Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 and report on review of the interim financial information
Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Contents
Management Report 3
Independent auditor’s report on the interim financial information 10
Statements of financial position 12
Statements of operations 14
Statements of comprehensive income (loss) 16
Statements of changes in equity 17
Statements of cash flow 18
Statements of value added 19
Notes to the interim financial information 20
2
Management Report
Dommo Energia S.A. (“Dommo Energia” or “Company”) management, in compliance with legal and statutory provisions, presents its results for the third quarter of 2018 (“3Q18” or “Period”), as well as relevant subsequent events to the market. The values are presented in thousands of Real, except when indicated otherwise..
1. Company’s highlights
Tubarão Martelo Field production reached 543.5 kbbls (thousand barrels of oil) in the 3Q18 Revenues of R$ 165,487, with 47.1% gross profit margin in 3Q18 Revenues of R$ 408,477, with 49.4% gross margin in 2018 year to date (“9M18”) Adjusted EBITDA of R$ 58,635 and Adjusted EBITDA margin of 35.4% in the 3Q18 Adjusted EBITDA of R$ 163,990 and Adjusted EBITDA margin of 40.1% in 9M18 Cash balance of R$ 154,833 at the end of the period compared to R$ 42,676 in the third quarter of 2017 (“3Q17”), an increase of 262.8% in 12 months
2. Introduction
The average international oil prices remained stable in the 3Q18 when compared to the previous period, verifying an upward trend as of the second half of the quarter, due to output shortcuts in Venezuela, USA embargo to Iran and to indication from Organization of the Petroleum Exporting Countries (“OPEC”) that it will not increase oil production in the short term, which drove prices in the international market to its highest level in 4 years.
In the international economic environment, the emerging countries’ currencies were negatively impacted by the Turkish and Argentinean crisis, resulting in the devaluation of most currencies against the Dollar. Regarding the Brazilian currency (“Real”), it shall be added to the international environment impact, the uncertainties derived from the presidential elections proximity, which triggered a 25.0% appreciation of the average Dollar rate against the Real in the 3Q18, when compared to the average 3Q17 rates.
These factors contributed to the maintenance of the Company’s performance in the Period that, as an oil exporter, soak up on its operational performance, both the Dollar appreciation against the Real as well as the oil prices upward trend verified in the second half of the Period.
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Brent price 3Q18 average Brent price reached US$ 75.84 per Chart 1: Brent price barrel, a 45.4% increase compared to last year’s in US$ per barrel same period, when the average Brent price was US$ 52.17 per barrel. Compared to the second quarter of 2018 (“2Q18”), the 3Q18 average price increased 1.2%.
In the last twelve months, Brent prices appreciated 43.8%, starting the period at US$ 57.54 per barrel and ending at US$ 82.72 per barrel.
(Source: Bloomberg) Exchange rate The average Real rate against Dollar went from R$ Chart 2: Real-Dollar Exchange rate 3.16 in 3Q17 to R$ 3.95 in 3Q18, a 25.0% average in R$/US$ Dollar appreciation.
Compared to 2Q18, when the average Real rate against Dollar was R$ 3.61, the average Dollar appreciation was 9.4% in the Period, having been verified increased volatility in rates, which reflected the global currencies devaluation movement against Dollar, and the uncertainties related to the pre-election period.
(Source: Bloomberg)
3. Operational assets
Tubarão Martelo Field Tubarão Martelo Field encompasses the concession areas of BM-C-39 and BM-C-40 exploration blocks and is located in the Campos Basin, at a water depth of 110 meters, in the north coast of the State of Rio de Janeiro. The Company is the asset operator, having acquired 100% of the exploration and production rights in 2007, in the 9th Bidding Round of Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (“ANP”), Brazilian regulatory agency. The production began on December 2nd, 2013 and reached 14.5 million barrels of oil produced.
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The average daily production in 3Q18 was 5.9 kbbls, Chart 3: Production, Commercialization and Inventories totaling 543.5 kbbls. The volume produced in the in kbbls Period presented a 11.7% reduction compared to 2Q18, when it was produced 615.7 kbbls, arising from the natural decline of the wells flow and interruption of well 7-TBMT-2HP production, which on July 29th, 2018 presented drawbacks in the submerged centrifugal pump culminating in the production suspension, remaining since then 3 active producing wells. The Company evaluates alternatives to resume well 7- TBMT-2HP production.
Atlanta and Oliva Fields – BS-4 block The BS-4 block (“BS-4 Block”), comprised by Atlanta and Oliva fields ("Atlanta and Oliva Fields" or "Atlanta Field"), is located in Santos Basin post-salt area, approximately 185 km from the coast, in water depth of about 1,550 meters.
As disclosed by Dommo Energia through the Material Fact dated October 23rd, 2017, there is an arbitration proceeding managed by London Court of International Arbitration – LCIA, established by the Company against the consortium partners ("BS-4 Consortium").
On September 25th, 2018, the Company received the arbitration award issued by the Arbitration Court (“Decision”) in respect to the first phase of the arbitration proceeding, which stated, among other things, that the notification issued by one of consortium partners on October 10th, 2017 (“Notification”), was valid at the time it was issued, without prejudice to the possible annulment of this exclusion in a subsequent step of the arbitration proceeding, based on analysis of evidence that could support such an annulment. The Notification had the purpose to exercise, without offer of payment, the option to demand the Company’s exclusion from the Joint Operating Agreement – JOA, the Consortium agreement and the Concession agreement, all related to the BS-4 Block.
The first phase of the arbitration did not include the analysis of evidence, having the Decision foreseen that, in any additional phase(s) of the arbitration, through the fact-finding exercise, Dommo Energia may still seek to annul the exclusion and the transfer of its stake in BS-4 Block and argue for an indemnity for losses and damages against the consortium partners. The Decision is subject to eventual clarification requests from the interested parties, which may change its content.
Regarding Atlanta Field’s operational performance, the operator announced on October 4th, 2018 that the 3Q18 production was 1,185.1 kbbls with average daily production of 12.9 kbbls. Since the operation started, on May 2nd, 2018, it was produced 1,778.8 kbbls.
4. Other assets
Corporate stake The Company holds 4,958,471 shares issued by Eneva S.A. booked as Marketable Securities. On September 30th, 2018, the shares marked-to-market value was of R$ 65,700.
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Tubarão Azul Field Considering that no economically feasible alternative was found to continue the activities in Tubarão Azul Field, located at Campos Basin, it was requested the concession’s return to ANP, in accordance with the Material Fact disclosed on September 20th, 2016. Dommo Energia, as operator, began in 2017 the decommissioning and abandonment process of the aforementioned field, in compliance with norms from ANP, regulatory bodies and authorities.
The wells abandonment process was completed in 1Q18 using financial resources from the escrow account established through an agreement signed in 2015 with FPSO OSX-1 rights holders.
5. Financial performance
The financial statements are presented on a consolidated basis, in Real thousands, and were prepared in accordance with accounting principles adopted in Brazil including the pronouncements issued by the Comitê de Pronunciamentos Contábeis – CPC, Brazilian accounting committee, and by the International Financial Reporting Standards – IFRS, issued by the International Accounting Standards Board – IASB.
Table 1: Key indicators (in R$ thousands)
Key Metrics 3Q18 2Q18 Var. % 3Q17 Var. % Average exchange rate (R$/US$) 3,95 3,61 9,4% 3,16 24,8% Volume traded (kbbls) 643,6 367,6 75,1% 817,7 -21,3%
Net revenue 165.487 96.231 72,0% 116.827 41,7% Cost of goods sold (87.491) (46.979) -86,2% (183.869) 52,4% Gross profit 77.996 49.252 58,4% (67.042) 216,3% Gross profit margin 47,1% 51,2% -4,0 p.p -57,4% 104,5 p.p Adjusted EBITDA 58.635 41.543 41,1% (25.446) -330,4% Adjusted EBITDA margin 35,4% 43,2% -7,7 p.p -21,8% 57,2 p.p Net profit (loss) (610.713) 198.770 -407,2% (1.749.978) 65,1% Earnings per share (R$) (0,23) 0,07 - (13,13) -
The volume sold increased from 367.6 kbbls in 2Q18 to 643.6 kbbls in 3Q18, a 75.1% growth, arising from the Company’s offloading optimization with its client, resulting in a larger number of offloads in the Period when compared to 2Q18. Therefore, part of the oil produced in 2Q18 and held in inventories was sold during 3Q18.
