Report of Foreign Issuer (6-k)

Date : 11/14/2017 @ 2:43PM
Source : Edgar (US Regulatory)
Stock : Petroleo Brasileiro S.A.- Petrobras American Depositary Shares (PBR.A)
Quote : 9.74  -0.13 (-1.32%) @ 3:59PM
Petroleo Brasil share price Chart

Report of Foreign Issuer (6-k)

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 6-K

 

Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the

Securities Exchange Act of 1934

 

For the month of November, 2017

 

Commission File Number 1-15106

 

 

 

PETRÓLEO BRASILEIRO S.A. - PETROBRAS

(Exact name of registrant as specified in its charter)



Brazilian Petroleum Corporation - PETROBRAS

(Translation of Registrant's name into English)



Avenida República do Chile, 65 

20031-912 - Rio de Janeiro, RJ

Federative Republic of Brazil

(Address of principal executive office)


Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. 

 

Form 20-F ___X___ Form 40-F _______

 

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes _______ No___X____

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

INTERIM FINANCIAL

STATEMENTS

 

 

September 30, 2017and 2016 with

report of independent registered public

accounting firm

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

4

Interim Consolidated Statement of Financial Position

5

Interim Consolidated Statement of Income

6

Interim Consolidated Statement of Comprehensive Income

7

Interim Consolidated Statement of Cash Flows

8

Interim Consolidated Statement of Changes in Shareholders’ Equity

9

1. The Company and its operations

10

2. Basis of presentation of unaudited interim financial statements

10

3. The “Lava Jato (Car Wash) investigation” and its effects on the Company

10

4. Basis of consolidation

11

5. Summary of significant accounting policies

11

6. Cash and cash equivalents and Marketable securities

12

7. Trade and other receivables

13

8. Inventories

16

9. Disposal of Assets and other changes in organizational structure

16

10. Investments

20

11. Property, plant and equipment

21

12. Intangible assets

23

13. Impairment

24

14. Exploration and evaluation of oil and gas reserves

25

15. Trade payables

26

16. Finance debt

26

17. Leases

31

18. Related-party transactions

32

19. Provision for decommissioning costs

34

20. Taxes

35

21. Employee benefits (Post-Employment)

41

22. Shareholders’ equity

43

23. Sales revenues

44

24. Other income and expenses

45

25. Costs and Expenses by nature

46

26. Net finance income (expense)

46

27. Supplemental information on statement of cash flows

47

28. Segment information

48

29. Provisions for legal proceedings

51

30. Collateral for crude oil exploration concession agreements

61

31. Risk management

61

32. Fair value of financial assets and liabilities

66

33. Subsequent events

67

34. Information Related to Guaranteed Securities Issued by Subsidiaries

67

 

 

 

3


 

 

Report of Independent Regist ered Public Accounting Firm

 

The Shareholders and Board of Directors of

Petróleo Brasileiro S.A. - Petrobras

 

We have reviewed the interim consolidated statement of financial position of Petróleo Brasileiro S.A. - Petrobras and subsidiaries (the “Company”) as of September 30, 2017, and the related interim consolidated statements of income and comprehensive income for the three and nine months periods ended September 30, 2017, and the related interim consolidated statements of changes in shareholders’ equity and cash flows for the nine-month period ended September 30, 2017. These interim consolidated financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the interim consolidated financial statements referred to above for them to be in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

 

We draw attention to Note 3 of the interim consolidated financial statements, which describes that: i) no additional information has been identified through this date which could materially impact the estimation methodology adopted for the write off recorded on September 30, 2014; and ii) the internal investigations being conducted by outside legal counsel under the supervision of a Special Committee created by the Company and the investigation conducted by the Securities and Exchange Commission are still on going, nevertheless to date no additional impact to those already disclosed in the interim financial statements has been identified. We also draw attention to Note 29.4 of the interim consolidated financial statements which describes class actions filed against the Company, for which it is unable to make a reliable estimate of loss.

 

The consolidated financial statements of the Company as of and for the year ended December 31, 2016, were audited by other accountants whose report dated March 21, 2017, expressed an unqualified opinion on those consolidated financial statements. Such consolidated financial statements were not audited by us and, accordingly, we do not express an opinion or any form of assurance on the information set forth in the accompanying consolidated statement of financial position as of December 31, 2016. Additionally, the interim consolidated statements of income and comprehensive income for the three and nine months periods ended September 30, 2016, and the related interim consolidated statements of changes in shareholders’ equity and cash flows for the nine-month period ended September 30, 2016, were not reviewed or audited by us, and accordingly, we do not express an opinion or any form of assurance on them.

 

 

Rio de Janeiro, November 13, 2017

 

 

 

/s/

KPMG Auditores Independentes

 

 

 

 

 

 

KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça.

KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

 

4


Petróleo Brasileiro S.A. – Petrobras

 

Interim Consolidated Statement of Financial Position

September 30, 2017 and December 31, 2016

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

Assets

Note

09.30.2017

12.31.2016

 

Liabilities

Note

09.30.2017

12.31.2016

Current assets

 

 

 

 

Current liabilities

 

 

 

Cash and cash equivalents

6

23,495

21,205

 

Trade payables

15

5,981

5,762

Marketable securities

6

1,813

784

 

Finance debt

16

7,369

9,755

Trade and other receivables, net

7

5,216

4,769

 

Finance lease obligations

17.1

26

18

Inventories, net

8

8,160

8,475

 

Income taxes payable

20.1

363

127

Recoverable income taxes

20.1

483

602

 

Other taxes payable

20.1

3,906

3,628

Other recoverable taxes

20.1

2,010

1,900

 

Payroll and related charges

 

1,654

2,197

Advances to suppliers

 

131

166

 

Pension and medical benefits

21.1

897

820

Others

 

1,946

1,140

 

Others

 

2,049

2,104

 

 

43,254

39,041

 

 

 

22,245

24,411

Assets classified as held for sale

9.2

2,182

5,728

 

Liabilities related to assets classified as held for sale

9.2

244

492

 

 

45,436

44,769

 

 

 

22,489

24,903

 

 

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

Non-current liabilities

 

 

 

Long-term receivables

 

 

 

 

Finance debt

16

105,833

108,371

Trade and other receivables, net

7

5,051

4,551

 

Finance lease obligations

17.1

223

226

Marketable securities

6

232

90

 

Income taxes payable

20.2

931

-

Judicial deposits

29.2

4,715

3,999

 

Deferred income taxes

20.5

2,122

263

Deferred income taxes

20.5

3,190

4,307

 

Pension and medical benefits

21.1

23,477

21,477

Other tax assets  

20.1

3,285

3,141

 

Provisions for legal proceedings

29.1

3,826

3,391

Advances to suppliers

 

1,114

1,148

 

Provision for decommissioning costs

19

10,653

10,252

Others

 

3,325

3,184

 

Others

 

696

550

 

 

20,912

20,420

 

 

 

147,761

144,530

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

170,250

169,433

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

Investments

10

3,996

3,052

 

Share capital (net of share issuance costs)

22.1

107,101

107,101

Property, plant and equipment

11

180,171

175,470

 

Capital transactions

 

629

628

Intangible assets

12

3,232

3,272

 

Profit reserves

 

54,742

53,143

 

 

208,311

202,214

 

Accumulated other comprehensive (deficit)

22.2

(79,845)

(84,093)

 

 

 

 

 

Attributable to the shareholders of Petrobras

 

82,627

76,779

 

 

 

 

 

Non-controlling interests

 

870

771

 

 

 

 

 

Total equity

 

83,497

77,550

 

 

 

 

 

 

 

 

 

Total assets

 

253,747

246,983

 

Total liabilities and shareholder's equity

 

253,747

246,983

 

 

 

 

 

 

 

 

 

The notes form an integral part of these financial statements.

