |||
(h) | Cash and cash equivalent | ||
Petrodelta, S.A. considers as cash and cash equivalents time deposits and all other cash placements with original maturities of less than three months and available on a current basis which at December 31, 2010 and 2009 amounted to approximately US$3.465 thousands and US$3.062 thousands (Bs.14.901 thousands and Bs.6.582 thousands), respectively. | |||
(i) | Impairment in the value of long-lived assets | ||
Non-derivative financial assets | |||
The Company asses the carrying amount of its financial assets at each reporting date to determine whether there is any objective evidence of impairment. A financial asset is impaired if there is objective evidence that one or more events have had a negative effect on the estimated future cash flows of the asset. | |||
Objective evidence that financial assets are impaired can include default or lack of compliance from debtors, restructuring a balance due to the Company in terms that may not be considered in other circumstances, signs that a debtor or issuer declares bankrupt or the instrument no longer has a market. | |||
Significant financial assets are reviewed individually to determine their impairment. The remaining financial assets with similar credit risk characteristics are evaluated as a group. | |||
In evaluating impairment, the Company uses historical trends of the probability of defaults, timing of recoveries and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than the suggested by historical trends. | |||
An impairment loss related to a financial asset is calculated as the difference between its carrying amount and the present value of the estimated future cash flows, discounted at the effective interest rate. Impairment losses are recognized in the statements of |
S-63
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
comprehensive income. An impairment loss is reversed if the amount can be related objectively to an event occurring after the impairment loss was recognized. | |||
Non-financial assets |
The carrying amounts of non-financial assets, excluding inventory and deferred tax, are reviewed at each reporting date of the statement of financial position to determine whether evidence of impairment exists. If any such indication exists, then the recoverable value of the asset is estimated. |
The recoverable value of an asset o cash-generating unit is the greater between its carrying value and its fair value, less direct selling expenses. When determining the carrying value, expected future net cash flows are discounted using present value techniques, using a discount rate before tax that reflects current market conditions over the time value of money and specific risks that the asset may bear. Impairment is determined by the Company based on cash-generating units, in accordance with its business segments, geographical locations and the final use of the production generated by each unit. A cash-generating unit is the assets grouped at the lowest levels for which there are separately identifiable cash flows. When evaluating impairment, goodwill acquired during business combinations is allocated among cash-generating units that are expected to benefit from combination synergies. |
An impairment loss is recognized when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment loss is recognized in the statements of comprehensive income for the year and the asset cost is shown net of this impairment charge. |
Impairment losses can be reversed only if the reversion is related to a change in the estimates used after the impairment loss was recognized. This reversion shall not exceed the book value of assets net of depreciation or amortization as if the impairment had never been recognized. |
(j) | Income tax |
Income tax expense comprises current and deferred income tax. Income tax expense is recognized in the results for each year, except to the extent that it relates to items that should be directly recognized in the other comprehensive income. |
Current income tax is the expected tax payable based on the taxable income for the year, using the methodology established by current laws and tax rates at the reporting date and any adjustment to taxes payable from previous years. Current income tax payable also includes fiscal responsibility derived from dividends declared. |
Deferred income tax is recognized using the balance sheet method. Deferred tax assets and liabilities are recognized by the timing differences that exist between assets and liabilities values presented in the statement of financial position and its corresponding fiscal value, as well as operating losses and tax credit carryforwards. The value of deferred tax assets and liabilities is determined based on tax rates expected to be applicable to taxable income for |
S-64
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
the year in which temporary differences will be recovered or settled pursuant to law. The effect on deferred assets and liabilities of changes in tax rates is recorded in the results for the year in which such changes become effective. |
A deferred tax asset is recognized only to the extent that future taxable income will be available for offsetting. Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that the related tax benefit will be realized. |
(k) | Provisions |
A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be reliably estimated, and it is probable that an outflow of economic benefits will be required to settle the obligation. When the effect of the time value of money is significant, the provision is determined by applying a discount rate associated with the estimated payment terms, if the terms can be estimated reliably as well as the risk associated with those obligations. | |||
Environmental issues |
In conformity with the environmental policy established by PDVSA and current legislation, the Company recognizes a liability when costs are likely and can be reasonably estimated. Environmental expenditures that relate to current or future revenues are expensed or capitalized as appropriate. Expenditures for past operations that do not contribute to generating current or future income are charged to expense. Recognition of these provisions coincides with the identification of an obligation for environmental remediation where the Company has sufficient information to determine a fair estimate of the respective cost. Subsequent adjustments to estimates, if necessary, are made upon obtaining additional information. | |||
Asset retirement |
Obligations associated with the retirement of long-lived assets are recognized at fair value on the date on which such obligation is incurred, based on future discounted cash flows. The fair values are determined based on current regulations and technologies. |
Changes in fair values of obligations are added to or deducted from the cost of the respective asset. The adjusted depreciation amount of the asset is depreciated over its remaining useful life. Therefore, once its useful life has ended all subsequent changes in the fair value of the obligation are recognized in the statements of comprehensive income. The increase in the obligation for each year is recognized in the results of operations as financial expenses. | |||
Litigation and other claims |
Provision for litigations and claims are recognized in the event that legal action has been lodged, government investigations have been initiated and other legal actions are outstanding or subject to be filed in the future against the Company, as a result of past |
S-65
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
events, which may result in a probable outflow of economic benefits to pay for that obligation which may be reliably estimated. The Company has no legal suits or claims that need to be recorded or disclosed at the date of the statements of financial position. | |||
Damages to Land |
Liabilities caused by damage to land resulting from the regular activities carried out by the Company to access the different existing areas or new, for which third-party property or economic activity can be or are affected causing the need to compensate the economic effects caused Are recorded when known the existence of the liability. As a result of the expansion of the activities in 2010, the Company caused damages to third parties and currently is in negotiation process with different owners. Management believes that potential liabilities reached U.S. $2,093 thousands (Bs.9.000 miles) and were included in the results of 2010. | |||
(l) | Revenue recognition |
Income from sales of crude oil and gas, are measured at fair value for the cash receipts or amounts to be received, net of commercial discounts and royalties on volumes transferred on behalf of the Republic of Venezuela, and is recorded in the statements of comprehensive income when risks and significant rights of ownership are transferred to PDVSA Petróleo and MPPEP as stipulated in the hydrocarbon purchase sale agreement. Income is recognized when it can be reasonably measured and it is probable that future economic benefits will flow to the Company. Income from activities other than the Company’s main business is recognized when realized. Income is not recognized when there is significant uncertainty as to the recoverability of the obligation acquired by the buyer. All of the Company results are from continuing operations. | |||
(m) | Royalties, extraction taxes and other taxes | ||
Royalties, extraction taxes and other related taxes are calculated according to the provisions of the Hydrocarbons Law and other laws regulating the oil industry (see Note 1 and 7) and are recognized in the statements of comprehensive income when caused. | |||
(n) | Capital stock |
Common shares are classified as equity. For the years ended December 31, 2010 and 2009, the Company has no preferred shares (See Note 14). | |||
(o) | Share premium |
The Company recognizes as share premium any excess in the value of contributions made by shareholders for Company incorporation over the par value at the incorporation date (See Note 14). | |||
(p) | Legal reserve |
The Venezuelan Code of Commerce requires companies to set aside 5% of their net income each year to a legal reserve until it reaches an amount equivalent to at least 10% of their capital stock in bolivars (See Note 14). |
S-66
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
(q) | Other equity reserves |
The Company has the policy of transferring from retained earnings to other equity reserves the balance of deferred tax account when the latter is an asset. This reserve is recognized in retained earnings to the extent that such asset gets realized when the temporary differences that gave rise to it are deducted for tax purposes and consequently would be available for dividend payments. | |||
(r) | Dividend distribution |
Dividend distribution to the Company’s shareholders is recognized as a liability in the financial statements in the period in which the dividends are approved by the shareholders of the Company and the corresponding shareholders minute is filed before the Register of Commerce. | |||
(s) | Accounting estimates requiring a high degree of judgment |
The Company continually evaluates judgments used to record its accounting estimates, which are recorded based on historical experience and other factors, including expectation of future events that are believed to be reasonable under the circumstances. Significant future changes to assumptions established by management may significantly affect the carrying value of assets and liabilities. |
Below is a summary of the most significant accounting estimates made by the Company: | |||
Estimates of oil reserves |
Oil and gas reserves are key elements in the Company’s decision-making process. They are also important in evaluating impairment in the carrying amount of long-lived assets. Calculation of depreciation, amortization and depletion of property, plant and equipment accounts related to hydrocarbon production requires quantification of proved developed hydrocarbon reserves expected to be recovered by the Company in the future. Reserve estimates are only approximate amounts due to the high degree of judgment and specialization required to develop the information. Reserves are calculated by specialized technical departments at Petróleos de Venezuela, S.A. (PDVSA) (related company that owns the Company’s main shareholder) and results are submitted for approval by MPPEP in order to guarantee the reasonableness of the information. Additionally, reserve studies are regularly updated to guarantee that any change in estimates is timely recorded in the Company’s financial statements. |
Reserves studies of crude oil and gas assigned to the Company has been updated as of November 30, 2010 by the superintendence of reservoir of the Company who possesses adequate technological elements necessary to determine reserves, and its impact in the statements of comprehensive income is being reflected as of December 31, 2010. |
S-67
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Assessment of impairment in the value of property, plant and equipment |
Management annually assesses impairment in the value of property, plant and equipment. The main key assumptions considered by management to determine the recoverable amount of property, plant and equipment were income projections, oil prices, royalties, operating and capital costs and the discount rate. Projections include proved developed reserves to be produced during the development period of production activities in the assigned fields. At December 31, 2010 and 2009, the Company has not identified impairment in the carrying value of property, plant and equipment as a result of these estimates. | |||
Abandonment cost calculation |
The Company’s financial statements include an asset and a provision for property, plant and equipment used in hydrocarbon production that is expected to be abandoned in the future and in relation to which the Company will make future disbursements. Assumptions considered for the calculation of this asset and the provision for abandonment (asset abandonment costs, date of abandonment, and inflation and discount rates) may vary depending on factors such as performance in the field, changes in technology and legal requirements. Assumptions made by the Company are recorded based on technical studies and management’s experience and are regularly reviewed (See Note 9). | |||
(t) | Related party transactions |
The Company does not disclose, as part of balances and transactions with related companies (See Note 21), transactions with government entities conducted in the normal course of business, the terms and conditions of which are consistently applied to other public and private entities and for which there are no other suppliers, i.e., electricity, telecommunications, taxes, etc. | |||