As a result, mainly due to the higher volume sold in the Period, net revenues was 72.0% compared to 2Q18, reaching R$ 165,487 in 3Q18. Compared to 3Q17 net revenues of R$ 116,827, period that had a higher volumes sold, 3Q18 performance is 41.7% stronger, explained by the 22.7% Real devaluation and Brent prices appreciation.
Gross Profit The Company posted gross profit of R$ 77,996 in 3Q18. Compared to 2Q18, it represents an increase of R$ 28,744, or 58.4%, mainly due to the higher volume sold. Conversely, the Real devaluation impacted Dollar linked operational costs, pressuring the gross margin that went from 51.2% to 47.1%.
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The past four quarters results, illustrated in Chart 4, Chart 4: Gross Profit and Gross Margin also reflects the terms of the current charter in R$ million agreement, part of the Creditors Agreements (“Agreements”) signed during the 3Q17, and effective as of the 4Q17, which partially explains the gross margin rebound.
Therefore, 3Q17 results are not fully comparable with the subsequent periods, as on this period the charter expenses were substantially higher than in the following periods.
Adjusted EBITDA Chart 5: Adjusted EBITDA in R$ million The end of 3Q18 represents the twelve-month period since the establishing and entering into force of the Agreements terms and conditions. Chart 5 illustrates the positive outcome to the Company, as shown by the Adjusted EBITDA improvement as of 4Q17. The last twelve-month Adjusted EBITDA is R$ 224,713, with a 45.6% margin
The 3Q18 Adjusted EBITDA reached R$ 58,635, with an Adjusted EBITDA margin of 35.4%. The Adjusted EBITDA slowdown compared to 2Q18 results from impacts of Real devaluation over USD linked operational and maintenance costs and expenses, write-off of advance to suppliers and provisioned costs related to legal advisors.
Net Profit/Loss Chart 6: Net Profit/Loss Breakdown in R$ million The net results posted by the Company, net loss of R$ 610,713 in 3Q18, and net profit of R$ 198,770 in the previous quarter, shall be adjusted, as relevant portion is derived from non-recurring and non-cash results.
Chart 6 illustrates the net results breakdown, and is noticeable that when adjusted, in the 2Q18, the amount of R$ 250,262 related to non-cash gains from currency exposure, the net loss would be of R$ 51,492.
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In 3Q18, adjusted the non-cash amounts of R$ 174,861 related to impairment, of R$ 283,296 related to loss from currency exposure, and, of R$ 143,505 related to reversion of income tax and social contribution and R$ 17,269 of non-recurring and non-cash provisions, the net loss would be of R$ 8,218.
The net loss registered in 3Q17 is not comparable due to the non-recurring losses arising from the conversion of financial debt into equity during the period. Balance Sheet
Assets The Company’s total assets in 3Q18 were R$ 864,818 Chart 7: Cash position of which 69.2% accounted as non-current asset and in R$ million comprised mainly of: (i) exploration and production fixed assets; (ii) deferred tax assets arising from tax losses; and (iii) escrow account.
Chart 7 illustrates the Company’s cash position. The 3Q18 ended with R$ 154,833 cash, 53.9% higher than 2Q18, as a result of cash generation and Real devaluation.
The Company reassessed the assumptions and conditions that supported the accounting of part of its interest on BS-4 Block as non-current assets held for sale, and reclassified the R$ 205,920 amount to fixed assets and intangible assets, in the amounts of R$ 101,602 and R$ 104,318, respectively.
Liabilities The cash calls related to BS-4 Consortium, whose payments are suspended by the Company, are accounted as current liabilities under the item other accounts payable, in the amount of R$ 95,859.
The R$ 818,087 non-current liabilities are essentially comprised of (i) provisions for asset retirement obligations (ARO) in the amount of R$ 346,763; (ii) provisions for regulatory contingencies in the amount of R$ 65,337; and (iii) provisions for environmental compensations in the amount of R$ 185,689..
Noteworthy that since the Judicial Reorganization procedure conclusion, the Company does not have any outstanding loans and financings with non-related parties.
As a result of the net loss registered in the 9M18, mainly due to impairment provision and exchange variation, the Company ended the 3Q18 with a net worth of R$ 89,270 compared to net worth of R$ 392,412 in 4Q17.
6. Management additional remarks
Notwithstanding the positive performance presented by the Company since 4Q17, management highlights that a significant part of these results derive from the implementation of the terms and conditions settled in the Agreements related to the Company's financial restructuring, and that the maintenance of the positive performance trend is subject to such terms and conditions. The Agreements’ terms, conditions and other information were disclosed to the market in general through Material Facts dated July 24th, 2017, October 3rd, 2017 and December 22nd, 2017 which were made available by the Company’s official investor relation channels, as well as set forth in “Formulário de Referência 2017” filed within Comissão de Valores Mobiliários, Brazilian securities and exchange agency, and its reading is recommended as part of each investor’s individual assessment.
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After negotiations with OSX 3 Leasing B.V. (“OSX 3”), owner of the FPSO OSX-3 which is currently operating at TBMT, the Company has signed a new amendment to the charter agreement, subquently to the 3Q18 (“New Charter”). The conditions established under the New Charter significantly changed the terms provided in the previous contract and the Agreements. Further information related to the changes and possible impacts in the Company’s operation were disclosed in the material fact of November 26th, 2018.
At last, the management highlights that, together with Óleo e Gás Participações S.A.’s management (“OGpar”), started the proceedings required for the merger of OGpar shares by the Company (“Merger”), and thus comply with the Judicial Reorganization Plan of both companies. In this manner, both managements enacted the Protocol and Justification of the Merger of Shares, having been submitted by the Company for the Extraordinary Shareholder’s Meeting (“ESM”) held on November 26th, 2018. The conditions, documents and further information on the Merger are available on the ESM’s management proposal available on the Company’s website.
(In thousand R$) Accounts reconciliation 3Q18 2Q18 3Q17 Net sales revenue 165,487 96,231 116,827
Net profit (llos) for the period (862,619) 198,770 (1,749,978) Adjustments Income tax and social contribution 143,505 4,354 (1,171) Financial result 279,816 (239,371) 1,044,990 Depreciation and amortization 5,871 4,105 3,511 EBITDA in compliance with CVM Rule nº 527, 3rd article (433,427) (32,142) (702,648) Other adjustments Non-cash and non-operating provisions 17,269 - - PIS and COFINS over financial result (a) 48,026 75,516 (24,801) Impairment (b) 426,767 (1,831) 649,250 Adjusted EBITDA 58,635 41,543 (78,199)
Adjusted EBITDA margin 35.4% 43.2% -66.9%
(a) Result derived from non-cash income from currency exchange rate variation. Accounted in the P&L under operational expenses. Reconciled to avoid misinterpretation in EBITDA’s analysis. (b) Similar impact to depreciation and doesn’t represent cash impact. Reconciled to avoid misinterpretation in EBITDA’s analysis.
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Report on review of quarterly information
To the Board of Directors and Shareholders Dommo Energia S.A.
Introduction
We have reviewed the accompanying parent company and consolidated interim accounting information of Dommo Energia S.A. ("Company"), included in the Quarterly Information Form (ITR) for the quarter ended September 30, 2018, comprising the balance sheet at that date and the statements of income and comprehensive income for the quarter and the nine-month period then ended, and the statements of changes in equity and cash flows for the nine- month period then ended, and a summary of significant accounting policies and other explanatory information.