 

 

 

 

 

 

 

 

 

5


Petróleo Brasileiro S.A. – Petrobras

 

Interim Consolidated Statement of Income

September  30, 2017 and 2016

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

 

Note

Jan-Sep/2017

Jan-Sep/2016

3Q-2017

3Q-2016

 

 

 

 

 

 

Sales revenues

23

65,260

60,002

22,700

21,693

Cost of sales

 

(44,343)

(40,940)

(15,988)

(14,506)

Gross profit

 

20,917

19,062

6,712

7,187

 

 

 

 

 

 

Income (expenses)

 

 

 

 

 

Selling expenses

 

(3,308)

(3,037)

(1,339)

(1,027)

General and administrative expenses

 

(2,198)

(2,425)

(774)

(937)

Exploration costs

14

(494)

(1,333)

(213)

(572)

Research and development expenses

 

(412)

(424)

(134)

(151)

Other taxes

 

(1,367)

(454)

(321)

(188)

Impairment of assets

13

(110)

(5,122)

(46)

(4,710)

Other income and expenses

24

(1,374)

(5,536)

(1,427)

(3,003)

 

 

(9,263)

(18,331)

(4,254)

(10,588)

 

 

 

 

 

 

Income before finance income (expense), results in equity-accounted investments and income taxes

 

11,654

731

2,458

(3,401)

 

 

 

 

 

 

Finance income

 

857

811

234

366

Finance expenses

 

(5,678)

(5,221)

(1,653)

(1,900)

Foreign exchange gains (losses) and inflation indexation charges

 

(2,734)

(1,733)

(924)

(659)

Net finance income (expense)

26

(7,555)

(6,143)

(2,343)

(2,193)

 

 

 

 

 

 

Results in equity-accounted investments

10.1

524

169

138

(43)

 

 

 

 

 

 

Net income before income taxes

 

4,623

(5,243)

253

(5,637)

 

 

 

 

 

 

Income taxes

20.6

(2,800)

64

(49)

298

 

 

 

 

 

 

Net income for the period

 

1,823

(5,179)

204

(5,339)

 

 

 

 

 

 

Net income (loss) attributable to:

 

 

 

 

 

   Shareholders of Petrobras

 

1,596

(5,592)

83

(5,380)

   Non-controlling interests

 

227

413

121

41

 

 

 

 

 

 

Net income for the period

 

1,823

(5,179)

204

(5,339)

 

 

 

 

 

 

Basic and diluted earning (loss) per weighted-average of common and preferred share - in U.S. dollars

22.3

0.12

(0.43)

0.01

(0.41)

 

 

 

 

 

 

The notes form an integral part of these financial statements.

 

 

 

 

 

 

 

6


Petróleo Brasileiro S.A. – Petrobras

 

Interim Consolidated Statement of Comprehensive Income

September  30, 2017 and 2016

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

 

Jan-Sep/2017

Jan-Sep/2016

3Q-2017

3Q-2016

 

 

 

 

 

Net Income for the period

1,823

(5,179)

204

(5,339)

 

 

 

 

 

Items that may be reclassified subsequently to the statement of income:

 

 

 

 

Unrealized gains / (losses) on available-for-sale securities

 

 

 

 

Recognized in shareholders' equity

(8)

6

 

(8)

6

Unrealized gains / (losses) on cash flow hedge - highly probable future exports

 

 

 

 

Recognized in shareholders' equity

1,787

11,072

2,457

(674)

Reclassified to the statement of income

2,323

2,111

812

658

Deferred income tax

(1,398)

(4,483)

(1,112)

4

 

2,712

8,700

2,157

(12)

Unrealized gains on cash flow hedge - others

 

 

 

 

Recognized in shareholders' equity

5

(1)

3

 

5

(1)

3

Cumulative translation adjustments (*)

 

 

 

 

Recognized in shareholders' equity

1,299

9,834

2,141

(628)

Reclassified to the statement of income

37

1,428

1,428

 

1,336

11,262

2,141

800

 

 

 

 

 

Share of other comprehensive income in equity-accounted investments

 

 

 

 

Recognized in shareholders' equity

186

347

71

(8)

Reclassified to the statement of income

22

 

208

347

71

(8)

 

 

 

 

 

Total other comprehensive income:

4,248

20,314

4,374

783

 

 

 

 

 

Total comprehensive income

6,071

15,135

4,578

(4,556)

 

 

 

 

 

Comprehensive income attributable to:

 

 

 

 

Shareholders of Petrobras

5,847

14,709

4,450

(4,604)

Non-controlling interests

224

426

128

48

Total comprehensive income

6,071

15,135

4,578

(4,556)

 

 

 

 

 

(*) Includes US$ 13 (US$ 365 in the nine month period ended september 30, 2016) of cumulative translation adjustments in associates and joint ventures.

 

 

 

 

The notes form an integral part of these financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

7


Petróleo Brasileiro S.A. – Petrobras

Interim Consolidated Statement of Cash Flows

September 30, 2017 and 2016

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

 

Jan-Sep/2017

Jan-Sep/2016

Cash flows from Operating activities

 

 

Net income (loss) for the period

1,823

(5,179)

Adjustments for:

 

 

Pension and medical benefits (actuarial expense)

2,056

1,700

Results in equity-accounted investments

(524)

(169)

Depreciation, depletion and amortization

10,090

10,555

Impairment of assets (reversal)

110

5,122

Exploratory expenditures write-offs

225

966

Gains and losses on disposals/write-offs of assets

(1,635)

267

Foreign exchange, indexation and finance charges  

7,397

6,247

Deferred income taxes, net

1,468

(1,338)

Allowance (reversals) for impairment of trade and others receivables

635

479

Inventory write-down to net realizable value

67

305

Reclassification of cumulative translation adjustment and other comprehensive income

59

1,428

Revision and unwinding of discount on the provision for decommissioning costs

573

(514)

Gain on remeasurement of investment retained with loss of control  

(217)

 

 

 

Decrease (Increase) in assets

 

 

Trade and other receivables, net

(774)

801

Inventories

313

(300)

Judicial deposits

(580)

(493)

Other assets

(164)

(553)

Increase (Decrease) in liabilities

 

 

Trade payables

(82)

(1,411)

Other taxes payable

2,263

164

Pension and medical benefits

(620)

(491)

Other liabilities

(727)

1,620

Income taxes paid

(671)

(254)

Net cash provided by operating activities

21,085

18,952

Cash flows from Investing activities

 

 

Capital expenditures

(9,481)

(10,267)

Decrease in investments in investees

(43)

(120)

Proceeds from disposal of assets - Divestment

2,953

739

Divestment (Investment) in marketable securities

(923)

209

Dividends received

253

230

Net cash used in investing activities

(7,241)

(9,209)

Cash flows from Financing activities

 

 

Investments by non-controlling interest

(61)

2

Financing and loans, net:

 

 

Proceeds from financing

22,644

12,496

Repayment of principal

(28,565)

(20,925)

Repayment of interest

(5,468)

(5,308)

Dividends paid to non-controlling interests

(149)

(47)

Net cash used in financing activities

(11,599)

(13,782)

 

 

 

Effect of exchange rate changes on cash and cash equivalents

45

563

 

 

 

Net decrease in cash and cash equivalents

2,290

(3,476)

 

 

 

Cash and cash equivalents at the beginning of the year

21,205

25,058

 

 

 

Cash and cash equivalents at the end of the period

23,495

21,582

 

 

 

The notes form an integral part of these financial statements.