(u) | Accrual for employee benefits |
Following corporate instructions from PDVSA, the related company PDVSA, S.A. assumed the employer role for employees who accepted the transfer, and are working as assigned employees to Petrodelta, S.A. operations. According to this, PDVSA Petróleo, S.A. administer and prepare those employees’ payroll and invoice direct payroll and benefits to the Company, which recognize those costs against a liability to PDVSA Petróleo, S.A. The direct payroll and benefits costs are determined by PDVSA according the following policies: | |||
Termination benefits |
The Company accrues for its liability in respect of employee termination benefits based on the provisions of the Venezuelan Labor Law and the prevailing oil-sector collective labor agreement (See Note 22). Under certain circumstances, the Law provides for an additional indemnity for unjustified dismissals. Most of this accrual for indemnification has been deposited in trust accounts in the name of each employee. |
S-68
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Profit sharing and bonuses |
Liabilities in respect of labor benefits and bonuses for staff, vacation leaves, and other benefits are accounted for as incurred along with the staff’s provision of services. |
During the years ended December 31, 2010 and 2009, the Company has not had direct employees and, therefore, has not recorded liabilities derived from these labor-related benefits except for the payroll related cost monthly billed to the Company by PDVSA Petróleos S.A.. | |||
Retirement Plan |
The amount to be provision for retirement benefits is received from PDVSA based on actuary studies. Net liabilities in respect of the retirement plan as defined in the contract are accounted for separately per each participant in said plan, by estimating the amount of future benefits to be acquired by staff versus their length of service during current and prior periods; said benefits are discounted in order to determine their current value, then it is deducted the fair market value of those assets associated to the plan. The discount rate reflects the yield rate that, as of the date of the financial statements, is reported through financial instruments issued by credit institutions with high ratings and maturity dates that are in line with those due dates applicable to said liabilities. This calculation is made by an actuary by using the projected unit credit method. |
Improvements made to the plan’s benefits, in connection with past service cost, are expensed in the statements of comprehensive income per the estimated period that, on average, will last until the moment said benefits will be paid in full. As said benefits fall under irrevocable acquired rights after approval, said expense is recorded, immediately, in the statements of comprehensive income. |
The amount accounted for as income or expense is the share corresponding to the total of unrecorded actuarial earnings or loss in excess of 10% of the greater of these sums: a) the current value of liabilities in respect of those benefits defined as of that date; and b) the reasonable value of the plan’s assets as of that date. Said caps are computed and apply separately per each plan’s benefit so defined. | |||
Post-retirement benefits other than retirement |
Net liabilities in respect of post-retirement benefits other than retirement, as defined in the contract, equal the total of future benefits earned by staff along with their length of service during current and prior periods. Said benefits include mainly: health and dental plans, burial and funeral insurance, and food electronic card. Said liabilities are computed by using the projected unit credit method; then they are deducted to reflect their current value and, if applicable, the fair market value of related assets is deducted as well. The discount rate should reflect the yield rate that, as of the date of the financial statements, is reported through financial instruments issued by credit institutions with high ratings and maturity dates that are in line with those due dates applicable to said liabilities. |
S-69
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Past service cost and the actuarial income or loss are recorded by using the method set out in the retirement plan per the contract. | |||
The provision for this concept is provided by PDVSA which is based on actuary studies. | |||
(v) | New accounting standards not yet adopted | ||
Certain new standards, amendments and interpretations to existing standards were not effective for the year ended December 31, 2010 and have not been applied in the preparation of the Company’s financial statements. The most important standards, amendments and interpretations for the Company are as follows: |
- | In December 2010, the IASB published amendments to IAS 12Income Taxes effective for accounting periods beginning on or after January 1, 2012. The amendments set out inDeferred Tax: Recovery of Underlying Assets,provides a practical solution to the problem by introducing a presumption that recovery of the carrying amount will, normally be through sale. As a result of the amendments, SIC-21Income Taxes—Recovery of Revalued Non-Depreciable Assetswould no longer apply to investment properties carried at fair value. The amendments also incorporate into IAS 12 the remaining guidance previously contained in SIC-21, which is accordingly withdrawn. | ||
- | In October 2010, the IASB published amendments to IFRS 7Financial Instruments Disclosureeffective for accounting periods beginning on or after July 1, 2011. The amendments will allow users of financial statements to improve their understanding of transfer transactions of financial assets (for example, securitizations), including understanding the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period. | ||
- | In May 2010, the IASB published improvements to International Financial Reporting Standards effective from January 1, 2011. The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations considered most important for the Company: IFRS 7Financial Instruments Disclosure;IAS 1Presentation of Financial Statements andIAS 27Consolidated and Separate Financial Statements. | ||
- | In November 2009, the IASB published amendments is to IFRIC 14Prepayments of a Minimum Funding Requirement, which has an effective date for annual periods beginning on or after January 1, 2011 and which itself is an interpretation of IAS 19Employee Benefits.The amendment applies in the limited circumstances when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover those requirements. The amendment permits such an entity to treat the benefit of such an early payment as an asset. |
S-70
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
- | In November 2009, the IASB published an amendment to IAS 24Related Party Disclosureswhich is effective for annual periods beginning on or after January 1, 2011. IAS 24 was revised in 2009 by: (a) simplifying the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition and by (b) providing a partial exemption from the disclosure requirements for government-related entities. | ||
- | In November 2009, the IASB issued IFRS 9Financial Instruments, effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. IFRS 9 replaces those parts of IAS 39 relating to the classification and measurement of financial assets. Key features are as follows: |
• | Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortized cost. The decision is to be made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. | ||
• | An instrument is subsequently measured at amortized cost only if it is a debt instrument and both (i) the objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset’s contractual cash flows represent only payments of principal and interest (that is, it has only “basic loan features”). All other debt instruments are to be measured at fair value through profit or loss. | ||
• | All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognize unrealized and realized fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment. |
The Company completed the analysis of these standards and determined no significant effects on its financial statements. | |||
(w) | Recently adopted accounting pronouncements | ||
The following standards and interpretations became effective during 2010: |
- | In November 2009, the International Financial Reporting Interpretations Committee (IFRIC) issued IFRIC 19Extinguishing Financial Liabilities with Equity Instrumentseffective from July 1, 2010 to provide guidance on how to account for the extinguishment of a financial liability by the issue of equity instruments. These |
S-71
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
transactions are often referred to as debt for equity swaps. IFRIC 19 clarifies the requirements of International Financial Reporting Standards (IFRSs) when an entity renegotiates the terms of a financial liability with its creditor and the creditor agrees to accept the entity’s shares or other equity instruments to settle the financial liability fully or partially. IFRIC 19 clarifies that: |
• | the entity’s equity instruments issued to a creditor are part of the consideration paid to extinguish the financial liability. | ||
• | the equity instruments issued are measured at their fair value. If their fair value cannot be reliably measured, the equity instruments should be measured to reflect the fair value of the financial liability extinguished. | ||
• | the difference between the carrying amount of the financial liability extinguished and the initial measurement amount of the equity instruments issued is included in the entity’s profit or loss for the period. |
- | In June 2009, the IASB issued amendments to IFRS 2Share-based Paymentthat clarify the accounting for group cash-settled share-based payment transactions. The amendments clarify how an individual subsidiary in a group should account for some share-based payment arrangements in its own financial statements. In these arrangements, the subsidiary receives goods or services from employees or suppliers but its parent or another entity in the group must pay those suppliers. The amendments clarifies that: |
• | An entity that receives goods or services in a share-based payment arrangement must account for those goods or services no matter which entity in the group settles the transaction, and no matter whether the transaction is settled in shares or cash. | ||
• | In IFRS 2 a ‘group’ has the same meaning as in IAS 27 Consolidated and Separate Financial Statements, that is, it includes only a parent and its subsidiaries. | ||
• | The amendments to IFRS 2 also incorporate guidance previously included in IFRIC 8Scope of IFRS 2and IFRIC 11IFRS 2—Group and Treasury Share Transactions. As a result, the IASB has withdrawn IFRIC 8 and IFRIC 11. |
- | In April 2009, the IASB published improvements to International Financial Reporting Standards. The improvement included amendments to certain existing standards and interpretations. Amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after July 1, 2009, and amendments to IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods beginning on or after January 1, 2010. The improvements consist of a mixture of substantive changes and clarifications to the following standards and interpretations: IFRS 2Share-based Paymentclarifying that contributions of businesses in common control transactions and formation of joint ventures are not within the scope of IFRS 2; IFRS 5Non-current Assets held for sale and discounted operationsclarifying disclosure requirements set by this and other standards for non-current assets (or disposal groups) classified as held for |
S-72
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
sale or discontinued operations; IFRS 8Operating Segmentsamending disclosure requirements for a measure of segment assets; IAS 1Presentation of Financial Statementsamending regarding non-current/current classification of liabilities settled by equity instruments; IAS 7Statement of Cash Flowsclarifying that only expenditures that result in a recognized asset are eligible for classification as investing activities; IAS 17Leasesclarifying the considerations for classification of land leases and setting out transition requirements for reclassification of unexpired leases; IAS 18Revenueproviding additional guidance for determining whether an entity acts as a principal or an agent; IAS 36Impairment of Assetsclarifying that a cash generating unit shall not be larger than an operating segment before aggregation; IAS 38Intangible Assetsamended regarding measurement of fair value of intangible assets acquired in a business combinations, providing additional guidance on techniques used in the absence of an active market; IAS 39Financial Instruments amended to exclude from its scope certain forward contracts resulting in business combinations, to clarify the period of reclassifying gains or losses on the hedged instruments from equity to profit or loss and to provide guidance for circumstances when prepayment options are closely related to the host contract; IFRIC 9Reassessment of Embedded Derivativesclarifying that embedded derivatives in contracts acquired in common control transactions and formation of joint ventures are not within the scope of IFRIC 9; and IFRIC 16Hedges of a Net Investment in a Foreign Operationamended for removal of the restriction that hedging instruments may not be held by the foreign operation that itself is being hedged. |
The Company’s accounting policies have been revised and modified, when necessary, to adopt the requirements established in these new standards or interpretations. Adoption of these standards and interpretations did not significantly affect the Company’s financial statements. |
(4) | Exchange Agreement with the Central Bank of Venezuela (BCV) |
On January 8, 2010, Official Gazette 39,342 was published containing Foreign Exchange Agreement No. 14, effective as of January 11, 2010, establishing exchange rates for the purchase and sale of currency, other than local currency, for legal entities as follows: |
• | Payment in currency, other than local currency, transactions aimed at imports by the sector of food, health, education, machinery and equipment and science and technology, as well as payments for the activities of the public sector not related to petroleum, will be made at an exchange rate of Bs.2.60 per U.S. Dollar; payments of all other foreign currency sale transactions will be made at an exchange rate of Bs.4.30 per U.S. Dollar. | ||