Management is responsible for the preparation of the parent company and consolidated interim accounting information in accordance with the accounting standard CPC 21, Interim Financial Reporting, of the Brazilian Accounting Pronouncements Committee (CPC) and International Accounting Standard (IAS) 34, Interim Financial Reporting issued by the International Accounting Standards Board (IASB), as well as the presentation of this information in accordance with the standards issued by the Brazilian Securities Commission (CVM), applicable to the preparation of the Quarterly Information (ITR). Our responsibility is to express a conclusion on this interim accounting information based on our review.
Scope of review
We conducted our review in accordance with Brazilian and International Standards on Reviews of Interim Financial Information (NBC TR 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity and ISRE 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of interim information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Brazilian and International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Basis for qualified conclusion
Deviation from accounting practice
As mentioned in Note 15, the individual and consolidated interim financial information at September 30, 2018, includes accounts receivable outstanding for a long time of R$ 110,280 thousand from the related party Óleo e Gás Participações S.A, without expectation of recovery. The Company did not recognize an impairment loss for this financial asset, as required by the accounting practices adopted in Brazil. Consequently, non-current assets and shareholders' equity at September 30, 2018 are overstated by R$ 110,280 thousand and the loss for the nine-month period then ended is understated by R$ 17,275 thousand.
Conclusion on the interim information
Based on our review, except for the effects described in the "Basis for qualified conclusion - deviation from accounting practice” section of our report, nothing has come to our attention that causes us to believe that the accompanying parent company and consolidated interim accounting information included in the quarterly information referred to above has not been prepared, in all material respects, in accordance with CPC 21 and IAS 34 applicable to the preparation of the Quarterly Information, and presented in accordance with the standards issued by the CVM.
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Other matters
Statements of value added
We have also reviewed the parent company and consolidated statements of value added for the nine-month period ended September 30, 2018. These statements are the responsibility of the Company's management, and are required to be presented in accordance with standards issued by the CVM applicable to the preparation of Quarterly Information (ITR) and are considered supplementary information under IFRS, which do not require the presentation of the statement of value added. These statements have been submitted to the same review procedures described above and, based on our review, except for the effects of the matter described in the "Basis for qualified conclusion - deviation from accounting practice” section of our report, nothing has come to our attention that causes us to believe that they have not been prepared, in all material respects, in a manner consistent with the parent company and consolidated interim accounting information taken as a whole.
Audit and review of previous year's figures
The Quarterly Information (ITR) referred to in the first paragraph includes accounting information corresponding to income and comprehensive income for the three and nine-month periods ended September 30, 2017, and to changes in stockholders' equity, cash flows and value added for the nine month period ended September 30, 2017, obtained from the quarterly information - ITR for that quarter, and related to the balance sheets as of December 31, 2017, obtained from the financial statements at December 31, 2017, presented for comparison purposes. The review of the Quarterly Information (ITR) for the quarter ended September 30, 2017 and the examination of the financial statements for the year ended December 31, 2017 before the adjustments described in Note 2 (e) were conducted under the responsibility of other independent auditors, who issued an unmodified review report dated November 10, 2017 with an emphasis paragraph on the closure of the judicial recovery plan and an unmodified audit report dated March 27, 2018 with an emphasis paragraph related to the arbitration proceedings involving the notice requesting the exclusion of the Company from the BS-4 Consortium.
As part of our review of the interim accounting information at September 30, 2018, we also reviewed the adjustments described in Note 2 (e.1; e.2) that were made to change the financial statements for 2017. Based on our review, nothing has come to our attention that such adjustments are not appropriate or have not been correctly performed, in all material respects. We were not appointed to audit, review or to apply any other procedures on the Company's financial statements for the year 2017 and, therefore, we do not express an opinion or any other form of assurance regarding the 2017 financial statements taken as a whole.
Rio de Janeiro, December 7, 2018.
PricewaterhouseCoopers Auditores Independentes CRC 2SP000160/O-5
Patricio Marques Roche
Contador CRC 1RJ081115/O-4
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Dommo Energia S.A. (Publicly Held Company)
Statements of financial position as at September 30, 2018 and December 31, 2017
(In thousands of Reais)
Company Consolidated
Note 09/30/2018 12/31/2017 09/30/2018 12/31/2017 (restated) (restated) Assets
Current Cash and cash equivalents 5 a 9,182 36,008 154,833 42,537 Trade accounts receivable 7 - 16,523 - 16,523 Inventory 8 33,014 18,055 30,449 16,820 Marketable securities 5 b 65,700 68,923 65,700 68,923 Escrow deposits 6 3,356 72,505 3,356 72,505 Other credits and prepaid expenses 9 12,511 16,283 12,366 16,102
123,763 228,297 266,704 233,410
Non-current assets held for sale 10 - 205,920 - 205,920
Total current assets 123,763 434,217 266,704 439,330
Non-current Long term assets Escrow deposits 6 150,938 60,676 150,938 60,676 Inventory 8 - - 10,533 10,533 Loans and financing with related parties 15 15,240,931 12,620,144 105,055 87,780 Income tax, social contribution and other recoverable taxes 14 87,353 87,971 89,224 89,444 Deferred income tax and social contribution 14 - 146,300 - 146,300 Credits with related parties 15 428,431 354,888 5,225 5,225 15,907,653 13,269,979 360,975 399,958
Investments 11 240,298 184,812 232,407 193,242 Fixed assets 12 255,575 178,268 256,628 179,139 Intangible assets 13 10 135,115 10 135,115
Total non-current assets 16,403,536 13,768,174 850,020 907,454
Total assets 16,527,299 14,202,391 1,116,724 1,346,784
The accompanying notes are an integral part of the interim financial information.
12 Dommo Energia S.A. (Publicly Held Company)
Statements of financial position as at September 30, 2018 and December 31, 2017
(In thousands of Reais)
Company Consolidated
Note 09/30/2018 12/31/2017 09/30/2018 12/31/2017 (restated) (restated) Liabilities Current Trade accounts payable 16 34,078 42,839 34,407 43,790 Income and social contribution taxes, government stakes and other taxes to be paid 14 36,134 29,947 36,138 29,948 Salaries and payroll charges 10,689 14,844 10,689 14,844 Accounts payable to related parties 15 123,089 84,587 633 2,185 Sundry provisions 17 3,460 41,406 3,460 41,406 Other accounts payable 18 76,090 92,602 124,040 130,956
Total current liabilities 283,540 306,225 209,367 263,129
Non-current Loans and financing with related parties 15 14,913,221 12,462,921 - - Accounts payable to related parties 15 423,181 349,590 - - Sundry provisions 17 654,496 654,068 654,496 654,068 Deferred PIS and COFINS 14 163,591 37,175 163,591 37,175
Total non-current liabilities 16,154,489 13,503,754 818,087 691,243
Equity Capital stock 20 10,157,770 10,157,770 10,157,770 10,157,770 Capital reserves 1,884,317 1,884,317 1,884,317 1,884,317 Currency translation adjustments 20 111,499 72,927 111,499 72,927 Accumulated losses (12,064,316) (11,722,602) (12,064,316) (11,722,602)
Total equity 89,270 392,412 89,270 392,412
Total liabilities and equity 16,527,299 14,202,391 1,116,724 1,346,784
The accompanying notes are an integral part of the interim financial information.