 

 

 

 

8


Petróleo Brasileiro S.A. – Petrobras

 

Interim Consolidated Statement of Changes in Shareholders’ Equity

September 30, 2017 and 2016

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

Share capital (net of share issuance costs)

 

Accumulated other comprehensive income (deficit) and deemed cost

Profit Reserves

 

 

 

 

 

Share Capital

Share issuance costs

Capital Transactions

Cumulative translation adjustment

Cash flow hedge - highly probable future exports

Actuarial gains (losses) on defined benefit pension plans

Other comprehensive income (loss) and deemed cost

Legal

Statutory

Tax incentives

Profit retention

Retained earnings

Shareholders' equity attributable to shareholders of Petrobras

Non-controlling interests

Total consolidated shareholders' equity

 

107,380

(279)

321

(71,220)

(20,288)

(7,362)

(1,293)

7,919

2,182

720

47,156

-

65,236

819

66,055

Balance at January 1, 2016

 

107,101

321

 

 

 

(100,163)

 

 

 

57,977

 

65,236

819

66,055

Realization of deemed cost

-

-

-

-

-

-

(3)

-

-

-

-

3

-

-

-

Capital transactions

-

-

6

-

-

-

-

-

-

-

-

-

6

(453)

(447)

Net income (loss)

-

-

-

-

-

-

-

-

-

-

-

(5,592)

(5,592)

413

(5,179)

Other comprehensive income

-

-

-

11,249

8,700

-

352

-

-

-

-

-

20,301

13

20,314

Appropriations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

-

-

-

-

-

-

-

-

-

-

-

-

-

(28)

(28)

 

107,380

(279)

327

(59,971)

(11,588)

(7,362)

(944)

7,919

2,182

720

47,156

(5,589)

79,951

764

80,715

Balance at September 30, 2016

 

107,101

327

 

 

 

(79,865)

 

 

 

57,977

(5,589)

79,951

764

80,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

107,380

(279)

628

(60,248)

(11,297)

(11,600)

(948)

7,919

2,182

720

42,322

-

76,779

771

77,550

Balance at January 1, 2017

 

107,101

628

 

 

 

(84,093)

 

 

 

53,143

 

76,779

771

77,550

Realization of deemed cost

-

-

-

-

-

-

(3)

-

-

-

-

3

-

-

-

Capital transactions

-

-

1

-

-

-

-

-

-

-

-

-

1

(61)

(60)

Net income

-

-

-

-

-

-

-

-

-

-

-

1,596

1,596

227

1,823

Other comprehensive income

-

-

-

1,339

2,712

-

200

-

-

-

-

-

4,251

(3)

4,248

Appropriations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

-

-

-

-

-

-

-

-

-

-

-

-

-

(64)

(64)

 

107,380

(279)

629

(58,909)

(8,585)

(11,600)

(751)

7,919

2,182

720

42,322

1,599

82,627

870

83,497

Balance at September 30, 2017

 

107,101

629

 

 

 

(79,845)

 

 

 

53,143

1,599

82,627

870

83,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The notes form an integral part of these financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9


Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

 

1.

The Company and its operations

Petróleo Brasileiro S.A. - Petrobras is a company controlled by the Brazilian government dedicated, directly or through its subsidiaries (referred to jointly as “Petrobras”, “the Company”, or “Petrobras Group”), either independently or through joint ventures or similar arrangements with third parties, to prospecting, drilling, refining, processing, trading and transporting crude oil from producing onshore and offshore oil fields and from shale or other rocks, as well as oil products, natural gas and other liquid hydrocarbons. In addition, Petrobras carries out energy related activities, such as research, development, production, transport, distribution and trading of all forms of energy, as well as other related or similar activities. The Company’s head office is located in Rio de Janeiro – RJ, Brazil.

 

2.

Basis of presentation of unaudited interim financial statements

These unaudited consolidated interim financial statements have been prepared and presented in accordance with IAS 34 – “Interim Financial Reporting” as issued by the International Accounting Standards Board (IASB). The information is presented in U.S. dollars.

These unaudited interim financial statements present the significant changes in the period, avoiding repetition of certain notes to the financial statements previously reported. Hence it should be read together with the Company’s audited annual financial statements for the year ended December 31, 2016, which include the full set of notes.

Petrobras has selected the U.S. Dollar as its presentation currency to facilitate a more direct comparison to other oil and gas companies. The financial statements have been translated from the functional currency (Brazilian Real) into the presentation currency (U.S. Dollar). All assets and liabilities are translated into U.S. dollars at the closing exchange rate at the date of the financial statements; income and expenses, as well as cash flows are translated into U.S. dollars using the average exchange rates prevailing during the period. All exchange differences arising from the translation of the consolidated financial statements from the functional currency into the presentation currency are recognized as cumulative translation adjustments (CTA) within accumulated other comprehensive income in the consolidated statements of changes in shareholders’ equity.

Brazilian Real x U.S. Dollar

Sep 2017

Jun 2017

Mar 2017

Dec 2016

Sep 2016

Jun 2016

Mar 2016

Quarterly average exchange rate

3.16

3.22

3.15

3.29

3.25

3.51

3.91

Period-end exchange rate

3.17

3.31

3.17

3.26

3.25

3.21

3.56

 

 

The Company’s Board of Directors in a meeting held on November 13, 2017 authorized the issuance of this consolidated interim financial statements.

2.1.

Accounting estimates

The preparation of interim financial statements requires the use of estimates and assumptions for certain assets, liabilities and other transactions. These estimates and assumptions include: oil and gas reserves and their impacts to other parts of the financial statements, the main assumptions and cash-generating units identified for impairment testing of assets, pension and medical benefits liabilities, provisions for legal proceedings, dismantling of areas and environmental remediation, deferred income taxes, cash flow hedge accounting and allowance for impairment of trade receivables. Although our management uses assumptions and judgments that are periodically reviewed, the actual results could differ from these estimates.

For further information on accounting estimates, see note 5 to the Company’s annual financial statements for the year ended December 31, 2016.

 

3.

The “Lava J ato (Car Wash) investigation” and its effects on the Company

In the third quarter of 2014, the Company wrote off US$ 2,527 of capitalized costs representing estimated amounts that Petrobras overpaid for the acquisition of property, plant and equipment in prior years. For further information see note 3 to the Company’s December 31, 2016 audited consolidated financial statements.

In preparing its interim financial statements for the period ended September 30, 2017, the Company considered all available information and did not identify any additional information in the investigations related to the “Lava Jato (Car Wash) investigation” by the Brazilian authorities or by the independent law firms conducting an internal investigation that could materially impact or change the methodology adopted to recognize the write-off taken in the third quarter of 2014. The Company continues to monitor the investigations for additional information and will review their potential impacts on the adjustment made.

10


Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

 

To the extent that any of the proceedings resulting from the Lava Jato investigation involve new leniency agreements with companies or plea agreements with individuals pursuant to which they agree to return funds, Petrobras may be entitled to receive a portion of such funds and will recognize them as other income and expenses when received. Nevertheless, the Company is unable to reliably estimate further recoverable amounts at this moment. Any recoverable amount will be recognized as income when received or when their econom ic benefits become virtually certain.

In the nine-month period ended September 30, 2017, the Company recognized US$ 48 as other income and expenses (US$ 69 in the same period in 2016) with respect to compensation for damages resulting from a leniency agreement. Of this amount, US$ 23 was received during this period and the remaining US$ 25 was recognized as accounts receivable at September 30, 2017 and collected in October 2017. The total funds returned through December 31, 2016, amounted to US$ 203 (US$ 131 in 2016 and US$ 72 in 2015).