• | Payment of purchase of currency, other than local currency, obtained: i) by the public sector, other than those originating from hydrocarbon imports regulated by Foreign Exchange Agreement 9, will be made at an exchange rate of Bs.2.5935 per U.S. Dollar; and ii) the remaining purchases of foreign currency will be made at an exchange rate of Bs.4.2893 per U.S. Dollar. |
S-73
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
• | Payment of currency purchase, other than local currency, transactions, originating from export of hydrocarbons, regulated under Foreign Exchange Agreement No. 9, will be made at an exchange rate of Bs.4.2893 and Bs.2.5935 per U.S. Dollar, pursuant to the provisions of the BCV, and proportions determined by that entity for payment of sale transactions. An exchange rate of Bs.2.5935, per U.S. Dollar will be applicable to at least 30% of those currencies purchase transactions, other than the local currency (see note 18). |
The previous paragraph is applicable to mix companies affiliates of PDVSA. | |||
In addition, this Agreement enables legal entities, other than PDVSA, in the area of exports of goods and services to withhold and manage up to thirty percent (30%) of income in foreign currency from the exports made; this percentage will be used to cover expenses from export activities other than long-term debt. This Agreement also established that purchase and sale transactions of foreign currency with payment requested to the BCV before the effective date will be paid at an exchange rate of Bs.2.14 per U.S. Dollar and Bs.2.15 per U.S. Dollar, respectively, as established in Foreign Exchange Agreement No. 2, dated March 1, 2005. | |||
In May 2010, the Venezuelan Government established the Sistema de Transacciones con Títulos en Moneda Extranjera (“SITME”) for exchanging Bolivars. SITME’s purpose is to assist companies and individuals requiring foreign currency (U.S. Dollars) for the import of goods and services into Venezuela. SITME may also be used for buying or selling of Venezuela’s bonds. The Company does not have, and has not had, any Bolivars pending government approval for settlement for U.S. Dollars at the official exchange rate or the SITME exchange rate. | |||
On December 30, 2010, Foreign Exchange Agreement No. 14, effective as of January 1, 2011, was published in Official Gazette 39,584. This Agreement sets the exchange rate at Bs.4.2893 per U.S. Dollar for purchases and Bs.4,30 per U.S. Dollar for sales. This resolution supersedes Foreign Exchange Agreement No. 14, dated January 8, 2010, published in Official Gazette of the Bolivarian Republic of Venezuela 39,342, dated January 8, 2010; as well as Foreign Exchange Agreements No. 15, No. 16, No. 17, and any other provision that may come into conflict with this Foreign Exchange Agreement. | |||
The pronouncement of the Exchange Agreement No. 14 did not have an effect on the Company’s right to maintain foreign currency funds at financial institutions outside the country on revenues proceeds from sale of crude in order to make payments and disbursements outside the Bolivarian Republic of Venezuela. | |||
On November 21, 2005, the Ministry of Finance and BCV published Exchange Agreement No. 9, in the Official Gazette No. 38,318, later revised on March 22, 2007 and published in the Official Gazette No. 38.650, which establishes that foreign currency obtained from hydrocarbon exports, including gaseous hydrocarbons, must be sold to BCV, except for foreign currency earmarked for activities conducted by PDVSA in conformity with the BCV Law Reform. Under this agreement, PDVSA and its subsidiaries may not maintain foreign currency funds in Venezuela for more than 48 hours, and establishes how these funds will be used by PDVSA and monthly information to be presented to BCV in respect of foreign |
S-74
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
currency flows generated by its activities, asset and liability positions in foreign currency, and payments made by PDVSA abroad. |
(5) | Determination of Fair Values |
Certain of the Company’s accounting policies and disclosures require the determination of fair values for financial and non-financial assets and liabilities. Fair values have been estimated for purposes of valuation and disclosure using available market information and appropriate valuation methods. When applicable, additional information on fair value estimates of assets and liabilities is disclosed in the specific notes to the statements of financial position. | ||
Non-derivative current financial assets and liabilities | ||
The carrying amounts of financial assets and liabilities included in prepaid expenses and other assets, accounts receivable, cash and cash equivalents and accounts payable to suppliers approximate their fair value because of the short-term maturities of these instruments. | ||
The fair value of recoverable tax credits and other liabilities has been determined by discounting net cash flows expected to be generated by the asset, using interest rates applicable in the monetary market (see note 7-k). | ||
The net carrying value of the account payable to PDVSA approximates the estimated fair value since its payment depends on the volume and nature of transactions conducted by the Company with the parent Company and its subsidiaries. | ||
Derivative financial assets and liabilities | ||
The fair value of derivative financial instruments is based on the amount that the Company will receive or pay to terminate the agreements, taking into account current commodity prices, interest rate and the current creditworthiness of the parties involved. During the years ended December 31, 2010 and 2009, the Company did not engage in operations involving derivative financial instruments. |
S-75
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Non-derivative financial obligations | ||
The fair value of non-derivative financial obligations, which is determined for disclosure purposes, is calculated based on information provided by financial institutions and the present value of future principal and interest cash flows, discounted at the market interest rate at the reporting date, based on the inherent risk of those obligations. |
(6) | Financial Risk Management |
Local and international conditions, such as recession periods, inflation, interest rates, devaluation, and hydrocarbon price volatility may have a significant effect on the Company’s financial position. The Company is exposed to a variety of financial risks: market risk (including exchange rate fluctuation risk, interest rate risk and price risk), liquidity risk and capital risk. Financial instruments exposed to concentration of credit risk consist primarily of cash and trade accounts receivable. | ||
At December 31, 2010 and 2009, the Company’s cash is placed with a local and foreign financial institution. In addition, there is some concentration of credit risk in trade accounts receivable since all crude oil and gas produced is sold to PDVSA Petróleo. | ||
Market risk | ||
Market risk is the risk that changes in market prices, including foreign exchange rates, interest rates or sales prices, will affect the Company’s income or the value of its financial instruments. The Company’s general risk management focuses on the uncertainty surrounding financial markets and seeks to minimize the potential adverse effects on the Company’s performance. | ||
The Company is exposed to risks stemming from changes in the sale price of hydrocarbons, which depend on external market factors. At December 31, 2010 and 2009, hydrocarbon sales prices are calculated based on predetermined formulas that consider the price of hydrocarbons in different international markets. Price fluctuations may have a significant impact on the Company’s income. At December 31, 2010 and 2009, the Company has no mechanisms in place to protect against exposure to hydrocarbon sales price fluctuations. | ||
In addition, the Company operates in Venezuela and is exposed to foreign exchange risk from variations in the exchange rate of the Venezuelan Bolívar relative to the U.S. Dollar. Foreign exchange risk is mainly derived from future commercial operations and assets and liabilities shown in bolivars. | ||
The Company has accounts receivable from PDVSA which earn interest on arrears 45 days after bills are due and are, therefore, exposed to interest rate fluctuation. | ||
Liquidity risk | ||
Handling prudently liquidity risk implies maintaining sufficient funds in cash and short term marketable securities, as well as having working capital credit facility available. The Company permanently evaluates its future cash flows through short and long term projections from |
S-76
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
estimated sales and cash requirements which correspond mainly to operation and maintenance of production facilities. | ||
Capital risk management | ||
The Company is focused on safeguarding its ability to continue as a going concern in order to provide returns for the shareholders and maintain an optimal capital structure to reduce capital costs. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares. |
(7) | Taxes and royalties |
Below is a summary of taxes affecting the Company’s operations, stated in thousands: |
Years ended December 31, | ||||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||||||||||
Income tax expense (benefit): | ||||||||||||||||||||||||
Estimated income tax expense | 189,780 | 105,868 | 69,374 | 816.054 | 227,616 | 149,154 | ||||||||||||||||||
Deferred income tax (benefit) expense | 72,568 | (43,922 | ) | (52,560 | ) | 312,042 | (94,432 | ) | (113,004 | ) | ||||||||||||||
Total income tax expense | 262,348 | 61,946 | 16,814 | 1,128.096 | 133,184 | 36,150 | ||||||||||||||||||
Years ended December 31, | ||||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||||||||||
Royalties, extraction tax, surface and windfall taxes: | ||||||||||||||||||||||||
Royalty on oil production | 181,252 | 135,442 | 138,311 | 779,384 | 291,200 | 297,369 | ||||||||||||||||||
Royalty on gas production | 1,824 | 2,483 | 11,294 | 7,843 | 5,338 | 24,282 | ||||||||||||||||||
Royalty for the municipalities | 6,789 | 8,613 | 10,687 | 29,193 | 18,518 | 22,977 | ||||||||||||||||||
Royalty for endogenous development projects | 13,578 | 6,935 | 5,343 | 58,385 | 14,910 | 11,487 | ||||||||||||||||||
Surface tax | 201 | 1,946 | 1,596 | 865 | 4,184 | 3,431 | ||||||||||||||||||
Windfall tax | 14,116 | 882 | 56,377 | 60,697 | 1,896 | 121,211 | ||||||||||||||||||
Accrual for investments in social project | 1,059 | 1,380 | 1,559 | 4,555 | 2,968 | 3,352 | ||||||||||||||||||
Total royalties, surface tax and other taxes | 218,819 | 157,681 | 225,167 | 940,922 | 339,014 | 484,109 | ||||||||||||||||||
(a) | Income tax | ||
Reconciliation between the nominal and the effective income tax rates for each year is shown below: |
S-77
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Years ended December 31, | ||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
Thousands | Thousands | Thousands | ||||||||||||||||||||||||||||||||||
U.S. | U.S. | U.S. | ||||||||||||||||||||||||||||||||||
% | Dollars | Bolivars | % | Dollars | Bolivars | % | Dollars | Bolivars | ||||||||||||||||||||||||||||
Profit before tax: | ||||||||||||||||||||||||||||||||||||
Net profit | 77,683 | 334,037 | 143,284 | 308,051 | 121,217 | 260,617 | ||||||||||||||||||||||||||||||
Income tax expense | 262,348 | 1,128,096 | 61,946 | 133,184 | 16,814 | 36,150 | ||||||||||||||||||||||||||||||
Profit before tax | 340,031 | 1,462,133 | 205,230 | 441,245 | 138,031 | 296,767 | ||||||||||||||||||||||||||||||
Oil-sector nominal income tax rate | 50 | 170,016 | 731,067 | 50 | 102,615 | 220,622 | 50 | 69,016 | 148,383 | |||||||||||||||||||||||||||
Tax inflation adjustment | (5 | ) | (16,325 | ) | (70,198 | ) | (11 | ) | (23,096 | ) | (49,656 | ) | (28 | ) | (38,697 | ) | (83,199 | ) | ||||||||||||||||||
Deferred income tax | 21 | 72,568 | 312,042 | (21 | ) | (43,922 | ) | (94,432 | ) | (38 | ) | (52,560 | ) | (113,004 | ) | |||||||||||||||||||||
Non-deductible provisions and other | 11 | 36,089 | 155,185 | 13 | 26,349 | 56,650 | 28 | 39,055 | 83,970 | |||||||||||||||||||||||||||
Effective rate | 77 | 262,348 | 1,128,096 | 30 | 61,946 | 133,184 | 12 | 16,814 | 36,150 | |||||||||||||||||||||||||||
- | Increase in taxable income as a result of accounting for variation in the foreign exchange rate that had an impact on the income tax expense calculated for companies with monetary assets and liabilities denominated in currencies other than bolivar. | |
- | Decrease on deferred tax assets as a result of the difference calculated between the financial base and the taxable base of property, plant and equipment. |
(b) | Tax loss carryforwards | ||
The current Income Tax Law allows tax losses to be carried forward for three years to offset future taxable income, except losses resulting from the application of the fiscal inflation adjustment, which can be carried forward one year. | |||
(c) | Tax inflation adjustment | ||
Venezuelan Income Tax Law requires an initial inflation adjustment to compute taxable income. The Law provides that the initially adjusted values of property, plant and equipment should be depreciated or amortized for tax purposes over the remaining useful lives of such assets. The Law also requires that an annual inflation adjustment be included in income tax reconciliation as a taxable or deductible item. | |||
(d) | Transfer pricing | ||
According to the Income Tax Law, taxpayers subject to this tax that conduct import, export and loan transactions with related parties abroad are required to calculate income, costs and deductions applying the methodology set out in the Law. The Company conducts no transactions with related parties abroad. |
S-78
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
(e) | Income tax rate | ||
Official Gazette No. 38,529 of the Bolivarian Republic of Venezuela, published on September 25, 2006, modifies Article No. 11 of the Law regarding the rate applicable to companies engaged in hydrocarbon production and related activities, establishing a 50% general rate. However, only companies that conduct integrated or non-integrated activities related to exploration and production of non-associated gas, and processing, transportation, distribution, storage, marketing and export of gas and its components, or those exclusively engaged in refining of hydrocarbons or enhancement of heavy and extra-heavy crude oil are subject to a 34% tax rate. Therefore, application of the 34% rate for companies incorporated under the joint venture agreements executed under the superseded Law Reserving Hydrocarbon Trade and Industry to the State is eliminated. | |||