13 Dommo Energia S.A. (Publicly Held Company)
Statements of operations
Periods ended September 30, 2018 and 2017
(In thousands of Reais, except for basic and diluted earnings [loss] per share)
Company 07/01/2018 to 07/01/2017 to 01/01/2018 to 01/01/2017 to Note 09/30/2018 09/30/2017 09/30/2018 09/30/2017 (restated) (restated)
Net sales revenue 21 157,797 116,827 400,787 342,055 Cost of goods sold 22 (93,383) (190,233) (220,728) (477,427) Gross profit 64,414 (73,406) 180,059 (135,372)
Operating expenses General and administrative expenses 23 (12,221) (9,677) (33,122) (53,565) Other operating income (expenses) 25 (76,114) 23,796 (157,794) 6,706 (Provision for)/realization/reversal of impairment 26 (179,186) (652,704) (168,395) (648,667) Equity in the earnings of subsidiaries 11 (432,246) 138,084 (755,389) 114,201 (699,767) (500,501) (1,114,700) (581,325)
Results before financial result and taxes on income (635,353) (573,907) (934,641) (716,697)
Financial results Financial revenue 24 9,445 45,402 14,616 89,136 Financial expenses 24 (4,873) 383,590 (24,234) 259,969 Loss on debt converted into equity instrument 24 - (1,590,937) - (1,590,937) Net exchange variations 24 163,573 (15,297) 750,404 (6,066) 168,145 (1,177,242) 740,786 (1,247,898)
Results before taxes on income (467,208) (1,751,149) (193,855) (1,964,595)
Income tax and social contribution 14 (143,505) 1,171 (147,859) 8,631
Net results of continuing operations (610,713) (1,749,978) (341,714) (1,955,964)
Discontinued operations - - - (27)
Profit (loss) for the period (610,713) (1,749,978) (341,714) (1,955,991)
Basic and diluted earnings (loss) per share (R$) 32 (0.12820) (14.67646)
The accompanying notes are an integral part of the interim financial information.
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Consolidated 07/01/2018 to 07/01/2017 to 01/01/2018 to 01/01/2017 to Note 09/30/2018 09/30/2017 09/30/2018 09/30/2017 (restated) (restated)
Net sales revenue 21 165,487 116,827 408,477 342,055 Cost of goods sold 22 (87,491) (183,869) (206,777) (461,569) Gross profit 77,996 (67,042) 201,700 (119,514)
Operating expenses General and administrative expenses 23 (12,504) (9,949) (34,168) (54,876) Other operating income (expenses) 25 (77,685) 22,529 (161,978) 3,300 (Provision for)/realization/reversal of impairment 26 (174,861) (649,250) (156,581) (638,228) Equity in the earnings of subsidiaries 11 (338) (2,447) 1,047 (3,155) (265,388) (639,117) (351,680) (692,959)
Results before financial result and taxes on income (187.392) (706.159) (149.980) (812.473)
Financial results Financial revenue 24 8,784 45,077 12,890 87,922 Financial expenses 24 (5,304) 382,214 (26,770) 255,637 Loss on debt converted into equity instrument 24 - (1,590,937) - (1,590,937) Net exchange variations 24 (283,296) 118,656 (29,995) 95,256 (279,816) (1,044,990) (43,875) (1,152,122)
Results before taxes on income (467,208) (1,751,149) (193,855) (1,964,595)
Income tax and social contribution 14 (143,505) 1,171 (147,859) 8,631
Net results of continuing operations (610,713) (1,749,978) (341,714) (1,955,964)
Discontinued operations - - - (27)
Profit (loss) for the period (610,713) (1,749,978) (341,714) (1,955,991)
Basic and diluted earnings (loss) per share (R$) 32 (0.12820) (14.67646)
The accompanying notes are an integral part of the interim financial information.
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Dommo Energia S.A. (Publicly Held Company)
Statements of comprehensive income (loss)
Periods ended September 30, 2018 and 2017
(In thousands of Reais)
Company and Consolidated 01/01/2018 to 01/01/2017 to 09/30/2018 09/30/2017 (restated)
Loss for the period (341,714) (1,955,991) Currency translation adjustments 38,572 16,147
Total comprehensive income (loss) (303,142) (1,939,844)
The accompanying notes are an integral part of the interim financial information.
16 Dommo Energia S.A. (Publicly Held Company)
Statements of changes in equity
Periods ended September 30, 2018 and 2017
(In thousands of Reais)
Company and Consolidated Retained Other earnings/ Capital Capital comprehensive accumulated Note stock reserve income (loss) losses Total
Balances as at January 1, 2017 8,607,471 117,273 90,552 (9,746,583) (931,287)
Shares to be issued in accordance with the extinction of debts - 1,550,101 - - 1,550,101 Creation of a Capital reserve - debt converted into equity instrument - 1,767,044 - - 1,767,044 11 and Currency translation adjustments 20 - - 16,147 - 16,147 Reclassification due to the equalization of amounts receivable from and payable to OGX Austria - - (41,138) - (41,138) Net loss for the period - - - (1,955,991) (1,955,991)
Balances as at September 30, 2017 8,607,471 3,434,418 65,561 (11,702,574) 404,876
Capital increase 20 198 - - - 198 Shares to be issued in accordance with the extinction of debts 1,550,101 (1,550,101) - - - 11 and Currency translation adjustments 20 - - (57,053) - (57,053) Reclassification due to the equalization of amounts receivable from and payable to OGX Austria - - 64,419 - 64,419 Net loss for the period - - - (20,028) (20,028)
Balances as at December 31, 2017 10,157,770 1,884,317 72,927 (11,722,602) 392,412
11 and Currency translation adjustments 20 - - 38,572 - 38,572 Net loss for the period - - - (341,714) (341,714)
Balances as at September 30, 2018 10,157,770 1,884,317 111,499 (12,064,316) 89,270
The accompanying notes are an integral part of the interim financial information.
17 Dommo Energia S.A. (Publicly Held Company)
Statements of cash flows
Periods ended September 30, 2018 and 2017
(In thousands of Reais) Company Consolidated
Note 09/30/2018 09/30/2017 09/30/2018 09/30/2017
(restated) (restated) Cash flow from operating activities Loss for the period from continuing operations (341,714) (1,955,964) (341,714) (1,955,964) Loss for the period from discontinued operations - (27) - (27) Adjustments to reconcile results with cash flow from operating activities: Depreciation of fixed assets and amortization of intangible assets 571 1,274 13,704 10,559 Equity in the earnings of subsidiaries 11 755,389 (114,201) (1,047) 3,155 Adjustment of the provision for stock option guarantees 17 (539) 75 (539) 75 Impairment 26 168,395 648,667 156,581 638,228 Reversal of provision for inventory losses 8 2 (47,671) 2 (47,671) Sundry provisions 17 863 813 863 813 Unrealized exchange variations on financing - assets and liabilities (808,520) 31,316 (10,401) (91,161) Interest/charges on financing - provisioned assets and liabilities (6,837) (291,659) (4,880) (290,094) Deferred income tax and social contribution 14 146,300 (8,631) 146,300 (8,631) Deferred PIS and COFINS 14 and 25 126,416 (16,077) 126,416 (16,077) Interest and exchange variations on provision for ARO 81,349 (2,713) 81,349 (2,713) Fair value adjustment of financial assets 24 3,223 (48,841) 3,223 (48,841) Loss on debt converted into equity instrument 24 - 1,590,937 - 1,590,937 Other (23,944) 5,269 (24,809) 6,422 Cash used in operations 100,954 (207,433) 145,048 (210,990)
Changes in assets and liabilities: Other credits and related parties 9 and 15 73,738 192,321 8 180,148 Income tax, social contribution and other recoverable taxes 14 618 7,614 220 7,459 Trade accounts receivable 7 16,523 (22,549) 16,523 (22,549) Inventory 8 (14,961) 121,150 (13,631) 114,560 Escrow deposits 6 2,831 15,163 2,831 15,163 Trade accounts payable 16 (8,761) 2,670 (9,383) 3,283 Salaries and payroll charges (4,155) (4,045) (4,155) (4,052) Income and social contribution taxes, government stakes and other taxes to be paid 14 6,187 2,410 6,190 2,411 Sundry provisions 17 (58,437) (25,906) (58,437) (25,906) Other accounts payable 18 17,110 (3,690) 26,706 32,480 30,693 285,138 (33,128) 302,997
Net cash - operating activities 131,647 77,705 111,920 92,007
Cash flows from financing activities Marketable securities - (19,834) - (19,834) Capital increase in equity interest 11 (1,052) (5,673) - (14,647) Sale of fixed assets 376 138 376 138 Acquisition of intangible assets - (61) - (61) Acquisitions of fixed assets 12 - (46,801) - (46,801) Net cash provided by (used in) investing activities (676) (72,231) 376 (81,205)
Cash flow from financing activities Amortization of principal (157,797) - - -
(157,797) - - -
Variations in cash and cash equivalents (26,826) 5,474 112,296 10,802
Variations in cash and cash equivalents Opening balance of cash and cash equivalents 36,008 25,927 42,537 31,874 Closing balance of cash and cash equivalents 9,182 31,401 154,833 42,676
Variations in cash and cash equivalents (26,826) 5,474 112,296 10,802
The accompanying notes are an integral part of the interim financial information.