We have been formally recognized as a victim of the crimes identified under the Lava Jato investigation by the Brazilian Federal Prosecutor’s Office, the lower court hearing the case and by the Brazilian Supreme Court. As a result, we have joined 41 criminal proceedings as an assistant to the prosecutor. In addition, we have entered into four criminal proceedings as an interested party. We have also renewed our commitment to continue cooperating with authorities to clarify the issues and report them regularly to our investors and to the public in general.

 

4.

Basis of consolidation

The consolidated interim financial statements include the interim financial statements of Petrobras, its subsidiaries, its assets and liabilities within joint operations and consolidated structured entities.

There were no significant changes in the Company’s basis of consolidation of entities in the period ended September 30, 2017 when compared to December 31, 2016, except for the disposal of the subsidiary Nova Transportadora do Sudeste - NTS, on April 4, 2017, as set out in note 9.

5.

Summary of significant accounting policies

The same accounting policies and methods of computation were followed in these consolidated interim financial statements as those followed in the preparation of the annual financial statements of the Company for the year ended December 31, 2016.

Formal Notice from CVM – Hedge accounting

Since mid-May 2013, the Company has designated cash flow hedging relationships, in which (a) the hedged items are portions of our highly probable future monthly export revenues in U.S. dollars, (b) the hedging instruments are portions of our long term debt obligations denominated in U.S. dollars, and (c) the risk hedged is the effect of changes in exchange rates between the U.S. dollar and the functional currency, the real. For more information, see note 31.2 to the Company’s audited consolidated financial statements for the year ended December 31, 2016.

On March 7, 2017, the Company received a formal notice from the Brazilian Securities and Exchange Commission ( Comissão de Valores Mobiliários – CVM) requesting that the Company restate its annual and interim financial statements since the second quarter of 2013. This notice requested that the Company restate the effects of the hedge accounting policy application relating to the cash flow hedge involving the Company’s future exports. The Company appealed the CVM decision and reaffirmed its view that its accounting policy has been correctly applied.

In July 2017, the CVM’s collegiate body accepted the Company’s appeal and dismissed the formal notice, which reinforced the correct application of the accounting policy by the Company.

 

11


Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

 

6.

Cash and cash equivalents and Marketable securities

Cash and cash equivalents

 

09.30.2017

12.31.2016

Cash at bank and in hand

1,162

591

 

 

 

Short-term financial investments

 

 

- In Brazil

 

 

Brazilian interbank deposit rate investment funds and other short-term deposits

3,557

1,180

Other investment funds

24

131

 

3,581

1,311

- Abroad

 

 

Time deposits

5,129

3,085

Automatic investing accounts and interest checking accounts

12,020

9,780

U.S. Treasury bills

5,217

Other financial investments

1,603

1,221

 

18,752

19,303

Total short-term financial investments

22,333

20,614

Total cash and cash equivalents

23,495

21,205

 

 

Short-term financial investments in Brazil primarily consist of investments in funds holding Brazilian Federal Government Bonds that mature within three months as of the date of their acquisition. Short-term financial investments abroad comprise time deposits that mature in three months or less from the date of their acquisition, highly-liquid automatic investment accounts, interest checking accounts and other short-term fixed income instruments.

 

Marketable securities

 

 

 

09.30.2017

 

12.31.2016

 

In Brazil

Abroad

Total

In Brazil

Total

Trading securities

1,162

1,162

784

784

Available-for-sale securities

135

651

786

Held-to-maturity securities

97

97

90

90

Total

1,394

651

2,045

874

874

Current

1,162

651

1,813

784

784

Non-current

232

232

90

90

 

 

 

 

 

 

 

 

Trading securities refer mainly to investments in Brazilian Federal Government Bonds. These financial investments have maturities of more than three months and are mostly classified as current assets due to their maturity or the expectation of their realization in the short term.

Available-for-sale securities in Brazil refer substantially to São Martinho’s common shares granted to the wholly-owned subsidiary Petrobras Biocombustível S.A. - PBIO (24 million shares) as consideration for PBIO’s shares in Nova Fronteira. For further information on this transaction see note 9.3. Available-for-sale securities abroad refer to UK government bonds amounting to GBP 475 million and maturing in March 2018.

 

12


Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

7.

Trade and othe r receivables

7.1.

Trade and other receivables, net

 

09.30.2017

12.31.2016

 

 

 

Trade receivables -Third parties

7,004

6,128

Related parties

 

 

Investees (note 18.1)

547

555

Receivables from the electricity sector (note 7.4) (*)

5,314

4,922

Petroleum and alcohol accounts -receivables from Brazilian Government

262

268

Finance lease receivables

551

1,223

Receivables from divestments  (note 9.1)

908

Other receivables

1,773

1,650

 

16,359

14,746

Allowance for impairment of trade and other receivables

(6,092)

(5,426)

Total

10,267

9,320

Current

5,216

4,769

Non-current

5,051

4,551

(*) Includes the amount of US$ 245 at September 30, 2017 (US$ 251 at  December 31, 2016) regarding  finance lease receivable from Amazonas Distribuidora de Energia.

 

 

 

 

 

7.2.

Trade receivables overdue - Third parties

 

09.30.2017

12.31.2016

Up to 3 months

916

403

From 3 to 6 months

43

67

From 6 to 12 months

99

411

More than 12 months

3,080

2,650

Total

4,138

3,531

 

 

7.3.

Changes in the allowance for impairment of trade and other receivables

 

09.30.2017

12.31.2016

Opening balance

5,426

3,656

Additions (*)

791

1,325

Write-offs

(86)

(9)

Reversals

(155)

(171)

Cumulative translation adjustment

116

625

Closing balance

6,092

5,426

 

 

 

Current

2,123

2,010

Non-current

3,969

3,416

 

 

 

(*) In 2017, additions include US$ 278 from the finance lease agreement termination relating to the Vitória 10,000 drilling rig.  In 2016, additions include: US$ 345 from electricity sector and US$ 621 from losses on advances to suppliers, as well as assumed debt and  termination costs relating to the agreement with

the  Ecovix shipyard.

 

 

 

 

 

On May, 22 2017, the Company terminated a finance lease agreement relating to the Vitória 10,000 drilling rig, owned by the indirect wholly-owned subsidiary Drill Ship International BV – DSI BV and leased to the Deep Black Drilling LLP – DBD, an entity from Schahin group. On July 19, 2017, a court ruling confirmed this contract termination and, shortly after, Schahin filed a request to suspend its effects, which was denied by the court on July 28, 2017.

13


Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

Due to the finance lease agreement termination, the Company assessed the value in use of the drilling rig based on the cash flows projected to arise from its commitment to certain Petrobras Group projects, and compared it to the carrying amount of the finance lease receivable at June 30, 2017. As result, the Company wrote-down US$ 254 as other income and expenses in the second quarter of 2017.

In addition, on August 9, 2017, measures were adopted to obtain possession of this drilling rig, which effectively occurred on August 16, 2017. As a result of this matter, in the third quarter of 2017 the Company added US$ 24 to the allowance for impairment due to additions to the finance lease receivable and contractual fine, as well as derecognized the finance lease receivable and recognized the drilling rig as equipment within Property, plant and equipment in the amount of US$ 387.

7.4.