(f) | Deferred income tax | ||
The components of deferred income tax expense at December 31, 2009 and 2010 shown in the results of each year are as follows (in thousands): |
2010: |
Movement during the year 2010, | Net deferred | |||||||||||||||||||||||||||
Income (Loss) | Effect for | tax at | ||||||||||||||||||||||||||
Recognized | variation in | December 31, | ||||||||||||||||||||||||||
2009 | In results for | the exchange | 2010 | 2010 | ||||||||||||||||||||||||
Asset (Liability) | the year | rate | Asset (Liability) | (see Note 14) | ||||||||||||||||||||||||
In U.S. Dollars- | ||||||||||||||||||||||||||||
Accounts receivable | (2,653 | ) | 4,527 | 1,326 | 3,200 | — | 3,200 | |||||||||||||||||||||
Property, plant and equipment | 104,556 | — | (86,372 | ) | — | 18,184 | — | 18,184 | ||||||||||||||||||||
Inventories | 4,520 | — | (5,507 | ) | — | — | (987 | ) | (987 | ) | ||||||||||||||||||
Accruals and other payables | 34,822 | — | 14,784 | (11,307 | ) | 38,821 | (522 | ) | 38,299 | |||||||||||||||||||
143,898 | (2,653 | ) | (72,568 | ) | (9,981 | ) | 60,205 | (1,509 | ) | 58,696 | ||||||||||||||||||
In Bolivars- | ||||||||||||||||||||||||||||
Accounts receivable | — | (5,704 | ) | 19,464 | — | 13,760 | — | 13,760 | ||||||||||||||||||||
Property, plant and equipment | 224,796 | — | (371,400 | ) | 224,795 | 78,191 | — | 78,191 | ||||||||||||||||||||
Inventories | 9,717 | — | (23,680 | ) | 9,719 | — | (4,244 | ) | (4,244 | ) | ||||||||||||||||||
Accruals and other payables | 74,867 | — | 63,572 | 26,247 | 166,930 | (2,244 | ) | 164,686 | ||||||||||||||||||||
309,380 | (5,704 | ) | (312,044 | ) | 260,761 | 258,881 | (6,488 | ) | 252,393 | |||||||||||||||||||
S-79
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
2009: |
Net deferred | ||||||||||||||||||||
Income (Loss) | tax at | |||||||||||||||||||
Recognized | December 31, | |||||||||||||||||||
2008 | In results for | 2009 | 2009 | |||||||||||||||||
Asset | the year | Asset (Liability) | (see Note 14) | |||||||||||||||||
In U.S. Dollars- | ||||||||||||||||||||
Accounts receivable | — | (2,653 | ) | — | (2,653 | ) | (2,653 | ) | ||||||||||||
Property, plant and equipment | 66,004 | 38,552 | 104,556 | — | 104,556 | |||||||||||||||
Inventories | 5,184 | (664 | ) | 4,520 | — | 4,520 | ||||||||||||||
Accruals and other payables | 26,135 | 8,687 | 34,822 | — | 34,822 | |||||||||||||||
97,323 | 43,922 | 143,898 | (2,653 | ) | 141,245 | |||||||||||||||
In Bolivars- | ||||||||||||||||||||
Accounts receivable | — | (5,704 | ) | — | (5,704 | ) | (5,704 | ) | ||||||||||||
Property, plant and equipment | 141,909 | 82,887 | 224,796 | — | 224,796 | |||||||||||||||
Inventories | 11,145 | (1,428 | ) | 9,717 | — | 9,717 | ||||||||||||||
Accruals and other payables | 56,190 | 18,678 | 74,868 | — | 74,868 | |||||||||||||||
209,244 | 94,433 | 309,381 | (5,704 | ) | 303,677 | |||||||||||||||
(g) | Royalties | ||
According with the Venezuelan Hydrocarbon Law (LOH), royalties are paid based on crude oil produced and associated natural gas processed in Venezuela. Volumes of hydrocarbons produced in traditional areas are taxed with a 30% rate. | |||
The partial reform of the Hydrocarbon Law was approved in May 2006, whereby operators should pay 33.33% of the wellhead value of each barrel to the Venezuelan government by means of royalties and additional taxes. | |||
On November 14, 2006, a new calculation of royalties was established for companies that conduct primary oil activities in the country requiring that contents of sulphur and API gravity of liquid hydrocarbons extracted be measured on a monthly basis and be reported together with taxed production. This information will be part of the royalty payment price and will be used for calculation of any special advantage. This information will result in adjustments for gravity and sulphur, which will be published by Ministry for Energy and Oil (MPPEP). | |||
The Company pays MPPEP a 30% royalty in kind for crude oil produced and associated natural gas transferred to PDVSA Petróleo, S.A. Royalty expenses for 2010, 2009 and 2008 amounted to US$183,076 thousands, US$137,925 thousands and US$149,605 thousands (Bs.787,227 thousands, Bs.296,538 thousands and Bs.321,651 thousands), respectively, included in the statements of comprehensive income under Royalties. | |||
(h) | Extraction tax | ||
The Venezuelan Hydrocarbon Law Reform establishes a rate equivalent to 33.33% of the value of all liquid hydrocarbons extracted from any reservoir, calculated on the same basis as for royalties. In determining this tax, the taxpayer may deduct the amount that would have been paid for royalty, including the additional royalty paid as special advantage. This tax is |
S-80
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
effective since 2006. The Company incurred no tax in this connection for 2010, 2009 and 2008. | |||
(i) | Surface tax | ||
The Venezuelan Hydrocarbon Law establishes a surface tax equivalent to 100 tax units for each square kilometer or fraction thereof per year for licensed areas that are not under production. This tax will increase by 2% during the first five years, and by 5% during all subsequent years. Company management considers that there are no nonproductive areas. Petrodelta, S.A. incurred in this tax during 2010, 2009 and 2008 for US$201 thousands, US$1,946 thousands and US$1,596 thousands (Bs.865 thousands, Bs.4,184 thousands and Bs.3,431 thousands), respectively, included in the statements of comprehensive income under royalties. | |||
(j) | General consumption tax | ||
The Venezuelan Hydrocarbon Law Reform establishes an internal consumption tax equivalent to 10% of the value of each cubic meter of hydrocarbon derivatives produced and consumed as fuel in internal operations, calculated on the final selling price. Company management considers that, other than associated gas, no hydrocarbon derivatives are consumed. | |||
(k) | Value added tax (VAT) | ||
A Partial Reform of the Value Added Tax Law was published in Official Gazette No. 38,632 on February 26, 2007 changing the applicable tax rate from 14% to 11% as from March 1 until June 30, 2007 and to 9% as from July 1, 2007. | |||
On March 26, 2009, under Official Gazette No. 39,147 modification of applicable tax rate to 12% was published, having effect from April 1, 2009. | |||
The VAT Law establishes an exemption on trading of certain hydrocarbon-derived fuels. Recoverable amounts bear no interest. | |||
Below is a summary of the movement of recoverable tax credits (in thousands): |
December 31, | ||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||
Recoverable amounts at the beginning of the year | 17,922 | 9,604 | 38,532 | 20,649 | ||||||||||||
Generated during the year | 8,443 | 10,110 | 36,307 | 21,736 | ||||||||||||
Adjustment to net realizable value | (3,951 | ) | (1,792 | ) | (16,990 | ) | (3,853 | ) | ||||||||
Effect for variation in the exchange rate | (8,961 | ) | — | — | ||||||||||||
Recoverable amounts at end of the year | 13,453 | 17,922 | 57,849 | 38,532 | ||||||||||||
Non-current portion of recoverable tax credits | 8,072 | 10,753 | 34,710 | 23,119 | ||||||||||||
Current portion of recoverable tax credits | 5,381 | 7,169 | 23,139 | 15,413 | ||||||||||||
S-81
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
At December 31, 2010 and 2009, the Company adjusted the amount of recoverable tax credits to the net realizable value applying a discount rate for assets deterioration of 13.098%. This rate is calculated by its main shareholder annually with the financial statements of the prior year and using outside parameters updated each year. At December 31, 2010 and 2009, the adjustment for US$3,951 thousands and US$1,792 thousands (Bs.16,990 thousands and Bs.3,853 thousands), respectively, is included in the statements of comprehensive income under the category of financial expenses. | |||
(l) | Law on Special Contributions over Extraordinary Prices of the International Hydrocarbons Market | ||
In April 2008, the Venezuelan government, by means of a decree-law, established a special contribution over extraordinary prices of the international hydrocarbons market, amended in July 2008, which levies the sale of crude oil whenever the average price for the month in question of the Venezuelan oil production exceeds the price of US$70/barrel. The amount of said contribution equals 50% of the difference resulting of the average price per month and the aforementioned cap of US$70/barrel. In addition, this decree-law sets forth that whenever the average price per month exceeds the price of US$100/barrel, the total amount of said special contribution will be equivalent to 60% of the above defined difference. Petrodelta, S.A. incurred in this tax during 2010, 2009 and 2008 for US$14,116 thousands, US$882 thousands and US$56,377 thousands (Bs.60,697 thousands, Bs.1,896 thousands and Bs.121,211 thousands), respectively, included in the statements of comprehensive income under royalties. | |||
m) | Other taxes | ||
The Company is subject to special advantage taxes, which are determined based on: a) an interest as additional royalty of 3.33% on volumes of hydrocarbons extracted in the delimited areas assigned to Petrodelta S.A., and b) an amount equivalent to the difference, if any, between (i) 50% of the value of the hydrocarbons extracted in the delimited areas assigned to Petrodelta S.A. in each calendar year and (ii) the sum of payments made by the mixed companies to the Bolivarian Republic of Venezuela, for activities developed during the calendar year, for royalties on hydrocarbons and investments in endogenous development projects, equivalent to 1% of pre-tax income. Taxes for special advantages must be paid before April 20 of each year, pursuant to Exhibit F of the Agreement for Conversion into a Mixed Company. In relation to a) above, Petrodelta, S.A. incurred in this tax during 2010, 2009 and 2008 for US$20,367 thousands, US$15,548 thousands and US$16,030 thousands (Bs.87,578 thousands, Bs.33,428 thousands and Bs.34,464 thousands), respectively, included in the statements of comprehensive income under royalties. In relation to b) above, at December 31, 2010, 2009 and 2008, this special advantage tax was lower than what the Company paid and accrued for royalties and special advantages tax. | |||
Official Gazette No. 39.273 of the Bolivarian Republic of Venezuela, published on September 28, 2009, approved the modification of article regulating special advantages tax levied on mix companies to redistribute the use of funds by the additional royalty of 3.33% that mix companies have to pay on hydrocarbons volumes extracted from delimited areas. The modified article establish deliver 1.11% to municipalities where oil activities in the country |
S-82
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
take place and 2.22% for a special fund to be administered by the Executive branch to finance endogenous development projects. |
Property, plant and equipment, net at December 31 comprises the following (in thousands): | ||
U.S. Dollars — |
Wells and | Asset | |||||||||||||||||||||||
production | Construction | retirement | Furniture and | Strategic | ||||||||||||||||||||
facilities | in progress | obligations | equipment | inventories | Total | |||||||||||||||||||
Cost: | ||||||||||||||||||||||||
Balances at December 31, 2008 | 211,660 | 30,946 | 16,279 | 3,737 | 10,272 | 272,894 | ||||||||||||||||||
Additions | — | 77,696 | — | 3,729 | — | 81,425 | ||||||||||||||||||
Transfers | 75,730 | (75,730 | ) | — | — | — | — | |||||||||||||||||
Strategic Inventories | — | — | — | — | 1,842 | 1,842 | ||||||||||||||||||
Assets retirement obligations | — | — | 3,603 | — | — | 3,603 | ||||||||||||||||||
Balances at December 31, 2009 | 287,390 | 32,912 | 19,882 | 7,466 | 12,114 | 359,764 | ||||||||||||||||||
Additions | — | 98,650 | — | 3,149 | — | 101,799 | ||||||||||||||||||
Transfers and capitalization | 52,807 | (52,807 | ) | — | — | — | — | |||||||||||||||||
Divestiture of Assets | (35 | ) | — | — | — | — | (35 | ) | ||||||||||||||||
Strategic inventories | — | — | — | — | (7,018 | ) | (7,018 | ) | ||||||||||||||||
Asset retirement obligations | — | — | 2,043 | — | — | 2,043 | ||||||||||||||||||
Balances at December 31, 2010 | 340,162 | 78,755 | 21,925 | 10,615 | 5,096 | 456,553 | ||||||||||||||||||
Depreciation and amortization: | ||||||||||||||||||||||||
Balances at December 31, 2008 | 55,721 | — | 3,629 | 1,784 | — | 61,134 | ||||||||||||||||||
Depreciation and amortization | 30,198 | — | 1,895 | 1,095 | — | 33,188 | ||||||||||||||||||
Balances at December 31, 2009 | 85,919 | — | 5,524 | 2,879 | — | 94,322 | ||||||||||||||||||
Depreciation and amortization | 36,490 | — | 2,677 | 1,262 | — | 40,429 | ||||||||||||||||||
Divestiture of Assets | (14 | ) | — | — | — | — | (14 | ) | ||||||||||||||||
Balances at December 31, 2010 | 122,395 | — | 8,201 | 4,141 | — | 134,737 | ||||||||||||||||||
Total net cost at December 31, 2010 | 217,767 | 78,755 | 13,724 | 6,474 | 5,096 | 321,816 | ||||||||||||||||||
Total net cost at December 31, 2009 | 201,471 | 32,912 | 14,358 | 4,587 | 12,114 | 265,442 | ||||||||||||||||||
S-83
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Wells and | Asset | Furniture | ||||||||||||||||||||||
production | Construction | retirement | and | Strategic | ||||||||||||||||||||
facilities | in progress | obligations | equipment | inventories | Total | |||||||||||||||||||
Cost: | ||||||||||||||||||||||||
Balances at December 31, 2008 | 455,069 | 66,534 | 35,000 | 8,035 | 22,085 | 586,723 | ||||||||||||||||||
Additions | — | 167,046 | — | 8,017 | — | 175,063 | ||||||||||||||||||
Transfers | 162,820 | (162,820 | ) | — | — | — | — | |||||||||||||||||
Strategic Inventories | — | — | — | — | 3,960 | 3,960 | ||||||||||||||||||
Assets retirement obligations | — | — | 7,746 | — | — | 7,746 | ||||||||||||||||||
Balances at December 31, 2009 | 617,889 | 70,760 | 42,746 | 16,052 | 26,045 | 773,492 | ||||||||||||||||||
Additions | — | 424,196 | — | 13,541 | — | 437,737 | ||||||||||||||||||
Transfers | 227,070 | (227,070 | ) | — | — | — | — | |||||||||||||||||
Retirement | (151 | ) | — | — | — | — | (151 | ) | ||||||||||||||||
Strategic inventories | — | — | — | — | (30,177 | ) | (30,177 | ) | ||||||||||||||||
Asset retirement obligations | — | — | 8,785 | — | — | 8,785 | ||||||||||||||||||
Effect for variation in the presentation currency | 617,889 | 70,760 | 42,746 | 16,052 | 26,045 | 773,492 | ||||||||||||||||||
Balances at December 31, 2010 | 1,462,697 | 338,495 | 94,277 | 45,645 | 21,913 | 1,963,178 | ||||||||||||||||||