18 Dommo Energia S.A. (Publicly Held Company)
Statements of value added
Periods ended September 30, 2018 and 2017
(In thousands of Reais)
Company Consolidated
Note 09/30/2018 09/30/2017 09/30/2018 09/30/2017 (restated) (restated)
Net sales revenue 21 400,787 342,055 408,477 342,055
Inputs acquired from third parties Costs of products, merchandise and services, less royalties 22 (183,609) (443,221) (169,658) (427,363) Materials, energy, outsourced services and others (18,244) (13,375) (11,654) (9,831) (Provision for)/realization of impairment 26 (168,395) (648,667) (156,581) (638,228) (370,248) (1,105,263) (337,893) (1,075,422)
Gross added value 30,539 (763,208) 70,584 (733,367)
Retentions Depreciation of fixed assets and amortization of intangible assets (571) (1,274) (13,704) (10,559) (571) (1,274) (13,704) (10,559)
Net value added produced by the Company 29,968 (764,482) 56,880 (743,926)
Value added received through transfers Equity in the earnings of subsidiaries 11 (755,389) 114,201 1,047 (3,155) Results of discontinued operations - (27) - (27) Loss on debt converted into equity instrument 24 - (1,590,937) - (1,590,937) Financial revenue 24 14,616 89,136 12,890 87,922 (740,773) (1,387,627) 13,937 (1,506,197)
Total value added to distribute (710,805) (2,152,109) 70,817 (2,250,123)
Distribution of value added Employees (i) Direct remuneration 30,388 35,892 30,388 36,014 Benefits 5,488 5,366 5,488 5,369 Accrued severance pay (FGTS) 2,387 2,365 2,387 2,365 38,263 43,623 38,263 43,748
Taxes Taxes, fees and contributions 281,697 (20,044) 280,384 (21,193) Royalties 22 37,119 34,206 37,119 34,206
Financial expenses and net exchange variations 24 (726,170) (253,903) 56,765 (350,893)
Value distributed to shareholders Loss for the period attributable to shareholders (341,714) (1,955,991) (341,714) (1,955,991)
Total value added distributed (710,805) (2,152,109) 70,817 (2,250,123)
(i) Composed of amounts allocated to projects as part of costs of products sold or fixed assets, and amounts recorded as administrative and general expenses.
The accompanying notes are an integral part of the interim financial information.
19 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Notes to the interim financial information
(In thousands of Brazilian Reais, except when indicated otherwise)
1 Operations
1.1 Corporate Structure
As at September 30, 2018, the corporate structure of Dommo Energia is as follows:
Dommo Energia S.A., former OGX Petróleo e Gás S.A., (“Dommo Energia” or the “Company”): Originally founded as a limited liability company (Ltda.) on June 27, 2007 and headquartered in the city of Rio de Janeiro, the Company’s purpose is to engage in activities authorized or granted by the Brazilian federal government involving research, extraction, refining, processing, sale and transportation of oil, natural gas and other hydrocarbons, as well as any other correlated activities. Acting either directly or through subsidiaries, Dommo Energia may further carry out activities related to its purpose within or outside of Brazil, and hold interests in other companies.
Sucursal Colômbia (“OGX Colômbia”): The Colombian branch of Dommo Energia was founded on October 26, 2010 to manage the operations of the exploration blocks acquired in that country.
OGX Petróleo e Gás S.A. (“OGX R-11”): This subsidiary was founded on October 4, 2013, is headquartered in the city of Rio de Janeiro and has the same corporate purpose as Dommo Energia.
20 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
OGX International GmbH (“OGX International”): Founded on November 11, 2009 and headquartered in the city of Vienna, Austria, this subsidiary’s purpose is to hold interests in other companies and engage in any type of business.
OGX Austria GmbH (“OGX Austria”): Also founded on November 11, 2009 and headquartered in Vienna, Austria, this subsidiary’s purpose is to engage in all activities related to the sale of oil, natural gas and all other hydrocarbons, including import, export, processing, transportation and storage. It may further acquire, maintain and dispose of interests in other companies and sign lease agreements.
OGX Netherlands B.V. (“OGX Netherlands Holding”): Founded on July 23, 2012 and headquartered in Amstelveen, in the Netherlands, this subsidiary’s purpose is to engage in the exploration, production and sale of oil and its byproducts, natural gas and other hydrocarbons. It may further hold interests in other companies and provide technical services to the O&G industry, and also engage in other activities associated with this industry. At present, its main operating activities consist of holding interests in other Dutch companies.
OGX Netherlands B.V. (“OGX Netherlands”): This subsidiary was founded on March 19, 2010, and is also headquartered in Amstelveen, in the Netherlands. Its corporate purpose is the exploration, production and sale of oil and its byproducts, natural gas and other hydrocarbons. It may further provide technical services for the O&G industry, as well as engaging in other activities associated with this industry. Currently, its main operating activities consist of acquiring and leasing equipment to Dommo Energia for use in the O&G industry.
Atlanta Field B.V. (“Atlanta Field”): This subsidiary was founded on November 2, 2012, and is headquartered in Rotterdam, in the Netherlands. At present, its main operations consist of acquiring and leasing equipment to be used in O&G exploration and production by the BS-4 Consortium, comprised of Dommo Energia with an interest of 40%, Queiroz Galvão Exploração e Produção S.A. (the “Operator” or “QGEP”) with an interest of 30%, and Barra Energia do Brasil Petróleo e Gás Ltda. (“Barra”) with an interest of 30% (jointly the “Consortium” or “BS-4 Consortium”).
Eneva S.A. (“Eneva”): This subsidiary was founded on April 25, 2001 under the name of MPX Mineração e Energia Ltda., headquartered in Rio de Janeiro. The Extraordinary Shareholders’ Meeting of September 11, 2013 approved the change of the corporate name to Eneva S.A. The company’s business plan states as its main activity the generation of electricity through the development of diversified energy matrices, including coal, natural gas and renewable sources. In order to integrate its operations, Eneva is also a shareholder in concessionaires of natural gas production and exploration projects in the Parnaíba basin, state of Maranhão, which provides gas for thermoelectric power plants built by the company in the said location. Dommo Energia classifies its interest in Eneva as a financial asset measured at fair value through profit or loss. On March 31, 2018, these assets were classified as marketable securities under current assets. See Note 5b.
21 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
1.2 Portfolio
As of September 30, 2018, the Company holds interests in the following fields: % Dommo Contractual Country Basin Block Field Operator Energia period 1 Brazil Campos BMC 41 Tubarão Azul Dommo Energia 100% 05/09/2012 to 05/09/2039 BMC 39 and 2 Brazil Campos 40 Tubarão Martelo Dommo Energia 100% 04/19/2012 to 04/19/2039 3 Brazil Santos BS-4 Atlanta Queiroz Galvão E&P 40% 12/27/2006 to 12/27/2033 4 Brazil Santos BS-4 Oliva Queiroz Galvão E&P 40% 12/27/2006 to 12/27/2033
Fields being developed and producing
Atlanta and Oliva – under dispute The Atlanta and Oliva fields, located in the BS-4 block in the Santos Basin (“BS-4” or “Atlanta and Oliva Fields” or “Atlanta Filed”) has a 40% interest in the BS-4 consortium, which is also comprised by Queiroz Galvão Exploração e Produção S.A. (“Operator” or “QGEP”), with an interest of 30%, and Barra Energia do Brasil Petróleo e Gás Ltda. (“Barra”), with an interest of 30% (jointly “Consortium” or “BS-4 Consortium”). The Atlanta field began production on May 2, 2018.