Trade receivables – electricity sector (isolated electricity system in the northern region of Brazil)

 

 

 

 

 

 

 

 

 

 

 

As of 12.31.2016

Sales

Amounts received

Transfers (*)

Write-offs

Recognition allowance for

impairment, net of reversals

Inflation indexation

CTA

As of 09.30.2017

Related parties (Eletrobras Group)

 

 

 

 

 

 

 

 

 

AME

2,475

231

(449)

237

(163)

228

71

2,630

Centrais Elétricas de Rondônia - CERON

369

(14)

28

11

394

Others

95

29

(34)

(18)

29

10

4

115

Subtotal

2,939

260

(497)

237

(18)

(134)

266

86

3,139

Third parties

 

 

 

 

 

 

 

 

 

Cigás

143

619

(354)

(237)

(2)

8

6

183

Celpa

66

(95)

32

3

Others

4

131

(126)

(6)

10

1

14

Subtotal

147

816

(575)

(237)

(6)

40

8

7

200

Trade receivables, net

3,086

1,076

(1,072)

(24)

(94)

274

93

3,339

 

 

 

 

 

 

 

 

 

 

Trade receivables - Eletrobras Group

4,922

260

(497)

237

(18)

266

144

5,314

(-) Allowance for impairment

(1,983)

(134)

(58)

(2,175)

Subtotal

2,939

260

(497)

237

(18)

(134)

266

86

3,139

Trade receivables - Third parties

515

816

(575)

(237)

(6)

8

17

538

(-) Allowance for impairment

(368)

40

(10)

(338)

Subtotal

147

816

(575)

(237)

(6)

40

8

7

200

Trade receivables - Total

5,437

1,076

(1,072)

(24)

274

161

5,852

(-) Allowance for impairment

(2,351)

(94)

(68)

(2,513)

Trade receivables, net

3,086

1,076

(1,072)

(24)

(94)

274

93

3,339

 

 

 

 

 

 

 

 

 

 

(*) Transfer of overdue receivables from Cigás to AME, pursuant to the purchase and sale agreement of natural gas (upstream and downstream) entered into by Petrobras, Cigás and AME.

 

 

 

 

 

 

 

 

 

 

 

 

The Company supplies fuel oil, natural gas, and other products to entities that operate in the state of Manaus and in the isolated electricity system in the northern region of Brazil, such as thermoelectric power plants controlled by Eletrobras, state-owned natural gas distribution companies and independent electricity producers ( Produtores Independentes de Energia – PIE). The isolated electricity system provides the public service of electricity distribution in the northern region of Brazil, as the Brazilian National Interconnected Power Grid ( Sistema Interligado Nacional ) has not yet met the demand for electricity due to technical or economic reasons.

A significant portion of the funds used by those companies to pay for products supplied by the Company came from the Fuel Consumption Account (Conta de Consumo de Combustível – CCC), which provides funds to cover a portion of the costs related to the supply of fuel to thermoelectric power plants located in the northern region of Brazil (operating in the isolated electricity system). However, as a result of changes in the CCC regulations over time, principally relating to Provisional Measure 579/2012 which significantly changed the sources of funds that were used to cover the cost of electricity generated in the Isolated Electricity System, funds transferred from the CCC to these electricity companies have not been sufficient for them to meet their financial obligations and, as a result, some have not been able to pay the total amount for the products supplied by the Company, increasing the default rate of those customers to the Company, notably from AME.

14


Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

The Company intensified negotiations with the state-owned natural gas distribution companies, the independent electricity producers (PIEs) , other private companies and entities controlled by Eletrobras. As a result, on December 31, 2014, the Company entered into a debt acknowledgement agreement with subsidiaries of Eletrobras with respect to the balance of its receivables as of November 30, 2014. Eletrobras acknowledged it owed US$ 2,202 to the Company, of which US$ 1,889 were collateralized by payables from the Brazilian Energy Development Account ( Conta de Desenvolvimento Energético CDE) to the CCC. This amount has been adjusted by the Selic interest rate (Brazilian short-term interest rate) on a monthly basis and the first of 120 monthly installments was paid in February 2015.

The contractual amortization clauses in the debt acknowledgement agreement establish the payment of 15% of the amount of renegotiated debt within 36 months and the remaining 85% to be paid in 84 installments beginning in January 2018. Therefore, the Company expects the balance of trade receivables from the electricity sector will decrease from 2018 onwards as the amounts to be received will be higher than inflation indexation on debt acknowledgement agreements. Despite some periodic delays, these payments have continued.

In order to mitigate an increase in default rates, on September 1, 2015 the Brazilian National Electricity Agency ( Agência Nacional de Energia Elétrica - ANEEL) enacted the Normative Instruction 679 enabling the Company to receive funds directly from the CCC, as these funds would be paid directly from the CCC for products supplied in the prior month with a limit of 75% of the average payments made by the CCC in the previous three months.

The Company had expected that the abovementioned rule would have strengthened the financial situation of the companies in the electricity sector. However, this had not occurred and the level of these defaults had increased. Accordingly, in 2015 and 2016 the Company recognized US$ 564 and US$ 345, respectively, as allowance for impairment of trade receivables (net of reversals) with respect to uncollateralized outstanding receivables.

Accordingly, the Company has adopted the following measures:

judicial collection of overdue receivables with respect to natural gas supplied to AME, Eletrobras and Cigás;

judicial collection of overdue receivables with respect to fuels, mainly fuel oil, supplied by the wholly-owned subsidiary BR Distribuidora to companies of Eletrobras Group (Amazonas, Acre, Rondônia and Roraima);

suspension of fuels supply on credit, mainly fuel oil, except when legally enforced;

The wholly-owned subsidiary Petrobras Distribuidora registered entities controlled by Eletrobras as delinquent companies in the Brazilian Central Bank records;

Petrobras parent company registered AME as a delinquent company in ANEEL records from April 2016 to May 2017. In May 2017, ANEEL canceled this registration alleging fuel purchases are non intra sector debt. The Company has appealed the ANEEL decision.

In the nine-month period ended September 30, 2017, the Company accounted for allowances for impairment of trade receivables, net of reversals, totaling US$ 94 (US$ 338 in the same period of 2016) primarily due to unsecure overdue receivables related to supplies of fuel oil and natural gas, partially offset by overdue receivables paid by CELPA - Centrais Elétricas do Pará.

 

15


Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

8.

Invent ories

 

09.30.2017

12.31.2016

Crude oil

3,342

3,524

Oil products

2,784

2,649

Intermediate products

637

700

Natural gas and LNG (*)

34

134

Biofuels

144

211

Fertilizers

28

26

Total products

6,969

7,244

Materials, supplies and others

1,203

1,243

Total

8,172

8,487

Current

8,160

8,475

Non-current

12

12

 

 

 

(*) Liquified Natural Gas

 

 

 

 

 

 

 

The amount of inventories is presented net of US$ 2 reducing inventories to net realizable value (US$ 28 as of December 31, 2016), primarily due to changes in international prices of crude oil and oil products. In the nine-month period ended September 30, 2017, the Company recognized as cost of sales US$ 68 reducing inventories to net realizable value, net of reversals (US$ 305 in the same period of 2016).

At September 30, 2017, the Company had pledged crude oil and oil products volumes as collateral for the Terms of Financial Commitment (TFC) signed by Petrobras and Petros in 2008, in the amount of US$ 3,817 (US$ 1,979 as of December 31, 2016), as set out in note 21. In the third quarter of 2017, the amount of collateral was revised and updated in order to reflect the increase in the commitments undertaken under TCF.

 

9.

Disposal of Assets and other changes in organizational structure

The Company has an effective divestment and venture program which takes into account opportunities for divestments in several areas where it operates. The divestment portfolio is dynamic, meaning that market conditions, legal matters and negotiations may affect the Company’s evaluation of ongoing and potential transactions.