Depreciation and amortization: | ||||||||||||||||||||||||
Balances at December 31, 2008 | 119,800 | — | 7,802 | 3,836 | — | 131,438 | ||||||||||||||||||
Depreciation and amortization | 64,926 | — | 4,074 | 2,354 | — | 71,354 | ||||||||||||||||||
Balances at December 31, 2009 | 184,726 | — | 11,876 | 6,190 | — | 202,792 | ||||||||||||||||||
Depreciation and amortization | 156,907 | — | 11,511 | 5,427 | — | 173,845 | ||||||||||||||||||
Retirement | (60 | ) | — | — | — | — | (60 | ) | ||||||||||||||||
Effect for variation in the presentation currency | 184,726 | — | 11,876 | 6,190 | — | 202,792 | ||||||||||||||||||
Balances at December 31, 2010 | 526,299 | — | 35,263 | 17,807 | — | 579,369 | ||||||||||||||||||
Total net cost at December 31, 2010 | 936,398 | 338,495 | 59,014 | 27,838 | 21,913 | 1,383,809 | ||||||||||||||||||
Total net cost at December 31, 2009 | 433,163 | 70,760 | 30,870 | 9,862 | 26,045 | 570,700 | ||||||||||||||||||
During the years ended December 31, 2010 and 2009, the Company made additions to production assets and construction in progress for approximately US$101,799 thousands and US$81,425 thousands (Bs.437,733 thousands and Bs.175,062 thousands), respectively. |
S-84
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
During 2010 and 2009, the Company assessed asset impairment, taking into account new market and business conditions, and determined that there was no evidence of impairment of production assets. |
At December 31, 2010 and 2009, accruals and other payables include US$2,043 thousands and US$3,603 thousands (Bs.8,782 thousands and Bs.7,745 thousands), respectively, in respect of the accrual for asset retirement obligations (See Note 9). |
The balance of construction in progress mainly comprises investment projects for exploration and production activities related to drilling, maintenance, electrical systems, pipelines, well reconditioning and adaptation, expansion and infrastructure aimed at maintaining production capacity and adapting the infrastructure to production levels set out in the Corporation’s business plan. At December 31, 2010 and 2009, the balance of construction in progress for investments related to the aforementioned activities amounts to approximately US$78,755 thousands and US$32,912 (Bs.338,647 thousands and Bs.70,760 thousands). |
The movement of the accrual for asset retirement obligations at December 31 is shown below (in thousands): |
U.S. Dollars | Bolivars | |||||||
Balance at December 31, 2008 | 19,174 | 41,224 | ||||||
Change on estimation | 3,603 | 7,746 | ||||||
Financial cost | 1,639 | 3,524 | ||||||
Balance at December 31, 2009 | 24,416 | 52,494 | ||||||
Change on estimation | 2,043 | 8,785 | ||||||
Financial cost | 3,339 | 14,358 | ||||||
Effect for variation in the presentation currency | — | 52,494 | ||||||
Balance at December 31, 2010 | 29,798 | 128,131 | ||||||
During 2010, Company management reviewed, based on new information, estimates on assumptions used for calculating the provision for abandonment costs. |
At December 31, 2010 and 2009, the variation of the estimation in of the provision for well abandonment cost of US$2,043 thousands and US$3,603 thousands (Bs.8,782 thousands and Bs.7,745 thousands) is included in the balance of property, plant and equipment (See Note 8). The Petrodelta, S.A. business plan as of December 31, 2010, contemplates the realization of hydrocarbons drilling and production activities until the year 2027; therefore, the accrual for asset retirement obligations was calculated based on the disbursements for this concept during this period. |
S-85
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Prepaid expenses and other assets comprise the following (in thousands): |
December 31, | ||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||
Prepaid insurance | 293 | 458 | 1.260 | 984 | ||||||||||||
Prepaid services | 72 | 62 | 310 | 134 | ||||||||||||
Prepaid rent | 42 | 39 | 182 | 84 | ||||||||||||
407 | 559 | 1,752 | 1,202 | |||||||||||||
A summary of inventories is shown below (in thousands): |
December 31, | ||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||
Materials and supplies, net | 30,093 | 33,586 | 129,400 | 72,210 | ||||||||||||
30,093 | 33,586 | 129,400 | 72,210 | |||||||||||||
Less: Materials and supplies classified under other non-current assets (see Note 8) | 5,096 | 12,114 | 21,913 | 26,045 | ||||||||||||
24,997 | 21,472 | 107,487 | 46,165 | |||||||||||||
Accounts receivable comprise the following (in thousands): |
December 31, | ||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||
Related parties (see Note 21) | 499,313 | 361,137 | 2,147,046 | 776,445 | ||||||||||||
Current portion of recoverable tax credits (see Note 7 — (k) and 19) | 5,381 | 7,169 | 23,139 | 15,413 | ||||||||||||
Other | 1,662 | 673 | 7,145 | 1,447 | ||||||||||||
506,356 | 368,979 | 2,177,331 | 793,305 | |||||||||||||
During the years ended December 31, 2010 and 2009, the Company offset accounts receivables and payables between PDVSA and its affiliates, including CVP with the Company in the amounts approximately of US$281 million and US$419 million, respectively (See Note 21): |
S-86
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Cash and cash equivalent comprises the following (in thousands): |
December 31, | ||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||
Cash on hand | 5 | 3 | 22 | 6 | ||||||||||||
Cash at banks | 3,460 | 3,059 | 14,878 | 6,577 | ||||||||||||
3,465 | 3,062 | 14,900 | 6,583 | |||||||||||||
Capital stock | ||
At December 31, 2010 and 2009, the Company’s nominal capital stock is represented by 1,500,000 common shares, fully authorized and paid in, with a par value of US$4.65 each (Bs 10 each). | ||
The Company’s capital stock is divided into two types of shares: Class “A” and Class “B” shares. Only the Venezuelan government or Venezuelan state-owned companies can own Class “A” shares. In October 2007, when the Company was incorporated, shareholders made an initial capital contribution of approximately Bs 1,000 thousands (US$465,000). Capital stock has been fully subscribed and paid in as follows: |
Share | ||||||||||||||||||
Type of | Number of | of | ||||||||||||||||
Shareholders | shares | shares | US$ | Bs. | equity | |||||||||||||
Corporación Venezolana del Petróleo, S.A. (CVP) | A | 900,000 | 4,186,047 | 9,000,000 | 60 | % | ||||||||||||
HNR Finance, B.V. (HNR Finance) | B | 600,000 | 2,790,698 | 6,000,000 | 40 | % | ||||||||||||
1,500,000 | 6,976,745 | 15,000,000 | 100 | % | ||||||||||||||
Contributions for future capital increases | ||
In November 2007, the shareholders made contributions for future capital increases of approximately US$6,512 thousands, equivalent to approximately Bs 14,000 thousands. In August 2008, this contribution was capitalized in compliance with Article No. 1, Paragraph 1.4 of the Agreement for Conversion into a Mixed Company. | ||
Legal reserve | ||
Venezuelan companies are required to set aside a legal reserve. According to Venezuelan Law, the legal reserve is not available for dividend distribution. |
S-87
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
During 2008, the Company has set aside a legal reserve of approximately US$651 thousands, equivalent to Bs.1,400 thousands, equivalent to 10% of capital stock. | ||
Deferred tax asset equity reserve | ||
In June 2009, CVP issued instructions to all mixed companies regarding the accounting for deferred tax assets. The mixed companies have been instructed to set up a reserve within the equity section of the balance sheet for deferred tax assets. The setting up of the reserve had no effect on the Company financial position, results of operations or cash flows. However, the new reserve reduces the amount of reserves available to pay dividends in the future. Changes in the deferred tax asset are recorded in appropriation to (transfer from) other reserves. | ||
On August 2009, the Board of Directors of the Company approved the creation of the deferred tax asset equity reserve with retained earnings accumulated to end of June 2009 for US$116,273 thousands (Bs.249,987 thousands). At December 31, 2010 and 2009, management has recorded as equity reserve and amount equal to the balance of deferred tax asset at that date equivalent to US$58,696 thousands and US$141,245 thousands (Bs.252,394 thousands and Bs.303,676 thousands) respectively (see Note 7-f), which has been approved by the Board of Directors of the Company. | ||
Share premium | ||
The share premium is in respect of contributions of fixed assets and inventories made by shareholders in conformity with the Agreement for Conversion into a Mixed Company, whose value exceeds the par value of common shares issued. At December 31, 2010 and 2009, the share premium amounts to approximately US$212,451 thousands, equivalent to approximately Bs.456,770 thousands, included in equity. | ||
Class “A” share premiums are in respect of fixed assets contributed by CVP. The value of this share premium amounts to approximately US$191,206 thousands, equivalent to approximately Bs.411,093 thousands, pursuant to Exhibit H of the Agreement for Conversion into a Mixed Company. | ||
Class “B” share premiums are in respect of fixed assets and inventories contributed by HNR Finance. The value of this share premium amounts to approximately US$21,245 thousands, equivalent to approximately Bs.45,677 thousands, pursuant to Exhibit G of the Agreement for Conversion into a Mixed Company. | ||
In conformity with the Company’s bylaws, in case of Company liquidation, all assets will be transferred only to the Class “A” shareholder. | ||
Dividends | ||
On May 22, 2008, the shareholders resolved to pay dividends of US$181,325 thousands, equivalent to Bs.389,846 thousands, out of retained earnings as of December 31, 2007. | ||
On August 28, 2008, the shareholders resolved to pay dividends in advance based on retained earnings as the end of June 2008 of US$51,876 thousands, equivalent to Bs.111,533 |
S-88
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
thousands. The dividend in advance approved was paid to HNR Finance for its share in the Company in the amount of US$20,750 thousands, equivalent to Bs.44,612 thousands. At December 31, 2009 the Company decided to record the dividend in advance against retained earnings at the end of 2009, recording as dividends payable the unpaid portion to CVP for an amount of US$31,126 thousands equivalent to Bs.66,921 thousands. |
On August 4, 2010, the shareholders resolved to pay dividends based on retained earnings as of December 31, 2009 in the amount of US$30,550 thousands (Bs.131,365 thousands). The dividend approved was paid on October 2010 to HNR Finance for its share in the Company in the amount of US$12,220 thousands (Bs.52,546 thousands). At December 31, 2010 the portion of the dividend corresponding to CVP for US$18,330 thousands (Bs.8,819 thousands) is recorded in the statements of financial position as a dividend payable. |
In November 2010, the Board of Directors of the Company endorsed a proposal to declare and distribute dividends for the amount of US$30,550 thousands (Bs.131,365 thousands) approximately. This dividend is in process of approval by the shareholders of the Company in order to file the corresponding minute before the Registry of Commerce to proceed to recognize the liability in the statement of financial position (see Note 24). | ||
Effect for variation of the exchange rate in the presentation currency |
The statement of changes in equity expressed in bolivars for the year ended December 31, 2010, includes the following effect originated for the variation of the official exchange rate when converting the financial statements from U.S. Dollars, (functional currency) to bolivars (presentation currency), in conformity with IAS 21 (see note 3-b) (in thousands): |
Balances as of December 31, 2010 | ||||||||||||||||
Bolivars before | Bolivars after | |||||||||||||||
translation | translation | Translation | ||||||||||||||
U.S. Dollars | adjustment | adjustment | adjustment | |||||||||||||
Capital stock | 6,977 | 15,000 | 30,000 | 15,000 | ||||||||||||
Shares premium | 212,451 | 456,770 | 913,540 | 456,770 | ||||||||||||
Legal reserve and other reserves | 141,943 | 305,177 | 610,354 | 305,177 | ||||||||||||
Retained earnings | 70,729 | 152,068 | 304,136 | 152,068 | ||||||||||||
432,100 | 929,015 | 1,858,030 | ||||||||||||||
Translation adjustment | 929,015 | |||||||||||||||
At the Board of Director meeting dated 10 March 2011 it was approved the proposal to submit for consideration to the Shareholders the distribution of the cumulative translation adjustment account to the different accounts of the equity (See Note 24). |
(15) | Accounts Payable |
Accounts payable comprise the following (in thousands): |
S-89
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
December 31, | ||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||
Trade | 21,022 | 35,021 | 90,395 | 75,295 | ||||||||||||
Related parties (see Note 21) | 31,073 | 70,311 | 133,614 | 151,169 | ||||||||||||
Total | 52,095 | 105,332 | 224,009 | 226,464 | ||||||||||||
Foreign currency and liquidity risk exposure in respect of accounts payable to suppliers is shown in Note 19. |
(16) | Accruals and Other Payables |
Accruals and other payables at December 31 comprise the following: |
December 31, | ||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||
Royalties | 30,842 | 49,277 | 132,621 | 105,945 | ||||||||||||
Provision for abandonment cost (See Note 9) | 29,798 | 24,416 | 128,131 | 52,494 | ||||||||||||
Provision for retirement benefits | 8,444 | 9,184 | 36,309 | 19,746 | ||||||||||||
Endogenous and social development | 3,922 | 5,728 | 16,865 | 12,315 | ||||||||||||
Antidrug National Fund | 7,418 | 6,392 | 31,897 | 13,743 | ||||||||||||
Science and Technology (LOCTI) | 4,583 | — | 19,707 | — | ||||||||||||
Other | 124,645 | 93,466 | 535,974 | 200,952 | ||||||||||||
209,652 | 188,463 | 901,504 | 405,195 | |||||||||||||
Less: Non-current portion of accruals and other payables | 38,237 | 33,600 | 164,419 | 72,240 | ||||||||||||
Short-term portion | 171,415 | 154,863 | 737,085 | 332,955 | ||||||||||||
At December 31, 2010 and 2009, included as non-current liabilities: a) U.S.$29.798 thousands and US$24,416 thousands, (Bs.128,129 thousands and Bs.52,492 thousands), in respect of the provision for abandonment cost for retirement obligations for exploration and production assets. Asset retirement costs and obligations related to the main structures used in drilling activities were not estimated because these assets have an indefinite useful life as a result of maintenance and major repairs and no information is available to reasonably determine their retirement date; and b) US$8.439 thousands and US$9,184 thousands, (Bs.36,286 thousands and Bs.19,746 thousands), as provision for retirement benefits for personnel assigned to the Company. Retirement benefits were adjusted during 2009 when PDVSA completed an actuarial study for their employee pension and retirement plan. At December 31, 2010, PDVSA sent a new statement for the liability |