In October 2017, Barra sent a notification to Dommo Energia informing the exercise of the option to demand that the Company withdraw from the Joint Operating Agreement ("JOA") referring to BS-4 Consortium and the concession agreement ("Notice"), without any offer to pay a price of indemnification. According to the Notice, the requirement was founded on Dommo Energia’s incapacity to remedy its default until the sixtieth (60th) day after the date the notifications of default related to the cash calls to cover expenditures of the BS-4 Consortium were sent (see Note 19e).
In this regard, on October 23, 2017, the Company informed the market that it started arbitration before the London Court of International Arbitration - LCIA, pursuant to the arbitration rules of UNCITRAL, against Barra and QGEP, challenging: (i) the exercise of the alleged option, by Barra, requiring Dommo to withdraw from the Joint Operating Agreement - JOA , the Consortium Agreement and the Concession Agreement of BS-4, without any offer to pay a price of indemnification; (ii) the default status of QGEP as operator of the BS-4 Consortium; and (iii) the illegality of certain JOA clauses that allegedly authorize the actions taken by Barra and QGEP. Dommon also filed an application requesting that Barra and QGEP pay for the damages caused by said conduct (See Note 19e).
The Arbitration Court issued a preliminary decision, effective as of 2Q18, determining that the amount related to the 40% interest in revenue from the sale of oil be deposited in an escrow account in order to be used to pay cash calls issued after said preliminary decision, and that the remaining balance be raised by the winner of the dispute. Therefore, pursuant to CPC 25, Dommo Energia did not record billings statements (R$136,458.00) and cash calls (R$120,103.00) received as of 2Q18. Similarly, revenues from the sale of oil have also not been recorded. On July 18, 2018, the operator issued a notice to Dommo Energia informing of about the opening of an escrow account in which the amounts from the sale of oil should be deposited and in which a total of R$42,045 referring to the the 40% under dispute related to offloadings was deposited. During this period, the operator redeemed the full amount deposited in the escrow account to pay the cash calls received as of 2Q18.
22 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
On September 25, 2018, the Company became aware of the judgment rendered by the Arbitration Court (“Decision”) regarding the first stage of the arbitration, as per Material Fact of October 23, 2017. Said decision states, among other things, that the notification issued by Barra on October 10, 2017, in order to exercise, without offering any payment, the option to demand the withdrawal of the Company from the Joint Operating Agreement - JOA, the Consortium Agreement and the Concession Agreement, all of which related to Block BS-4, as per Material Fact of October 20, 2017,valid at the time, and should produce effects from the date of receipt of the notice, i.e., October 11, 2017, without prejudice to a possible annulment of said withdrawal at a latter stage of the arbitration, with the production of new evidence that supports said annulment. The first stage of the arbitration did not support the production of evidence, as the Decision established that ina new stage of the arbitration that includes the production of evidence, Dommo Energia can still plead for the annulment of its withdrawal and the mandatory transfer of its interest in Block BS-4 and/or award for damages from QGEP and Barra.
The decision is still subject to requests for clarification of the parties, which may alter its content.
The effects and consequent enforceability of the decision in Brazil are subject to ratification by the Superior Court of Justice (STJ) of a judgment rendered abroad, in accordance with the Federal Constitution and effective law.
Within this context and pursuant to the accounting law represented by CPC 01 – Impairment of Assets, and CPC 25 – Provisions, Contingent Liabilities and Contingent Assets, Dommo Energia reclassified R$205,920, referring to its interest in BS-4, from held for sale to fixed assets (R$101,602) and intangible assets (R$104,318). As established by the same accountinglaw, the Company complemented the impairment amount, which totaled R$1,083,838 on September 30, 2018, which is net of provision for ARO (Note 17) and cash calls received after October 2017 (Note 18), as described in Note 26. Additionally, the Company reversed the amount related to deferred income and social contribution taxes for future taxable profit arising from Block BS-4, considering the aspects inherent to the sale of oil mentioned in the arbitration. It is worth noting that these reclassifications of the accounting records carried out in 3Q18 comply with CPC 01 and CPC 25 and do not represent, under any circumstances, the opinion of the Company’s Management and its legal counsel regarding the Decision, nor do they jeopardize any legal strategy that may be implemented.
Tubarão Martelo Tubarão Martelo Field, located in Campos Basin (“Tubarão Martelo Field” or “TBMT”) is operational and operated by the Company. The Floating Production, Storage and Offloading Platform (FPSO OSX-3), owned by OSX-3 Leasing B.V. (“OSX-3”), is allocated to the field production.
On November 26, 2018, the Company, upon approval of its Board of Directors, executed a new amendment to the charter agreement (“New Charter”) with OSX 3 Leasing B.V. ("OSX 3") to extend the existing charter for a period of up to 20 years. OSX 3 is the owner of FPSO OSX-3 ("FPSO") that serves as the production facility on the Tubarão Martelo Field ("TBMT"), which currently produces around 6,000 barrels of oil per day. Additionally, in conjunction with the New Charter, the Company and OSX 3 cancelled the option to acquire TBMT that was held by OSX 3 following the judicial recovery procdures.
Under the terms of the previous charter agreement (“Old Charter”), which had been negotiated as part of the Company’s restructuring of its indebtedness while still under judicial recovery procedures (as disclosed in the Material Fact released on July 24th, 2017), OSX 3 had the option to notify the Company at any time of its intent to remove the vessel from TBMT.
23 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Furthermore, as an additional protection to OSX 3, the Company granted a call option, which enabled OSX 3 to acquire TBMT for USD 1.00 under certain conditions.
The terms of the Old Charter made it difficult for Dommo Energia to carry on with its planned and approved investments in TBMT given the uncertainty regarding the permanence of the FPSO as the production facility on the field. The parties negotiated the New Charter in order to give Dommo Energia the necessary visibility and long-term commitment to keep investing in TBMT and further increase its production capacity.
As a result of the New Charter, the Company will be able to resume its planned and approved investments in TBMT (“Revitalization”). The Revitalization consists of the completion of the fifth well, 4HP, which has already been drilled and needs to be connected to the FPSO, as well as workover activities in the four producing wells, known as 2HP, 6HP, 8H and 44HP. The goal of the Revitalization is to increase the production of TBMT to an estimated 10,000 bbls/day by late 2019. The Company estimates the cost of the Revitalization to be USD 80.0MM (“Revitalization Expenditures”), which should be disbursed over the next 12-18 months and will be funded from existing cash balances and future cash generation.
The following are the general terms of the Old Charter, in force since the implementation of the settlement agreement executed with the Company's creditors on July 24, 2017 ("Omnibus Deed"): (i) the grant by Dommo Energia to OSX 3 of a call option on TBMT through the payment of USD 1.00 plus the sum of certain other amounts ("TBMT Call Option"); (ii) given certain precedent conditions, the grant by OSX 3 to Dommo Energia of a call option on 4,958,471 Eneva shares held by OSX 3 through the payment of USD 1.00 ("Eneva Call Option"); (iii) no fixed term. Dommo Energia, when notified at any point in time, would have to take all necessary measures to complete the re-delivery process of the FPSO in up to 240 days from the notification receipt; (iv) charter payments based on an established formula and effective until the re-delivery of the FPSO to OSX 3.