On December 7, 2016, the Brazilian Federal Auditor’s Office ( Tribunal de Contas da União – TCU ) filed a civil action prohibiting the Company from commencing additional divestment projects and entering into sales agreements, except for transactions in their final stages at that time. After the TCU’s assessment of the divestments decision-making methodology and the Company’s review of its divestment policies, the TCU’s civil action was dismissed, allowing the progress of the divestment and venture program to continue based on the revised methodology.

Accordingly, the Company’s Executive Board approved the new divestment portfolio on March 30, 2017, consisting of projects that follow the revised divestment methodology in compliance with the TCU’s decision.

9.1.

Disposal of Assets

Disposal of distribution assets in Chile

On July 22, 2016, the Company signed a sale and purchase agreement with the Southern Cross Group for the sale of 100% of Petrobras Chile Distribución Ltda (PCD), a group entity from the distribution business segment, held through Petrobras Caribe Ltda.

This transaction was concluded on January 4, 2017 and the net proceeds from this sale were US$ 470, of which US$ 90 was received via distribution of dividends after taxes on December 9, 2016 and the remaining US$ 380 was paid by Southern Cross Group at the transaction closing. Accordingly, the Company recognized a gain of US$ 0.8 as other income and expenses, in the first quarter of 2017, taking into account the impairment of US$ 82 at December 31, 2016.

In addition, a US$ 79 loss was recycled from shareholders’ equity to other income and expenses within the income statement, reflecting the reclassification of cumulative translation adjustments resulting from the depreciation of the Chilean Peso against the U.S Dollar from the time of the acquisition of this investment to its disposal (see note 22.2).

16


Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

Disposal of interest in Nova Transportadora do Sudeste (NTS ) and related changes in organizational structure

After a corporate restructuring intended to concentrate the transportation assets of the southeastern region in Nova Transportadora do Sudeste -NTS, a group entity from the gas and power business segment, the Company’s Board of Directors approved on September 22, 2016 the sale of a 90% interest in NTS to Brookfield Infrastructure Partners (BIP) and its affiliates, through a Private Equity Investment Fund (FIP) whose other shareholders are British Columbia Investment Management Corporation (BCIMC), CIC Capital Corporation (wholly-owned subsidiary of China Investment Corporation - CIC) and GIC Private Limited (GIC).

The following changes in organizational structure occurred as part of this process:

 

-

The Extraordinary General Meeting of NTS, held on October 21, 2016, approved an increase to its share capital in the amount of US$ 711, based on an independent expert report dated on October 14, 2016, through net assets of the Company’s subsidiary Transportadora Associada de Gás S.A. - TAG. This capital increase required the approval of the National Petroleum, Natural Gas and Biofuels Agency - ANP through the issuance of Permissions of Provisional Operation ( Autorizações de Operação Provisórias );

 

-

The Extraordinary General Meeting of the TAG, held on October 21, 2016, approved a reduction to its share capital, via a capital surplus, in the amount of its investment in NTS (US$ 800) and transfer of all of its interest in NTS to Petrobras, as occurred on October 24, 2016 pursuant to the Permissions of Provisional Operation.

This transaction prescribes the maintenance of charge capacity and also the same terms of five Firm Gas Transportation Agreements including 100% ship-or-pay clauses. These agreements have terms of 20 years from 2016 and their rates are indexed to the Brazilian General Market Price Index (IGP-M) and regulated by the ANP.

On April 4, 2017, after performing all conditions precedent and adjustments provided for in the purchase and sale agreement, this transaction was completed in the amount of US$ 5.08 billion upon the payment of US$ 4.23 billion on this date, of which US$ 2.59 billion relates to the sale of shares, US$ 100 relates to an escrow account pledged as collateral for charges associated with the repair of pipelines, and US$ 1.64 billion relates to the issuance of convertible debentures by NTS, maturing in 10 years, as a replacement of the debt to PGT. The remaining balance (US$ 850, also relating to the sale of shares) will be paid in the fifth year, bearing annual interests at a fixed rate, as established in the purchase and sale agreement.

At June 30, 2017, the Company recognized a gain on this transaction in the amount of US$ 2,169 accounted for as other income and expenses, which includes a US$ 217 gain on remeasurement of retained interests. This amount was subject to price adjustments according to the purchase and sale agreement.

On October 10, 2017, the final price adjustment was settled in the amount of US$ 20, totaling a gain of US$ 2,189 on this transaction.

Disposal of Guarani

On December 28, 2016, the Company’s wholly-owned subsidiary from the biofuels business segment - Petrobras Biocombustível S.A. (PBIO) disposed of its interests in the associate Guarani S.A. (45.97% of share capital) to Tereos Participations SAS, an entity of the French group Tereos.

On February 3, 2017, this transaction was concluded pursuant to the payment of US$ 203, after all conditions precedent were performed by Tereos Participations SAS. At December 31, 2016, an impairment loss amounting to US$ 118 was accounted for.

Additionally, a gain of US$ 42 was recycled from shareholders’ equity to other income and expenses within the income statement, reflecting the reclassification of cumulative translation adjustment resulting from the appreciation of Mozambican Metical against the Brazilian Real from the acquisition of this investment to its disposal (see note 22.2). This gain was partially offset by a US$ 22 loss also recycled from shareholders’ equity to other income and expenses reflecting cumulative losses relating to cash flow hedge accounting.

Disposal of Liquigás

On November 17, 2016 the Company’s Board of Directors approved the disposal of its wholly-owned subsidiary Liquigás Distribuidora S.A, a group entity from the RT&M business segment (Refining, Transportation and Marketing), to Companhia Ultragaz S.A., a subsidiary of Ultrapar Participações S.A.. Accordingly, the related assets and liabilities were classified as held for sale at December 31, 2016, as this transaction was subject to approval at Ultrapar’s and Petrobras’ Shareholders’ Meetings, as well as the approval of CADE.

In January 2017, this sale was approved at Ultrapar’s and Petrobras’ Shareholders’ Meetings in the amount of US$ 828.

17


Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

According to an offici al statement released by the Brazilian Antitrust Regulator (CADE) in June 2017, additional diligence was required in order to conclude on market concentration aspects of this sale. In August 2017, the CADE reported some concerns about market concentration that may result from this transaction. However, the CADE’s conclusion is still under assessment and additional procedures may be necessary.

The Company has performed a regular assessment on the progress of CADE’s evaluations on this transaction and no new factors that could change the commitment to its plan to sell Liquigás have been identified. Based on this assessment and other pending conditions precedent to the transaction, including the aforementioned approval by CADE, the related assets and liabilities remained classified as held for sale as of September 30, 2017.

Disposal of Suape and Citepe petrochemical plants

On December 28, 2016, the Company’s Board of Directors approved the disposal of the interests in the wholly-owned subsidiaries Companhia Petroquímica de Pernambuco (PetroquímicaSuape) and Companhia Integrada Têxtil de Pernambuco (Citepe), both from the RT&M business segment, to Grupo Petrotemex S.A. de C.V. and Dak Americas Exterior, S.L., both subsidiaries of Alpek, S.A.B. de C.V., which is a company from Grupo Alfa S.A.B. de C.V. (a Mexican public company), in the amount of US$ 385, which will be totally disbursed at the transaction closing. This amount remains subject to adjustments relating to working capital, net debt and recoverable taxes.

On February 21, 2017, the transaction was approved at the Grupo Alfa’s Board of Directors Meeting and, on March 27, 2017, at Petrobras’ Shareholders’ Meeting.

According to an official statement released by the Brazilian Antitrust Regulator (CADE) on October 10, 2017, additional diligence was required in order to conclude on market concentration aspects of this sale.