S-90
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
according to the actuary report. The Company has analyzed demographic and financial data, considers that it reasonably reflects the liability for such concept and adjusted the obligation at the date of the statements of financial position. This pension and retirement plan covers all PDVSA employees and mixed companies payroll. Pension cost is not tax deductible until future periods when the pension is settled in cash. The Company is not required to reimburse the pension costs to PDVSA until PDVSA pays. |
Additionally, at December 31, 2010 and 2009, accruals and other payables include the accruals in respect of drilling services and infrastructure totaling US$61.231 thousands and US$47,892 thousands (Bs.263,293 thousands and Bs.102,968 thousands), respectively. |
Below are the movements of accruals and other payables during the year 2010 (in thousands): |
Balance at | Balance at | Long- | ||||||||||||||||||||||
December | December | Current | term | |||||||||||||||||||||
31, 2009 | Increase | Decrease | 31, 2010 | portion | portion | |||||||||||||||||||
U.S. Dollars | ||||||||||||||||||||||||
Royalties | 49,277 | 217,760 | (236,195 | ) | 30,842 | 30,842 | — | |||||||||||||||||
Provision for abandonment cost (See Note 9) | 24,416 | 5,382 | — | 29,798 | — | 29,798 | ||||||||||||||||||
Provision for retirement benefits | 9,184 | 3,852 | (4,592 | ) | 8,444 | 5 | 8,439 | |||||||||||||||||
Endogenous and social development | 5,728 | 1,059 | (2,865 | ) | 3,922 | 3,922 | — | |||||||||||||||||
Antidrug National Fund | 6,392 | 4,222 | (3,196 | ) | 7,418 | 7,418 | — | |||||||||||||||||
Science and Technology (LOCTI) | — | 4,583 | — | 4,583 | 4,583 | — | ||||||||||||||||||
Other | 93,466 | 51,833 | (20,654 | ) | 124,645 | 124,645 | — | |||||||||||||||||
Total accruals and other payables | 188,463 | 288,691 | (267,502 | ) | 209,652 | 171,415 | 38,237 | |||||||||||||||||
Effect for | ||||||||||||||||||||||||||||
variation in | ||||||||||||||||||||||||||||
Balance at | the | Balance at | ||||||||||||||||||||||||||
December | presentation | December | Current | Long-term | ||||||||||||||||||||||||
31, 2009 | currency | Increase | Decrease | 31, 2010 | portion | portion | ||||||||||||||||||||||
Bolivars | ||||||||||||||||||||||||||||
Royalties | 105,945 | 105,945 | 936,369 | (1,015,638 | ) | 132,621 | 132,621 | — | ||||||||||||||||||||
Provision for abandonment cost (See Note 9) | 52,494 | 52,494 | 23,143 | — | 128,131 | — | 128,131 | |||||||||||||||||||||
Provision for retirement benefits | 19,746 | 19,746 | 16,563 | (19,746 | ) | 36,309 | 21 | 36,288 | ||||||||||||||||||||
Endogenous and social development | 12,315 | 12,315 | 4,554 | (12,319 | ) | 16,865 | 16,865 | — | ||||||||||||||||||||
Antidrug National Fund | 13,743 | 13,743 | 18,154 | (13,743 | ) | 31,897 | 31,897 | — | ||||||||||||||||||||
Science and Technology (LOCTI) | — | — | 19,707 | — | 19,707 | 19,707 | — | |||||||||||||||||||||
Other | 200,952 | 200,952 | 222,884 | (88,814 | ) | 535,974 | 535,974 | — | ||||||||||||||||||||
Total accruals and other payables | 405,195 | 405,195 | 1,241,374 | (1,150,260 | ) | 901,504 | 737,085 | 164,419 | ||||||||||||||||||||
(17) | Operational expenses |
Below is a summary of operational expenses incurred by the Company (in thousands): |
S-91
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Years ended December 31, | ||||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||||||||||
Crude and gas operations | 34,120 | 20,340 | 58,940 | 146,716 | 43,731 | 126,721 | ||||||||||||||||||
Crude transportation | 12,220 | 11,120 | 8,630 | 52,546 | 23,908 | 18,555 | ||||||||||||||||||
Others | 7,319 | 16,851 | 10,039 | 31,472 | 36,230 | 21,583 | ||||||||||||||||||
53,659 | 48,311 | 77,609 | 230,734 | 103,869 | 166,859 | |||||||||||||||||||
(18) | Financial income and expenses |
Financial income and expenses comprised the following (in thousands): |
December 31st, | ||||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||||||||||
Financial income: | ||||||||||||||||||||||||
Gain on variation of exchange rate | 84,439 | — | — | 363,088 | — | — | ||||||||||||||||||
Other financial income | 9 | 3 | 268 | 38 | 7 | 577 | ||||||||||||||||||
84,448 | 3 | 268 | 363,126 | 7 | 577 | |||||||||||||||||||
Financial expenses | — | — | ||||||||||||||||||||||
Adjustment to net realizable value on financial assets (See Note 7-k) | 3,951 | 1,792 | — | 16,989 | 3,853 | — | ||||||||||||||||||
Financial cost transferred from related party | 19,475 | — | — | 83,742 | — | — | ||||||||||||||||||
Financial cost on provision for asset retirement obligations (See Note 9) | 3,339 | 1,639 | 2,344 | 14,358 | 3,524 | 5,040 | ||||||||||||||||||
Other financial expenses | 2 | 8 | 27 | 9 | 17 | 58 | ||||||||||||||||||
26,767 | 3,439 | 2,371 | 115,098 | 7,394 | 5,098 | |||||||||||||||||||
Gain on variation of exchange rate: |
On January 8, 2010, the Ministry of Finance and BCV published Exchange Agreement No. 14, in the Official Gazette No. 39.342, which went into effect January 11, 2010. This Exchange Agreement modified the official exchange rate for the purchase and sale of foreign currency denominated in U.S. Dollars. Therefore, all transactions and balances in Bolivars were converted to U.S. Dollars as per the new exchange rate, resulting in a net gain for the variation effect in the |
S-92
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
exchange rate due to the fact of maintaining a net liability monetary position in bolivars at the date when the variation of the exchange rate went into effect (see Note 4) | ||
Financial cost transferred from related party |
In accordance with Foreign Exchange Agreement 9, published in Official Gazette 38,318, dated November 21, 2005, currencies from the export of hydrocarbons that the Company sells PDVSA, must be sold to the BCV, except for those to be used at activities performed by PDVSA pursuant to the Amendment to the BCV Law, which compels the Company to sell to the BCV only the cash flows in currencies, other than local currencies, required to meet its obligations in bolivars. As of January 11, 2010, payment of those transactions with the BCV was made at the exchange rates of Bs.4.2893 and Bs.2.5935 per U.S. Dollar, in conformity with the rates established by the BCV for payment of sale transactions under the Foreign Exchange Agreement 14 (See Note 4). During the year 2010, the average exchange rate on those transactions was Bs.3.61 per U.S. Dollar, because of this PDVSA had recorded a financial expense for the difference between this average exchange rate and the official exchange rate. |
As a result of PDVSA paying, with resources from the sale of crude and gas, in local and foreign currency the liabilities of the Company for the services incurred as well as payroll related obligations assigned by PDVSA (See Note 21), during the year ended December 31, 2010 the Company recorded US$19,475 thousands (Bs.83,743 thousands) corresponding to its share for the difference in the average exchange rate mentioned before of Bs.3.61 and the official exchange rate of Bs.4.30 (See Note 4). |
(19) | Financial Instruments |
Credit Risk | ||
Exposure to Credit Risk |
The book value of financial assets represents the highest level of credit risk exposure. A breakdown is shown below (in thousands): |
December 31, | ||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||
Accounts receivable (Note 12) | 499,313 | 361,137 | 2,147,046 | 776,445 | ||||||||||||
Recoverable tax credits (See Note 7) | 13,453 | 17,922 | 57,849 | 38,532 | ||||||||||||
Accounts receivable other (See Note 12) | 1,662 | 673 | 7,147 | 1,447 | ||||||||||||
Cash and cash equivalents | 3,465 | 3,062 | 14,900 | 6,583 | ||||||||||||
517,893 | 382,794 | 2,226,942 | 823,007 | |||||||||||||
S-93
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Aging of the account receivables are shown below (in thousands): |
December 31, | ||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||
Under 30 days | 206,410 | 136,755 | 887,563 | 294,023 | ||||||||||||
Between 31 and 180 days | 260,375 | 113,666 | 1,119,613 | 244,382 | ||||||||||||
Between 180 days and one year | 32,528 | 109,186 | 139,870 | 234,750 | ||||||||||||
More than one year | — | 1,530 | — | 3,290 | ||||||||||||
499,313 | 361,137 | 2,147,046 | 776,445 | |||||||||||||
Liquidity risk |
Maturity of financial liabilities, including estimated interest payments and excluding the impact of offset agreements, is shown below (in thousands): |
Contractual cash | ||||||||||||||||||||||||||||||
Book value | flows | 6 months or less | ||||||||||||||||||||||||||||
Non-derivative financial liabilities | ||||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
U.S. Dollars | ||||||||||||||||||||||||||||||
Accounts payable to suppliers (See Note 15) | 21,022 | 35,021 | 21,022 | 35,021 | 21,022 | 35,021 | ||||||||||||||||||||||||
Bolivars | ||||||||||||||||||||||||||||||
Accounts payable to suppliers (See Note 15) | 90,395 | 75,295 | 90,395 | 75,295 | 90,395 | 75,295 | ||||||||||||||||||||||||
Foreign Currency Risk |
Petrodelta, S.A. has the following monetary assets and liabilities denominated in currencies other than the U.S. Dollar, which were converted into U.S. Dollars at the exchange rate in effect at the statements of financial position (in thousands): |
December 31, | ||||||||
2010 | 2009 | |||||||
Monetary assets: | ||||||||
Bolivars | 86,991 | 391,383 | ||||||
86,991 | 391,383 | |||||||
Monetary liabilities: | ||||||||
Bolivars | 1,423,259 | 691,588 | ||||||
1,423,259 | 691,588 | |||||||
Net monetary liability position | (1,336,268 | ) | (300,205 | ) | ||||
S-94
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
The year-end exchange rate, the average exchange rate for the year and the interannual increases in the exchange rate and the Consumer Price Index (CPI), as published by BCV, were as follows: |
December 31, | ||||||||
2010 | 2009 | |||||||
Exchange rate at year end (Bs./US$1) | 4.30 | 2.15 | ||||||
Average exchange rate for the year (Bs./US$1) | 4.30 | 2.15 | ||||||
Interannual increase in the CPI (%) | 27.18 | 25.06 | ||||||
Fair Value of Financial Instruments |
The following estimated amounts do not necessarily reflect the amounts at which the instruments could be exchanged in the current market. The use of different market assumptions and valuation methods can significantly affect the estimated fair values. The bases for determining the fair value are disclosed in Note 5 (in thousands): |
December 31, | December 31, | |||||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||
Book | Fair | Book | Fair | Book | Book | Fair | ||||||||||||||||||||||||||
value | value | value | value | value | Fair value | value | value | |||||||||||||||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Accounts receivable | 499,313 | 499,313 | 361,137 | 361,137 | 2,147,046 | 2,147,046 | 776,445 | 776,445 | ||||||||||||||||||||||||
Recoverable tax credits | 17,404 | 13,453 | 19,714 | 17,922 | 74,837 | 57,849 | 38,532 | 38,532 | ||||||||||||||||||||||||
Accounts receivable other | 1,662 | 1,662 | 673 | 673 | 7,147 | 7,147 | 1,448 | 1,448 | ||||||||||||||||||||||||
Cash and cash equivalents | 3,465 | 3,465 | 3,062 | 3,062 | 14,900 | 14,900 | 6,583 | 6,583 | ||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Accounts payable to suppliers | 21,022 | 21,022 | 35,021 | 35,021 | 90,395 | 90,395 | 75,295 | 75,295 | ||||||||||||||||||||||||
Other liabilities (included in accruals and other payables) | 171,415 | 171,415 | 154,863 | 154,863 | 737,085 | 737,085 | 332,955 | 332,955 | ||||||||||||||||||||||||
Accounts and dividends payables to shareholders and related companies | 49,403 | 49,403 | 101,437 | 101,437 | 212,433 | 212,433 | 218,090 | 218,090 | ||||||||||||||||||||||||
(20) | Commitments and Contingencies |
At December 31, 2010 and 2009 the Company has not set aside a provision for litigations and other claims. Should the outcome of existing lawsuits and claims be unfavorable to the Company, it could have a material adverse effect on its results of operations. Although it is not possible to predict the outcome, Company management, based in part on the opinion of its legal advisors, does not believe it is likely that losses related to the aforementioned legal procedures will exceed recognized estimated amounts or generate significant amounts that could affect the Company’s financial position or results of operations. |
S-95
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Compliance with Environmental Regulations |
The subsidiaries of CVP are subject to different environmental laws and regulations which may require significant expenditures to modify facilities and prevent or remedy the environmental effects from waste disposal and spills of pollutants. |
Petrodelta, S.A. and its parent company CVP are taking steps to prevent environmental risks, protect employee health and preserve the integrity of their facilities. |
Agreements with the Organization of Petroleum Exporting Countries (OPEC) |
The Bolivarian Republic of Venezuela is a member of OPEC, an organization mainly dedicated to establishing agreements to maintain stable crude oil prices by setting production quotas. To date, the reduction in crude oil production resulting from changes in the production quotas set by OPEC and price fluctuations has not significantly affected the Company’s results of operations, cash flows or financial results. |
(21) | Related Party Transactions |
Petrodelta, S.A. considers its shareholders and related subsidiaries and affiliates, Company directors and executives, as well as other governmental institutions, as related parties. | ||
A summary of transactions and balances with related parties is shown below (in thousands): |
December 31, | ||||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
Dólares | Bolívares | |||||||||||||||||||||||
Activities for the year: | ||||||||||||||||||||||||
Crude oil and natural gas sales | 607,586 | 458,251 | 474,619 | 2,612,621 | 985,240 | 1,020,431 | ||||||||||||||||||
Operating expenses | 17,544 | 35,442 | 21,298 | 75,439 | 76,200 | 45,791 | ||||||||||||||||||
General, administrative and selling expenses | 3,868 | 6,589 | 3,506 | 16,632 | 14,167 | 7,538 | ||||||||||||||||||