The General Terms of the New Charter are:
(i) Cancellation of the TBMT Call Option;
(ii) Cancellation of the Eneva Call Option;
(iii) 20 (twenty) years charter term, subject to early termination provisions as described below;
(iv) Charter payments shall be calculated and paid upon each offload based upon a formula that will distribute the cash flows generated by TBMT between the parties as follows:
Gross TBMT Revenues minus ANP royalties minus TBMT Revitalization Expenditures minus abandonment fund deposits (when applicable) = TBMT Gross Cash Flows (“TBMT GCF”).
The division of TBMT-GCF between the parties shall be as follows (pro-rata calculation according to the number of calendar days spent between offloads):
24 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Payment by Dommo Energia ("DP"): 100% of TBMT-GCF up to USD 58.5MM per year;
Charter Payment (“CP”): 100% of TBMT-GCF up to USD 47.2MM per year –equivalent to USD 129,315 daily rate.
Following the payments above, the remaining cash flow from TBMT will be divided into 20% to Dommo Energia, the Dommo Energia Variable Payment (“DVP”), and 80% to OSX 3, the Variable Charter Payment (“VCP”).
in order to secure a long-term charter and cancel the TBMT Call Option, Dommo Energia will make a payment of USD 50.0MM to OSX 3 upon the signing of the New Charter and another payment of USD 15.0MM on or before September 30th, 2019. In the event of termination of the New Charter by OSX 3 prior to the expiration of the contractual term, there will be an early termination fee to be paid by OSX 3 to Dommo Energia as follows: 2019: USD 65.0MM / 2020: USD 50.0MM / 2021: USD 25.0MM / 2022: USD 12.0MM / 2023: USD 6.0MM.
Along with the financial terms described above, the New Charter also includes additional terms such as financial and operational covenants; guarantees (lien on oil, field and receivables); penalties for default (for both parties); collection account for disbursement of payments; and other terms negotiated by the parties.
Field in final decommissioning process
Tubarão Azul According to a Material Fact disclosed on January 22, 2016, the demobilization of the FPSO OSX-1 production vessel operating in the Field was completed. The abandonment of the wells was completed in 1Q18 and the decommissioning of the field is ongoing.
1.3 Going concern assumption
The conclusion of the new FPSO OSX-3 charter agreement between the Company and OSX-3 establishes new conditions that will allow for the realization of interventions in the Tubarão Martelo Field wells that will result in the production of 11MM bbls by 2022 and incremental cash generation in the amount of R$ 251.9MM. This new scenario is the basis for the reassessment of the impairment of property, plant and equipment of Tubarão Martelo Field whose premises are described in note 12.
2 Presentation of the Interim Financial Information
Basis of preparation
a. Statement of compliance with international standards (“IFRS”) and Accounting Pronouncements Committee (“CPC”) pronouncements
The financial statements have been prepared in accordance with the accounting practices adopted in Brazil, including the pronouncements issued by the Brazilian Accounting Pronouncements Committee (“CPC”) and the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”).
25 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
The Company submits individual and consolidated interim financial information as required by CPC 21 - (R1) Interim Financial Information issued by the CPC, and IAS 34 issued by IASB and the regulations established by the Brazilian Securities and Exchange Commission (“CVM”). All significant information pertaining to the interim financial information, and this information alone, is being evidenced and corresponds to the information used by Management in the course of its duties. b. Basis of measurement The individual and consolidated interim financial information has been prepared based on historical costs, except for derivative financial instruments, when applicable, and other financial instruments, which have been measured at fair value. c. Functional and reporting currency This interim financial information is being presented in Brazilian Reais, which is the Company’s functional currency. All balances have been rounded to the nearest thousand, except as indicated otherwise. d. Use of estimates and judgments
When preparing this interim financial information, Management made use of judgments, estimates and assumptions that affect the application of the Company’s accounting policies and the reported amounts of assets, liabilities, revenue and expenses. Actual results may differ from such estimates. Estimates and assumptions are reviewed on an ongoing basis. Revisions of estimates are recognized prospectively.
Information on estimates and assumptions that may result in adjustments during the next financial reporting year is included in the following Notes:
Note 12b - estimated recovery of the reserves for impairment testing purposes, depreciation based on the units of production method, provision for abandonment, deferred taxes, as well as significant impacts on the evaluation of the ability to continue as a going concern. Notes 12 and 13 - Depreciation and Amortization - useful lives, rates and impairment testing. Note 14 - Deferred income tax and social contribution - period for realization. Note 17 - Provisions for Asset Retirement Obligation (“ARO”) - discount rate assumptions. Note 19 - Contingencies - expectation of success or loss. Note 29 - Financial instruments - fair value calculation assumptions.
Basis of consolidation
The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which that control ceases to exist. The accounting policies of subsidiaries are aligned with the policies adopted by the Company.
The subsidiaries' financial statements are recognized in the Company's individual financial statements using the equity method.
Intergroup balances and transactions, and any revenue and expenses arising from intergroup transactions, have been eliminated for the preparation of the consolidated financial statements. Unrealized gains arising from transactions with subsidiaries and recognized using the equity method have been eliminated against investments in proportion to the Company's interest in these subsidiaries. Unrealized profits (losses) have been eliminated on the same basis of unrealized gains, but only to the extent that there is no evidence of impairment.
26 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
e. Restatement
e.1 Capital increase
Pursuant to CPC 23 – Accounting Policies, Changes in Accounting Estimates and Errors, and CPC 26 (R1) – Presentation of Financial Statements, the capital stock and capital reserve balances on December 31, 2017 are being restated.
The indenture establishes that the restatement of the amount subscribed is not due at the moment the debentures are converted into shares, as defined in clauses 4.21.2.8 and 4.21.2.16 of the 5th amendment to the Indenture of the Third Debenture Issue. However, such provision was not complied with upon capitalization, which unduly considered the restatement.
Therefore, through the Minutes of the Board of Directors’ Meeting of August 3, 2018, the Company rectified the capital increase amount approved at the Minutes of the Board of Directors’ Meeting of December 21, 2017, from six hundred and eighty-one thousand, one hundred and twenty reais (R$681,120.00) to five hundred and five thousand, two hundred and ten reais (R$505,210.00). The total number of shares issued was maintained at one billion, seven hundred and thirty-two million, five hundred and thirty-eight thousand, six hundred and thirteen (1,732,538,613) registered, book-entry common shares with no par value, but the issue price was adjusted to R$0.2916014 per share.
As a result of the rectification, the Company’s capital stock moved down from R$10,333,679.00 to R$10,157,770.00. The corresponding effect is an increase in negative goodwill recorded as capital reserve due to a difference between the fair value per share of R$1.31 at the time of the capitalization and the issue price, that fell from R$0.3931341 to R$0.2916014 per share.
Consequently, Dommo Energia is restating the capital stock and capital reserve lines, both under equity. The effects are as follows:
Statement of Financial Position Company 12/31/2017 Originally stated Adjustments Restated
Capital stock 10,333,679 (175,909) 10,157,770 Capital reserves 1,708,408 175,909 1,884,317
e.2 Currency translation adjustments
Pursuant to CPC 38, CPC 48 and clauses 6.1, 6.1.1 and 6.2 of the Court-Supervised Reorganization Plan, the Company reclassified the amount related to OGX Austria GmbH from provision for investment losses in subsidiary to loans and financing with related parties. As a result of this change, the exchange variation effects of the investment in this subsidiary, previously recorded as currency translation adjustments in equity, have been reclassified to exchange variation in profit or loss for the period.
