Rio de Janeiro, April 14, 2015 - Petróleo Brasileiro SA - Petrobras´ response to Official Letter OFÍCIO/CVM/SEP/GEA-1/N.º 128/2015 that requests clarification as follows:
OFFICIAL LETTER /CVM/SEP/GEA-1/N.º 128/2015
'We refer to the article published on 14.04.2015, by Valor Economico newspaper, under the title: 'Petrobras will use two types of adjustments', bearing the following statements
'Petrobras might perform two types of adjustments in the balance statement that the administration intends to adopt and publish on the 22nd of the month. Yesterday, the Company reported that on that day the board will meet to discuss the financial statements of the third quarter and 2014. Estimates verified by the Valor (newspaper) indicate a range of BRL$ 14 billion to BRL$28 billion total impact.
The issue related to corruption will be treated as error correction in accordance with accounting pronouncement CPC 23, and will amount between BRL$ 4 billion and BRL$ 8 billion, according to one of our sources. The error to be corrected refers to the treatment of spending on corruption as an investment, not as non-deductible expense.
The basis for determining the value will be the plea bargain agreed with the executives involved. The range of values is justified by the difference of the percentages mentioned by informers, ranging from 2% to 5%, depending on the case, however, the 3% rate is the most present in the whistleblowing. When the former board, led by Graça Foster and Almir Barbassa, prepared the non-audited balance statement related to the third quarter, it was considered using 3% on contracts that the Company was already aware of its potential contamination at the time and the calculated figure was BRL$ 4.06 billion. At that moment, however, neither the board of Petrobras nor the auditors had confidence to use this number, since the 3% had been mentioned only generally in a recorded statement by former Petrobras' Downstream Officer Paulo Roberto Costa in the Federal Court of Paraná. Since then, the crossing of information reported during the plea bargain of several defendants, in addition to other evidence raised by Justice, allows more assurance in regards to those amounts. However, other companies and contracts were mentioned. The accounting standard establishes as a general rule that the adjustments relative to error correction are to be made retroactively, in the year in which the each error occurred, which would require republication of old statements.However, the company might mention literature that deals specifically with fraud and argue to be unable to identify accurate periods and values, and most likely will perform the entire adjustment in the year 2014, when the problem came to light.
The second portion of the write-off will be the result of impairment or loss of recoverable value of assets, in accordance with accounting pronouncement CPC 01. The Company will probably maintain the practice of making future cash flow projections based on its refining capacity as a single large cash generating unit (UGC). This has eventually resulted in the failure to recognize the write-off relative to refineries under construction in Suape (PE) and in Rio in recent years, although on an individual analysis of the assets, there were signs that the cost of these investments, compared to the budget overruns would not be entirely recovered.
Also, as a general rule, it is ideal that there is consistency in the criteria for defining a UGC over the years. But now, changes to the schedule and scope of the projects should be used as an argument for Rnest and Comperj to undergo impairment test separately from the UGC, bringing together the old refineries.
It is also possible that there is asset write-off due to impairment in the exploration and production area. In this case, Petrobras will be fulfilling an accounting policy that it is always applied in the fourth quarter of each year, which is, checking if the value invested in its wells is fully recoverable. The only difference is that at the end of 2014, the price of Brent barrel plunged from the US$ 100 to $ 60, which can result in a decrease above the average of recent years.
The estimate for the impairment size of refineries and also of dry or sub-wells is BRL$ 10 billion to BRL$ 20 billion.
According to Valor newspaper, conversations with theBrazilian Securities Commission (CVM)and theSecurities and Exchange Commission (SEC)indicate that regulators will be no problem for the publication of the balance statement, confirming early information by the newspaper on February 10 that informed that even then there was a technical evasion to the imbroglio.Only informal consultations were held with CVM, and the agency has not provided, and it is not even their understanding that they should provide, prior formal approval for adjustments in the balance sheet. With this attitude, the regulator is totally free to supervise the criteria used by administrators. In regards to SEC, there was a formal consultation on the methodology, but we are not able to confirm whether there have been or will be a formal response. PwC is also comfortable with the progress of the work and the most likely scenario is that they will issue an unqualified opinion.
The opinion among all involved is that they are faced with a case not expressly provided for in accounting standards, which requires the application of accounting judgment by the company's management to show the best possible information to shareholders, creditors and other interested parties. Likewise, regulators and auditors shall require the company to be very transparent in the explanatory notes to the balance on the criteria used for the adjustments to be made as well as the assumptions that will be used in the impairment tests - discount rates, refining margins, oil price, and exchange rate, among others.
In addition to the adjustments in asset, it is not ruled out either that there are extraordinary records of the right side of the balance, with the establishment of provisions for losses on lawsuits filed against the company by investors in the United States. Such move will depend, however, on how Petrobras will be able to estimate the amount that can be charged - as the lawsuits grow each day. If the Company is unable to provide the estimate, it should only disclose this information as an explanatory note.'
In regard,we have determinedthe Company´s response, until9:00 AM on 04.15.15, about the veracity of these statements, and if so confirmed, explanations regarding the reasons for not interpreting as Material Fact, according to Directive CVM n. º 358/2002.
Clarification
Petrobras reaffirms that due to the developments of the Lava Jato Operation, Petrobras is conducting the necessary analyses to finish and disclose financial statements for the third quarter of 2014 and the 2014 annual statements, reviewed by the independent auditors. These analyses may result in loss recognitions, which may be reflected in the results.
The financial statements will be evaluated by the Board of Directors of the Company on April 22nd and Petrobras expects to disclose it to the market after the deliberation of the Board.