Royalties (See Note 7) | 183,076 | 137,925 | 149,605 | 787,227 | 296,539 | 321,651 | ||||||||||||||||||
Reimbursement of expenses | 235,634 | 149,058 | 272,852 | 1,013,326 | 320,475 | 586,632 | ||||||||||||||||||
Balances at the end of the year: | ||||||||||||||||||||||||
Accounts receivable (See Note 12) | 499,313 | 361,137 | 257,292 | 2,147,049 | 776,445 | 553,178 | ||||||||||||||||||
Dividends paid to Shareholders (See Note 14) | 43,346 | — | 20,750 | 186,388 | — | 44,612 | ||||||||||||||||||
Accounts payable to Shareholder B(See Note 15) | 1,499 | 4,060 | 2,327 | 6,446 | 8,729 | 5,003 | ||||||||||||||||||
Dividends payable- Shareholder A (See Note 14) | 18,330 | 31,126 | — | 78,819 | 66,921 | — | ||||||||||||||||||
Accounts payable to PDVSA (See Note 15) | 29,574 | 66,251 | 78,241 | 127,168 | 142,440 | 168,218 | ||||||||||||||||||
S-96
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
As of April 2006, due to the migration of operating agreements to mixed companies, PDVSA Petróleo signed purchase and sale agreements with these companies, which set out that mixed companies will notify PDVSA Petróleo of the estimated volume of hydrocarbons expected to be delivered the following month. PDVSA Petróleo must pay the mixed companies for delivered volumes, net of volumes for royalties in kind and paid to the Venezuelan government. | ||
In conformity with the terms and conditions of the agreements, CVP mixed companies agree to sell and deliver to PDVSA Petróleo, and the latter agrees to purchase and receive from these mixed companies, crude oil and natural gas produced in the delimited areas that are not used for primary activities or for payment of royalties in kind to the Venezuelan government. | ||
Crude oil delivered from the Petrodelta fields to PDVSA is priced with reference to Merey 16 published prices, weighted for different markets and adjusted for variations in gravity and sulphur content, commercialization costs and distortions that may occur given the reference price and prevailing market conditions. Market prices for crude oil of the type produced in the fields operated by Petrodelta averaged approximately US$70.57, US$57.62 and US$84.52 per barrel for the year ended December 31, 2010, 2009 and 2008, respectively. | ||
During the years ended December 31, 2010, 2009 and 2008, the Company sold crude oil and natural gas to PDVSA Petróleo for US$607,586 thousands, US$458,251 thousands and US$474,619 thousands (Bs.2,612,621 thousands, Bs.985,239 thousands and Bs.1,020,431 thousands), respectively, included in the statements of comprehensive income under Income. At December 31, 2010, 2009 and 2008, the statement of financial position includes US$499.313 thousands, US$361,137 thousands and US$257,292 thousands (Bs.2,147,049 thousands, Bs.776,445 thousands and Bs.553,178 thousands) of accounts receivable in this connection. | ||
During 2010, 2009 and 2008, PDVSA Petróleo charged Petrodelta, S.A. US$246 million, US$278 million and US$370 million (Bs.1,197 million, Bs.561 million and Bs.798 million), respectively, for labor and other costs, taxes, royalties, cash advances, dividends, included in general, administrative and selling expenses and operational expenses. | ||
Certain Company directors hold key positions in other related entities; some of their attributions include influencing the operational and financial policies of these entities. | ||
At December 31, 2010 and 2009, transactions with related parties do not necessarily reflect the results that would have been obtained had these transactions been held with third parties. | ||
At a Board of Directors’ Meeting in December 11, 2008, it was resolved to offset receivables and payables with PDVSA and its affiliates for the amount if US$329.3 million (Bs.708 million). In this regard, it was established that 75% of accounts receivable and 100% of accounts payable and billed to PDVSA would be recorded with no interest charges. | ||
In February 26, 2009, July 3, 2009 and December 4, 2009, the Company’s Board of Directors approved the offsetting of accounts payable to PDVSA and its affiliates, including CVP, for royalties, taxes and operation expenditures in the amount of US$206.2 million, US$94.7 million and US$118.2 million (Bs.443.3 million, Bs.203.7 million and Bs.254.1 millions) respectively, against the receivable from PDVSA and its affiliates, including CVP, for oil and gas deliveries. |
S-97
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
In June 10, 2010, the Company’s Board of Directors approved the offsetting of accounts payable to PDVSA and its affiliates, including CVP, for 2010 royalties, taxes and operation expenditures in the amount of US$40 million (Bs.172 million) against the receivable from PDVSA and its affiliates, including CVP, for 2010 oil and gas deliveries. | ||
As a result, accounts payable in respect of reimbursement of capital costs and operating expenses were offset against accounts receivable in respect of estimated hydrocarbons extracted and transferred to PDVSA in accordance with the purchase sale agreement (See Note 24). |
(22) | Collective Labor Agreement |
On January 20, 2010 the Collective Labor Agreement was signed, valid for the period from October 1, 2009 thru October 1, 2011, among PDVSA and oil labor union (FUTPV) regarding the approval of the new labor contract and the impact on labor cost affecting mix companies. The Collective Labor Agreement establishes a salary raise and payroll and retirement benefits which has a significant impact on the Company’s payroll cost. The most significant impacts are: |
I. | A salary raise of Bs.35 daily which represents an increase of 80% of current salary. The increase shall be pay in two portions, the first of Bs.25 at the signing of the contract and the second of Bs.10 from January 1st, 2011. | ||
II. | An increase in the monthly amount for electronic food from Bs.1,300 to Bs. 1,700. | ||
III. | An increase in the retirement benefit from Bs. 1,000 to Bs. 1,600. | ||
IV. | The increase will be retroactively from October 1, 2009 and not from January 21, 2009, date which expired the prior contract, in compensation it was agreed a one-time bonus of Bs. 8.000 which has no effect in the severance benefits of employees. |
On October 11, 2007, PDVSA entered into a Collective Labor Agreement, effective through 2009, so improving salaries and labor benefits for staff in the contract payroll in Venezuela. Those liabilities resulting of the application of said Collective Labor Agreement are in full effect as from November 2007. |
(23) | Laws, Resolutions and Legal Contributions |
a) | Laws enacted under the Enabling Law | ||
On December 17, 2010, the National Assembly approved the Law Authorizing the President of the Republic to issue Decree-Laws. The Enabling law was published in the extraordinary Official Gazette No. 6.009 and covers a range of areas for a term of 18 months after publication thereof. Under this law, the authorization encompasses areas involving the transformation of government institutions, popular participation, as well as economic, social, financial, tax and energy matters. |
S-98
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
b) | Foreign Exchange Agreement 18 | ||
On June 4, 2010, Official Gazette 39,439 was published containing Foreign Exchange Agreement 18, which establishes that the BCV will be in charge of regulating the terms and conditions for the negotiation, in local currency, and through the system accorded for that purpose, of securities of the Bolivarian Republic of Venezuela, its decentralized entities or any other issuing body, whether they are issued or to be issued in foreign currency. | |||
c) | Ruling 001-2010 by National Antidrugs Office (Oficina Nacional Antidrogas or ONA) | ||
On February 11, 2010, Official Gazette 39,366 was published containing Ruling 001-2010, which establishes standards for the admissible discounts to the expense set forth under LOCTICSEP and its Regulation for payment corresponding to fiscal years 2006, 2007 and 2008. This ruling establishes that only the following payments made by taxpayers during fiscal years 2006, 2007 and 2008 may be subject to rebates: |
• | Conduction of projects for comprehensive social prevention and development. | ||
• | Expenses under non-reimbursable technical assistance agreements. | ||
• | Funding or performance of activities under comprehensive social prevention. |
d) | Foreign Exchange Agreement 15 | ||
On January 27, 2010, as a result of a material error, Foreign Exchange Agreement 15 was republished in Official Gazette 39,355, originally published in Official Gazette 39,349 dated January 19, 2010. This agreement contains new provisions and guidelines complementing the multiple exchange rate system created under Foreign Exchange Agreement 14 (See Note 4). The most relevant aspects of this agreement follow: |
• | As to the Value Added Tax (VAT), imports of goods and services are subject to the exchange rate of Bs.2.60 per U.S. Dollar, for the food, health, education, machinery and equipment and science and technology sectors; Bs.4.30 per U.S. Dollar will be used for other sectors. With regards to exports of goods and services, the applicable exchange rate is Bs.4.2893 per U.S. Dollar. | ||
• | In relation to customs, the applicable exchange rate is Bs.2.60 per U.S. Dollar for imports corresponding to the food, health, education, machinery and equipment and science and technology sectors; and Bs.4.30 per U.S. Dollar for all other imports. |
e) | Organic Law Reserving for the State Assets and Services Related to Primary Hydrocarbons Activities | ||
On May 7, 2009, Official Gazette No. 39,173 was published containing the Organic Law Reserving for the State Assets and Services Related to Primary Hydrocarbons Activities, which reserves for the Republic, as a result of its strategic condition, assets and services |
S-99
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
associated with the primary activities established under Organic Hydrocarbons Law to be performed by PDVSA or any of its subsidiaries. |
f) | Organic Law on Science and Technology and Innovation (LOCTI) | ||
On December 2010, the Partial Amendment to the Organic Law on Science and Technology and Innovation (LOCTI) was published. This amendment establishes that legal or private or publicly owned entities, domiciled in the Bolivarian Republic of Venezuela or abroad, performing economic activities within the national territory are under the obligation of paying on an annual basis an established percentage of their gross income from the previous year, in respect to their business area, as follows: |
• | One percent for privately owned enterprises operating in business areas subject to the Organic Law on Hydrocarbons and Gaseous Hydrocarbons, including mining, processing and distribution activities. | ||
• | Half percent for publicly owned companies if the business pursued is one of those listed in the Organic Law on Hydrocarbons and Gaseous Hydrocarbons including mining, processing and distribution activities. | ||
• | Half percent for any other business activity. |
As of December 31, 2010, CVP sent instructions to the Company to record its share according to the law for its obligation corresponding to the year ended December 2010 only. The provision recorded in the statements of financial position corresponding to the year ended December 31, 2010 amounts to US$4,583 thousands (Bs.19,705 thousands). For the year ended December 31, 2009 the Company received instructions from its shareholder CVP to grant exemption from paying the contribution since it will be PDVSA who will file on a consolidated basis the contribution established in this Law. Therefore, the Company has not make any provision in relation to the contribution corresponding to the year ended December 31, 2009, | |||
g) | Law for Special Contributions on Extraordinary International Hydrocarbon Market Prices | ||
On April 15, 2008, the Law for Special Contributions on Extraordinary International Hydrocarbon Market Prices was published in Official Gazette No. 38,910. Subsequently, Resolutions No. 151 and No. 195 of MPPEP were published in Official Gazette No. 38,939 of May 27, 2008 and Official Gazette No. 38,970 of July 10, 2008. This Law and its resolutions require entities that export or transport liquid hydrocarbons and hydrocarbon derivatives abroad to pay a special monthly contribution. The contribution will be equivalent to: a) 50% of the difference between the average monthly price of the Venezuelan crude oil basket and the threshold price of US$70 per barrel and b) 60% of the difference between the average |
S-100
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
monthly price of the Venezuelan crude oil basket and the threshold price over US$100 per barrel. This contribution shall be paid on every barrel of oil exported or transported abroad and shall be collected and paid monthly by MPPEP to FONDEN for execution of infrastructure development projects, production and social development projects aimed at strengthening Communal Power. This Law became effective on April 15, 2008. | |||
h) | Antidrug Organic Law (LOD) | ||
On September 15, 2010, the Antidrug Organic Law was published in Official Gazette No. 39,510. The LOD eliminates the Law on Narcotic and Psychotropic Substances (LOCTISEP) and its partial regulation published June 5, 1996 under Official Gazette No. 35,986. Among the significant changes are: |
- | Taxable base is changed, previously considered base on net profit and now establishes as taxable base current period operating income. | ||
- | Filing and payment of tribute is extended from 15 calendar days of the following taxable period, to 60 calendar days from the closing corresponding taxable period. | ||
- | In relation to sanctions, the law establishes: 1) failure to comply the contribution of 1%, a penalty equivalent to double the amount due, if re-occur the penalty will be 3 times the corresponding contribution due, and 2) for not complying the special contribution of 2%, same penalty, before was 60,000 tax units or suspension of business activities during 1 year in case of re-occurrence. | ||
- | In the prior law, donations made by persons or companies in favor of plans and programs established by the government in relation to drugs matter and approved by ONA, can be deducted for income tax purposes, previously approved by public document. In the new law, this last aspect is eliminated as a requisite for proceeding to deduct from income tax purposes. | ||
- | Incorporates an obligation by government agencies and institutions, as well as public and private companies that employ more than 50 workers, to provide labor to rehabilitated persons, under the programs of social inclusions. |