The Company has performed a regular assessment on the progress of CADE’s evaluations on this transaction and no new factors that could change the commitment to its plan to sell these petrochemical plants were identified. Based on this assessment and other pending conditions precedent to the transaction, including the aforementioned approval by CADE, the related assets and liabilities remained classified as held for sale as of September 30, 2017.

Strategic alliance with Total

On December 21, 2016, the Company entered into a master agreement with Total, in connection with the Strategic Alliance established in the Memorandum of Understanding signed on October 24, 2016. Accordingly, certain E&P assets were classified as held for sale at December 31, 2016 due to the share of interests established in this agreement, as described below:

Transfer of the Company’s 22.5% stake in the concession area named as Iara, comprising Sururu, Berbigão and West of Atapu fields, which are subject to unitization agreements with Entorno de Iara (an area under the Assignment Agreement in which the Company holds 100% and is located in the Block BM-S-11). The Company will continue to operate the block;

Transfer of the Company’s 35% stake in the concession area of Lapa field, located in the Block BM-S-9. Total will also become the operator and the Company will retain a 10% interest in this area; and

Transfer of the Company’s 50% interests in the power plants Celso Furtado and Rômulo Almeida. In 2016, the Company recognized an impairment loss on this transaction in the amount of US$ 47.

On February 28, 2017, the Company and Total signed purchase and sale agreements with respect to the aforementioned assets. Total will pay to the Company the amount of US$ 1,675 in cash for assets and services, as well as contingent payments in the amount of US$ 150, associated with the production volume in Iara field. In addition, a long-term line of credit in the amount of US$ 400 will be provided by Total, which may be used to fund the Company’s investments in the Iara fields.

The aforementioned agreements adds up to the ones already executed on December 21, 2016, such as: (i) the option for Petrobras to purchase a 20% interest in block 2 of the Perdido Foldbelt area, in the Mexican sector of the Gulf of Mexico, (ii) the joint exploration studies in the exploratory areas of Equatorial Margin and in Santos Basin; and (iii) the Technological partnership agreement in the areas of digital petrophysics, geological processing and subsea production systems.

These transactions are still subject to approval by the relevant authorities, the potential exercise of preemptive rights by current Iara partners, and other customary conditions precedent.

The Company has performed a regular assessment on the progress of conditions precedent to the transaction and no new factors that could change the commitment to its plan to sell these assets were identified. Accordingly, the related assets and liabilities remained classified as held for sale as of September 30, 2017.


18


Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

9.2.

Assets classified as held for sale

The major classes of assets and liabilities classified as held for sale are shown in the following table:

 

 

 

 

 

09.30.2017

12.31.2016

 

E&P

Distribution

RT&M

Gas

&

Power

Total

Total

Assets classified as held for sale (*)

 

 

 

 

 

 

Cash and Cash Equivalents

10

10

109

Trade receivables

156

156

205

Inventories

86

86

172

Investments

5

5

378

Property, plant and equipment

1,231

2

282

97

1,612

4,420

Others

313

313

444

Total

1,231

2

852

97

2,182

5,728

Liabilities on assets classified as held for sale(*)

 

 

 

 

 

 

Trade Payables

10

50

60

135

Finance debt

8

8

14

Provision for decommissioning costs

62

62

52

Others

114

114

291

Total

72

172

244

492

 

 

 

 

 

 

 

(*) As of September 30, 2017, the amounts  mainly refer to assets and liabilities transferred following the approvals of the disposal of Liquigás, Petroquímica Suape and Citepe,  interest in the concession areas named as Iara and Lapa, as well as interests in the thermoelectric power generation plants  Rômulo Almeida and Celso Furtado. At December 31, 2016, the amounts also comprise assets and liabilities transferred following the approvals of the disposals of NTS, PCD, Guarani and Nova Fronteira.

 

 

9.3.

Other changes in organizational structure

Sale and merger of Nova Fronteira Bioenergia

On December 15, 2016, the Company’s wholly-owned subsidiary PBIO (biofuels business segment) entered into an agreement with the São Martinho group to merge PBIO’s interests in Nova Fronteira Bioenergia S.A. (49%) into São Martinho.

On February 23, 2017, this transaction was concluded as São Martinho granted to PBIO an additional 24 million of its common shares, corresponding to 6.593% of its voting and total paid in capital, in exchange and in proportion to the shares that PBIOs held in Nova Fronteira. These shares are accounted for as available – for- sale securities, as set out in note 6.

Corporate restructuring in Petrobras Distribuidora (BR)

On July 11, 2017, the Company’s Board of Directors approved an initial public offering (IPO) of its wholly-owned subsidiary Petrobras Distribuidora (BR), which will be effected through a secondary public offering of shares. Accordingly, the corporate restructuring of BR was approved in August 2017 through the following transactions:

On August 31, 2017, Petrobras Parent Company increased the share capital of BR by US$  2,006 in order to pre-pay borrowings owned by BR and unconditionally guaranteed by Petrobras; and

Partial spin-off of BR, with the separation of the collateralized receivables held by BR resulting from debt acknowledgement agreement with the Eletrobras group and other receivables from other entities of Petrobras Group also held by BR, totaling the same amount of the aforementioned capital increase. These assets were incorporated by the wholly owned subsidiary Downstream Participações Ltda. (“Downstream”) on August 31, 2017.

 

19


Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

10.

Invest ments

10.1.

Investments in associates and joint ventures

 

Balance at 12.31.2016

Investments

Restructuring, capital decrease and others

Results in equity-accounted investments

CTA

OCI

Dividends

Balance at  

09.30.2017

Joint Ventures

 

 

 

 

 

 

 

 

Petrobras Oil & Gas B.V. - PO&G

1,428

-

-

81

-

-

(125)

1,384

State-controlled natural gas distributors

330

-

-

57

10

-

(30)

367

Compañia Mega S.A. - MEGA

36

-

-

21

(2)

-

(11)

44

Petrochemical joint ventures

25

-

-

7

-

-

-

32

Other joint ventures

103

73

(3)

(79)

3

2

(12)

87

Associates

 

 

 

 

 

 

 

 

Braskem S.A.

1,033

-

-

412

(6)

184

-

1,623

Nova Transportadora do Sudeste

-

-

357

29

6

-

(36)

356

Petrochemical associates

31

-

-

2

1

-

-

34

Other associates

50

-

(3)

7

3

-

(3)

54

Other investments

16

-

-

-

(1)

-

-

15

Total

3,052

73

351

537

14

186

(217)

3,996

 

 

 

 

 

 

 

 

 

Results in investees transferred to assets held for sale

 

 

 

(13)

 

 

 

 

 

 

 

 

 

 

 

 

 

Results in equity-accounted investments

 

 

 

524

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.2.

Investments in listed companies

 

Thousand-share lot

 

Quoted stock exchange prices (US$  per share)

Market value

 

09.30.2017

12.31.2016

Type

09.30.2017

12.31.2016

09.30.2017

12.31.2016

 

 

 

 

 

 

 

 

Associate

 

 

 

 

 

 

 

Braskem S.A.

212,427

212,427

Common

13.51

9.20

2,870

1,955

Braskem S.A.

75,762

75,762

Preferred A

13.39

10.51

1,015

796

 

 

 

 

 

 

3,885

2,751

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The market value of these shares does not necessarily reflect the realizable value upon sale of a large block of shares.

Investment in publicly traded associate (Braskem S.A.)

Braskem’s shares are publicly traded on stock exchanges in Brazil and abroad. As of September 30, 2017, the quoted market value of the Company’s investment in Braskem was US$ 3,885 based on the quoted values of both Petrobras’ interest in Braskem’s common stock (47% of the outstanding shares), and preferred stock (22% of the outstanding shares). However, there is extremely limited trading of the common shares, since non-signatories of the shareholders’ agreement hold only approximately 3% of the common shares.

Given the operational relationship between Petrobras and Braskem, at December 31, 2016, the recoverable amount of the investment for impairment testing purposes was determined based on its value in use, considering future cash flow projections and the manner in which the Company can derive value from this investment via dividends and other distributions to arrive at its value in use. As the recoverable amount was higher than the carrying amount, no impairment losses were recognized for this investment.

The main assumptions on which cash flow projections were based to determine Braskem’s value in use are set out in note 14 to the Company’s audited consolidated financial statements for the year ended December 31, 2016.

 

20


Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

11.

Property, plant and equipment

11.1.

By class of assets

 

Land, buildings

and

improvement

Equipment and other assets

Assets under construction (*)

Exploration and development costs (oil and gas producing properties)

Total

Balance at January 1, 2016

6,100

73,893

37,610

43,694

161,297

Additions

110

917

11,846

203

13,076

Additions to / review of estimates of decommissioning costs

-

-

-

937

937

Capitalized borrowing costs

-

-

1,724

-

1,724

Write-offs              

(64)

(140)

(1,371)

(43)

(1,618)

Transfers (***)

387

4,519

(15,863)

5,912

(5,045)

Depreciation, amortization and depletion

(428)

(7,520)

-

(5,862)

(13,810)

Impairment recognition

(319)

(3,891)

(439)

(1,932)

(6,581)

Impairment reversal

-

768

-

179

947

Cumulative  translation adjustment

1,196

10,178

5,062

8,107

24,543

Balance at December 31, 2016

6,982

78,724

38,569

51,195

175,470

Cost

9,999

127,539

38,569

80,662

256,769

Accumulated depreciation, amortization and depletion

(3,017)

(48,815)

-

(29,467)

(81,299)

Balance at December 31, 2016

6,982

78,724

38,569

51,195

175,470

Additions

1

996

8,262

23

9,282

Additions to / review of estimates of decommissioning costs

-

-

-

30

30

Capitalized borrowing costs

-

-

1,464

-

1,464

Write-offs

(1)

(9)

(426)

(18)

(454)

Transfers

311

3,874

(6,896)

3,115

404

Depreciation, amortization and depletion

(346)

(5,393)

-

(4,172)

(9,911)

Impairment recognition

(2)

(45)

(64)

-

(111)

Cumulative  translation adjustment

196

1,608

787

1,406

3,997

Balance at September 30, 2017

7,141

79,755

41,696

51,579

180,171

Cost

10,452

134,334

41,696

85,986

272,468

Accumulated depreciation, amortization and depletion

(3,311)

(54,579)

-

(34,407)

(92,297)

Balance at September 30, 2017

7,141

79,755

41,696

51,579

180,171

Weighted average useful life in years

40

(25 to 50 )

(except land)

20

(3 to 31)

(**)

 

Units of production method

 

(*) See note 28 for assets under construction by business area.

(**) Includes exploration and production assets depreciated based on the units of production method.

(***) In 2016 includes transfers to assets held for sale.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In addition to the capital commitments previously reported and in line with the investments foreseen in the Strategic Plan and the 2017-2021 Business and Management Plan, in the nine-month period ended September 30, 2017, the Company entered into agreements for the acquisition and construction of property, plant and equipment, especially the contract for the conclusion of the hull conversion of FPSO P-76, in the amount of US$ 497, and the contract for the supply of flexible pipelines for the production, gas lifting and water injection in many pre-salt projects, in the total amount of US$ 595, expiring in March 2018 and May 2022, respectively.

As of September 30, 2017, property, plant and equipment include assets under finance leases of US$ 124 (US$ 125 as of December 31, 2016).

21


Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

11.2.

Concession for exploration of oil and natural gas - Assignment Agreement (“Cessão Onerosa”)

Petrobras and the Brazilian Federal Government entered into the Assignment Agreement in 2010, which grants the Company the right to carry out prospecting and drilling activities for oil, natural gas and other liquid hydrocarbons located in the pre-salt area, subject to a maximum production of five billion barrels of oil equivalent. The agreement has a term of forty years and is renewable for a further five years subject to certain conditions. As of September 30, 2017, the Company’s property, plant and equipment include the amount of US$ 23,614 related to the Assignment Agreement (US$ 22,954 as of December 31, 2016).

The agreement establishes that its review procedures will commence immediately after the declaration of commerciality for each area and must be based on reports by independent experts engaged by Petrobras and the ANP. The review of the Assignment Agreement, which will determine if the value of acquired rights is greater or lower than the amount initially paid by the Company, will be concluded after the assessment of all the areas.

Petrobras has already declared commerciality in fields of all six blocks under this agreement: Franco (Búzios), Florim (Itapu), Nordeste de Tupi (Sépia), Entorno de Iara (Norte de Berbigão, Sul de Berbigão, Norte de Sururu, Sul de Sururu, Atapu), Sul de Guará (Sul de Sapinhoá) and Sul de Tupi (Sul de Lula).

If the review of the Assignment Agreement determines that the value of acquired rights is greater than the amount initially paid, the Company may be required to pay the difference to the Brazilian Federal Government, or may proportionally reduce the total volume of barrels acquired under the agreement in order to match with the amount originally paid. If the review determines that the value of the acquired rights is lower than initially paid by the Company, the Brazilian Federal Government will reimburse the Company for the difference by delivering cash or bonds or equivalent means of payment, subject to budgetary regulations.

The formal review procedures for each block are based on costs incurred over the exploration phase, and estimated costs and production for the development period. The review of the Assignment Agreement may result in renegotiation in: (i) the amount of the agreement; (ii) the total volume (in barrels of oil) to be produced; (iii) the term of the agreement; and (iv) the minimum percentages of local content.

The information gathered after drilling over 50 exploratory wells and performing extended well tests in this area, as well as the extensive knowledge acquired on the pre-salt layer of Santos Basin, made possible the identification of volumes exceeding five million barrels of oil equivalent.

The Company considers this surplus provides an opportunity to enter into an agreement concerning the compensation to the Company arising from this review. Therefore, aiming to support an eventual negotiation where this compensation would be paid through the right over exceeding volume, the Company is complementing its assessment based on reports issued by its independent experts engaged.

Currently, the final amount to be established for this agreement is not defined. The beginning of negotiation with the Brazilian Federal Government, which is expected to occur in the fourth quarter of 2017, still depends on the conclusion of the appraisals by independent experts engaged by both parties and the issuance of the respective reports.

The Minority Shareholders Committee, created on October 21, 2016, will monitor this agreement review process and will provide support to the board’s decisions through opinions about related matters.

 

22


Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

 

 

12.

Intangib l e assets

12.1.

By class of assets

 

 

 

 

 

 

 

 

 

Software

 

 

 

Rights and Concessions

Acquired

Developed

in-house

Goodwill

Total

Balance at January 1, 2016

2,438

80

290

284

3,092

Addition

11

15

59

-

85

Capitalized borrowing costs

-

-

5

-

5

Write-offs

(160)

-

(1)

-

(161)

Transfers

(15)

(4)

(1)

(99)

(119)

Amortization

(22)

(35)

(98)

-

(155)

Impairment recognition

(3)

-

-

-

(3)

Cumulative  translation adjustment

429

12

52

35

528

Balance at December 31, 2016

2,678

68

306

220

3,272

Cost

2,875

487

1,209

220

4,791

Accumulated amortization

(197)

(419)

(903)

-

(1,519)

Balance at December 31, 2016

2,678

68

306

220

3,272

Addition

16

9

40

-

65

Capitalized borrowing costs

-

-

3

-

3

Write-offs