i) | Law on Narcotic and Psychotropic Substances (LOCTISEP) |
The Law on Narcotic and Psychotropic Substances was published in Official Gazette No. 38,287 on December 16, 2005. This Law repeals the previous Law of September 30, 1993 and requires all companies, public or private, with 50 or more employees to earmark 1% of their annual net income for social programs for the prevention of illegal drug consumption and traffic, one-half of which is to be set aside for child welfare protection programs. | |||
On May 31, 2006, the National Anti-Drug Agency (ONA) published an extension to the process for starting to make contributions according to the Law; therefore as of December 31, 2009 and 2008 no contribution has been made for this concept. | |||
In July 1, 2009, Presidential Decree No.6.776 was published in Official Gazette No. 39,211 where Partial Regulation of LOCTISEP was enacted, with the purpose to define and establish |
S-101
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
the guidelines, mechanism, modalities, forms and opportunities in which legal entities, public and private as mentioned in the Articles No.96 and No.97 of the Law, comply with the obligation to fund ONA the contributions established. | |||
In December 29, 2009 providence 007-2009 and 008-2009 were published in Official Gazette No. 39,336 whereas the National Anti-Drug Agency (ONA) establishes norms and procedures to collect, control and audit contributions by public and private companies. The providence among other things lay out the amount subject to the calculation set as taxable income and not net income applied in prior years. During the years ended December 31, 2010 and 2009, the Company recorded an expense of approximately US$4,813 thousands and US$3,336 thousands (Bs.20,697 thousands and Bs.7,173 thousands), respectively, in this connection, included net in the statements of comprehensive income for each year under general and administrative expenses. As a result of the change in the methodology used to calculate the contribution from applying the providence No. 007-2009, for the amount recorded during the year ended December 31, 2009 approximately US$1,082 thousands and US$168 thousands (Bs.2,327 thousands y Bs.362 thousands), correspond to 2008 and 2007, respectively. |
(24) | Subsequent events |
a) | During February 2011, CVP sent instructions to the Company to transfer the expense originated from the sale of foreign currency to the BCV by PDVSA for the difference in the average exchange rate of Bs.3.61 and the official exchange rate of Bs.4.30 (See Note 18). | ||
b) | During February 2011, the Company following instructions from its shareholder CVP proceeded to offset accounts receivables and payables between PDVSA and its affiliates, including CVP with the Company outstanding as of December 31, 2009 at the exchange rate prevailing as of this date, resulting in a netting of US$46 million (Bs.101 million). Additionally, in the same month and year, CVP sent instructions again to the Company to proceed and offset accounts receivables and payables between PDVSA and its affiliates, including CVP with the Company outstanding as of December 31, 2010, resulting in a netting of US$195 million (Bs.838 million). Both nettings have been recorded in the month of December of 2010, and are included in the statements of financial position as of December 31, 2010 and approved by the Board of Directors of the Company on February 23, 2011. | ||
c) | On February 23, 2011, providence No. 0001-2011 was published in the Official Gazette No. 39.622, establishing that labor matters related to Projects for Integral Prevention on Drug Consumption must be presented to the National Antidrug Fund (FONA). The providence also establishes timing and guidelines for responsible entities. |
(25) | Subsequent Events after the Date of Independent Accountants Opinion |
a) | On February 24, 2011, providence No. SNAT/2011-0009 from the National Integrated Service on Tributes and Customs Administration (SENIAT) was published in Official |
S-102
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Gazette No. 39,623 in which the current tax unit value was adjusted from Bs.65 to Bs.76. | |||
b) | At the Board of Director meeting dated 10 March 2011 it was approved the proposal to submit for consideration to the Shareholders the distribution of the cumulative translation adjustment account to the different accounts of the equity. The following table shows the amounts at December 31, 2010 of different components of equity with the distribution of the translation adjustment once the shareholders of the Company have approved it: |
Balances as of December 31, 2010 | ||||||||||||||||
Bolivars | ||||||||||||||||
before | Bolivars after | |||||||||||||||
translation | translation | Translation | ||||||||||||||
U.S. Dollars | adjustment | adjustment | adjustment | |||||||||||||
Capital stock | 6,977 | 15,000 | 30,000 | 15,000 | ||||||||||||
Share premium | 212,451 | 456,770 | 913,539 | 456,769 | ||||||||||||
Legal reserve and other reserves | ||||||||||||||||
Legal reserve | 698 | 1,500 | 3,000 | 1,500 | ||||||||||||
Deferred tax equity reserve | 58,696 | 252,394 | 252,394 | — | ||||||||||||
59,394 | 253,894 | 255,394 | 1,500 | |||||||||||||
Retained earnings: | ||||||||||||||||
Distributable retained earnings at December 31, 2009 | 122,728 | 71,984 | 527,730 | 455,746 | ||||||||||||
Total comprehensive income for the year 2010 | 77,683 | 334,035 | 334,035 | — | ||||||||||||
200,411 | 406,019 | 861,765 | ||||||||||||||
Equity | 479,233 | 1,131,683 | 2,060,698 | |||||||||||||
Translation adjustment not allocated | 929,015 | |||||||||||||||
c) | On March 10, 2011, the Board of Directors of the Company approved the issuance of the financial statements under International Financial Reporting Standards and submitted said financial statements to the Shareholders of the Company for approval purposes. |
(26) | Supplementary Information on Oil and Gas Exploration and Production Activities (unaudited) |
The following tables provide supplementary information on oil and gas exploration, development and production activities. All exploration and production activities are conducted mainly by CVP and Mixed Companies in Venezuela. |
S-103
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Table I — Crude Oil and Natural Gas Reserves | ||
All crude oil and natural gas reserves located in Venezuela are owned by the Bolivarian Republic of Venezuela. Crude oil and natural gas reserves are estimated by PDVSA and reviewed by the People’s Power Ministry for Energy and Oil using reserve criteria that are consistent with those prescribed by the American Petroleum Institute (API) of the United States of America. | ||
Proved reserves are the estimated quantities of crude oil and gas which, with reasonable certainty, are recoverable in future years from known deposits under existing economic and operating conditions. Due to the inherent uncertainties and limited nature of reservoir data, reserve estimates are subject to changes over time, as additional information becomes available. Proved reserves do not include additional volumes which may result from the extension of currently explored areas or from the application of secondary recovery processes not yet tested and determined to be economically feasible. | ||
Proved developed oil and gas reserves are the quantities that can be recovered from existing wells with existing equipment and methods. Proved undeveloped reserves are those volumes that are expected to be recovered from new wells on undrilled acreage or from existing wells. | ||
It is important to mention an increase for the year 2010 on extensions and discoveries of oil and gas proved reserves. The increase is due to a new revision to Petrodleta’s Business Plan for the period 2011-2027 elaborated for the year ended December 31, 2010. The new revision take into account a Base Case for Development with a much lower risk and a greater potential in reserves to be develop compared to the prior Business Plan and the reason lies in the success obtained from the wells testing and drilling programs executed during the period 2008-2010 in the new fields Temblador and El Salto. | ||
A summary of annual changes in proved crude oil and natural gas reserves is shown below: |
(a) | Conventional Crude Oil (in thousands of barrels) |
Years ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Proved developed and undeveloped reserves of conventional crude oil at January 1 | 206.823 | 214,658 | 220,163 | |||||||||
Revisions | — | — | — | |||||||||
Expansions and discoveries | 313.058 | — | — | |||||||||
Production | (8,561 | ) | (7,835 | ) | (5,505 | ) | ||||||
Proved developed and undeveloped reserves of conventional crude oil at December 31 | 511.320 | 206.823 | 214.658 | |||||||||
Proved developed reserves of conventional crude oil at December 31 (included on the previous amount) | 52.705 | 54.110 | 47.298 | |||||||||
At December 31, 2010, 2009 and 2008, certified reserves assigned to the Company amounted to 511.320 thousands, 206,823 thousands and 214.658 thousand barrels, respectively. |
S-104
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Production for the year ended December 31, 2010, 2009 and 2008 was 8.561 thousands, 7.835 thousands and 5.505 thousand barrels. |
(b) | Natural Gas Reserves (in millions of cubic feet) |
Years ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Proved developed and undeveloped reserves of natural gas at January 1 | 266.292 | 273,281 | 283,981 | |||||||||
Revisions | (2,592 | ) | — | |||||||||
Expansions and discoveries | 284.792 | — | — | |||||||||
Production | (2,204 | ) | (4,397 | ) | (10,700 | ) | ||||||
Proved developed and undeveloped reserves of natural gas at December 31 | 548.880 | 266,292 | 273,281 | |||||||||
Proved developed reserves of natural gas at December 31 (included on the previous amount) | 10,350 | 25,641 | 32,630 | |||||||||
Natural gas production is shown on the basis of actual volumes before the extraction of liquefiable hydrocarbons. | ||
Table II — Costs Incurred in Exploration and Development Activities | ||
Exploration costs include costs incurred from geological and geophysical activities, and drilling and equipping exploratory wells. The Company did not conduct exploration activities in the year 2010. Development costs include those for drilling and equipping development wells, enhanced recovery projects and facilities to extract, treat and store crude oil and natural gas. Annual costs, summarized below, include amounts both expensed and capitalized for the Company’s conventional crude oil reserves (In thousands): |
Conventional Crude | ||||||||||||||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
Development costs | 93,640 | 83,141 | 53,576 | 402,652 | 178,753 | 115,188 | ||||||||||||||||||
Total costs incurred from development activities | 93,640 | 83,141 | 53,576 | 402,652 | 178,753 | 115,188 | ||||||||||||||||||
Table III — Costs Recorded as Assets in Oil and Gas Production Activities | ||
Costs recorded as assets for oil and gas exploration and production activities, as well as the related accumulated depreciation and amortization at December 31 for PDVSA’s conventional and extra-heavy crude oil reserves are summarized below (In thousands): |
S-105
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Conventional Crude | ||||||||||||||||||||||||
U.S. Dollars | Bolivars | |||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
Assets used in production | 362,087 | 307,272 | 227,939 | 1,556,974 | 660,635 | 490,069 | ||||||||||||||||||
Equipment and facilities | 10,615 | 7,466 | 3,737 | 45,645 | 16,052 | 8,035 | ||||||||||||||||||
372,702 | 314,738 | 231,676 | 1,602,619 | 676,687 | 498,104 | |||||||||||||||||||
Accumulated Depletion, depreciation and amortization | (134,737 | ) | (94,322 | ) | (61,134 | ) | (579,369 | ) | (202,792 | ) | (131,438 | ) | ||||||||||||
Construction in progress | 78,755 | 32,912 | 30,946 | 338,646 | 70,760 | 66,534 | ||||||||||||||||||
Total net costs capitalized as assets | 316,720 | 253,328 | 201,488 | 1,361,896 | 544,655 | 433,200 | ||||||||||||||||||
Table IV — Results of Operations for Oil and Gas Production Activities for Each Year(In thousands): |
Conventional Crude | ||||||||||||||||||||||||
Years ended December 31 | ||||||||||||||||||||||||
U.S. Dollar | Bolivars | |||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
Net production income | ||||||||||||||||||||||||
Sales | 607.586 | 458.251 | 474.619 | 2.612.621 | 985.240 | 1.020.431 | ||||||||||||||||||
Production costs | (69.872 | ) | (59.152 | ) | (84.314 | ) | (300,450 | ) | (127.177 | ) | (181.275 | ) | ||||||||||||
Royalties | (218.819 | ) | (157.681 | ) | (225.167 | ) | (940.922 | ) | (339.014 | ) | (484.109 | ) | ||||||||||||
Depletion, depreciation and amortization | (39.166 | ) | (32.571 | ) | (24.778 | ) | (168,414 | ) | (70.028 | ) | (53.273 | ) | ||||||||||||
Results of operation before income Tax | 279,729 | 208,847 | 0140,360 | 1,202,835 | 449,021 | 301,774 | ||||||||||||||||||
Income tax | (189.780 | ) | (105.868 | ) | (69.374 | ) | (816.054 | ) | (227.616 | ) | (149.154 | ) | ||||||||||||
Results production operation | 89.949 | 102.979 | 70.986 | 386,781 | 221.405 | 152.620 | ||||||||||||||||||
Income from oil production is calculated at international market price as if all production were sold. | ||
Production costs are lifting costs incurred to operate and maintain productive wells and related facilities and equipment, including operating labor costs, materials, supplies, fuel consumed in operations and operating costs of natural liquid gas plants. |
S-106
Table of Contents
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements
Depreciation and amortization expenses relate to assets used in exploration and production activities. Income tax expense is computed using the statutory rate for the year. For these purposes, the results of production operations do not include finance costs and corporate overhead nor their associated tax effects. | ||
A summary of average per unit sale prices and production costs is shown below: |
Years ended December 31 | ||||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
Dólares | Bolívares | |||||||||||||||||||||||
Average sale price | ||||||||||||||||||||||||
Crude oil per barrel | 70.57 | 57.62 | 84.52 | 303.46 | 123.88 | 181.72 | ||||||||||||||||||
Natural gas per barrel | 1.54 | 1.54 | 1.54 | 6.62 | 3.31 | 3.31 | ||||||||||||||||||
Average production cost per BOE | 7.83 | 6,90 | 11.57 | 33.65 | 14.84 | 24.88 | ||||||||||||||||||
S-107