In accordance with the effects of this reclassification and with CPC 23 – Accounting Policies, Changes in Accounting Estimates and Errors, and CPC 26 (R1) – Presentation of Financial Statements, the balances were restated as follows:
27 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Statement of Financial Position Company and Consolidated 01/01/2017 Originally Stated Adjustments Restated
Equity Currency translation adjustments (213,226) 303,778 90,552 Accumulated losses (9,442,805) (303,778) (9,746,583)
Statement of Financial Position Company 12/31/2017 Originally Stated Adjustments Restated
Assets Investments 6,669 178,143 184,812
Non-current liabilities Loans and financing with related parties 10,907,963 1,554,958 12,462,921 Provision for losses on investments in subsidiaries 1,376,815 (1,376,815) -
Equity Currency translation adjustments (254,132) 327,059 72,927 Accumulated losses (11,395,543) (327,059) (11,722,602)
Statement of Operations for the Period Company 01/01/2017 to 09/30/2017
Equity in the earnings of subsidiaries 73,063 41,138 114,201 Net loss for the period (1,997,129) 41,138 (1,955,991)
Statement of Cash Flows Company 01/01/2017 to 09/30/2017 Net results of continuing operations (1,997,102) 41,138 (1,955,964) Equity in the earnings of subsidiaries (73,063) (41,138) (114,201)
Statement of Financial Position Consolidated 12/31/2017 Originally Stated Adjustments Restated
Equity Currency translation adjustments (254,132) 327,059 72,927 Accumulated losses (11,395,543) (327,059) (11,722,602)
Statement of Operations for the Period Consolidated 01/01/2017 to 09/30/2017
Net exchange variation 54,118 41,138 95,256 Net loss for the period (1,997,129) 41,138 (1,955,991)
28 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Statement of Cash Flows Consolidated 01/01/2017 to 09/30/2017
Net results of continuing operations (1,997,102) 41,138 (1,955,964) Net exchange variation (50,023) (41,138) (91,161)
f. Disclosure of the interim financial information Management examined the interim financial information as at September 30, 2018 and authorized its disclosure on December 7, 2018.
3 Summary of Significant Accounting Practices Except as described below, the accounting policies applied to this interim financial information are the same as those applied to the Company's consolidated financial statements for the year ended December 31, 2017.
Changes in accounting policies should also be reflected in the Company’s consolidated financial statements for the year ending December 31, 2018. The Company officially adopted CPC 47 (IFRS 15) - Revenue from Contracts with Customers and CPC 48 (IFRS 9) - Financial Instruments from January 1, 2018. Similarly to other new standards effective from January 1, 2018, CPC 47 (IFRS 15) - Revenue from Contracts with Customers and CPC 48 (IFRS 9) - Financial Instruments do not have a significant effect on the Company’s financial statements and interim financial information in the current scenario.
CPC 47 (IFRS 15) CPC 47 (IFRS 15) establishes a comprehensive structure to determine if and when revenue is recognized, as well as the recognition amount. CPC 47 replaces CPC 30 (IAS 18) - Revenue, CPC 17 (IAS 11) - Construction Contracts and related interpretations.
The Company adopted CPC 47 (IFRS 15) using the cumulative effects method (with no practical expedients), reflecting the effects of the first-time adoption of the standard recognized on the first-time adoption date (i.e. January 1, 2018). Consequently, the information presented for 2017 has not been restated and, accordingly, it was presented as previously reported pursuant to CPC 30 (IAS 18), CPC 17 (IAS 11) and related interpretations.
In accordance with CPC 47 (IFRS 15), revenue is recognized when a customer obtains control of goods or services. Determining the time required for the transfer of control – whether at a specific point in time or over time – requires the use of judgment. Revenue from an oil sales contract the purpose of which is the sale of oil from the Tubarão Martelo field is governed by Free on Board (“FOB”) agreements. Therefore, this type of agreement does not require separate performance obligations given that, once the offloading is concluded, the control, risks and benefits of the oil sold are transferred exclusively to the customer. The fifth step of the standard requires that revenue from sales be recognized when the selling entity satisfies its performance obligation through the transfer of the assets or services promised to the customer. The standard clarifies that assets are transferred to the customer when (or as) the customer obtains control over the asset.
Based on the above, the Company fully recognizes revenue from the sale of oil from the Tubarão Martelo field when the offloading is concluded.
29 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
CPC 48 (IFRS 9) Financial Instruments CPC 48 (IFRS 9) determines the requirements to recognize and measure financial assets, financial liabilities and some contracts for the purchase or sale of non-financial items. This standard replaces CPC 38 (IAS 39) - Financial Instruments.
(i) Classification and measurement of financial assets and liabilities
CPC 48 (IFRS 9) retains most of the requirements provided for in CPC 38 (IAS 39) for the classification and measurement of financial liabilities. However, it eliminates the former categories of CPC 38 (IAS 39) for financial assets: held to maturity, loans and receivables and available for sale.
The adoption of CPC 48 (IFRS 9) did not have a significant impact on the Company’s accounting policies related to financial liabilities. The impact of CPC 48 (IFRS 9) on the classification and measurement of financial assets is described below.
In accordance with CPC 48 (IFRS 9), during initial recognition a financial asset is classified as measured at “amortized cost”; at “fair value through other comprehensive income (“FVTOCI”) – debt instrument; FVTOCI – equity instrument; or “fair value through profit or loss” (“FVTPL”). Pursuant to CPC 48/IFRS 9, the classification of financial assets is usually based on the business model in which a financial asset is managed, as well as on its contractual cash flow characteristics. Embedded derivatives in which the main contract is a financial asset within the scope of the standard are never separated. Instead, the hybrid financial instrument is assessed as a whole for classification purposes.
A financial asset is measured at amortized cost if it complies with both of the conditions below, and it is not designated as measured at FVTPL: It is held within a business model whose objective is to hold financial assets to collect the contractual cash flow; and Its contractual terms give rise, on specified dates, to cash flow related to the payment of the principal and interest on the principal amount outstanding.
A debt instrument is measured at FVTOCI if both of the conditions below are complied with, and it is not designated as measured at FVTPL: It is held within a business model whose objective is achieved by both collecting contractual cash flow and selling financial assets; and Its contractual terms give rise, on specified dates, to cash flow that solely represents payments of principal and interest on the principal amount outstanding.
Upon the initial recognition of an investment in an equity instrument not held for trading, the Company can make an irrevocable choice to present subsequent changes to the fair value of the investment under “other comprehensive income” (“OCI”). This choice is made on a case-by- case basis.
All financial assets not classified as measured at amortized cost or at FVTOCI, as described above, are classified as FVTPL. This includes all derivative financial assets. Upon initial recognition, the Company can irrevocably designate a financial asset that would otherwise comply with the requirement to be measured at amortized cost, or FVTOCI as FVTPL if that eliminates or significantly reduces an accounting mismatch that would otherwise arise, in accordance with the fair value option available on CPC 48 (IFRS 9).
30 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
A financial asset (unless it is a trade account receivable without a significant financing component that is initially measured at the transaction price) is initially measured at fair value plus, for an item not measured at FVTPL, the transaction costs directly attributable to its acquisition.
The following accounting policies apply to the subsequent measurement of financial assets: Financial assets measured at FVTPL: These assets are subsequently measured at fair value. The net result, including interest or dividend income, is recognized in profit or loss. Financial assets at amortized cost: These assets are subsequently measured at amortized cost using the effective interest rate method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange rate gains or losses and impairment are recognized in profit or loss. Any gain or loss arising from derecognition is recognized in profit or loss. Debt instruments designated at FVTOCI: These assets are subsequently measured at fair value. Interest income calculated using the effective interest rate method, foreign exchange rate gains or losses and impairment are recognized in profit or loss. Other net results are recognized in OCI. During derecognition, the accumulated results in OCI are reclassified to profit or loss. Equity instruments designated at FVTOCI: These assets are subsequently measured at fair value. Dividends are recognized as gains in profit or loss, unless it clearly represents the recovery of a portion of the investment cost. Other net profit or loss items are recognized in OCI and are never reclassified to profit or loss.
The table below explains the original measurement categories of CPC 38/IAS 39 and the new measurement categories of CPC 48/IFRS 9 for each class of the Company’s financial assets as at January 1, 2018.
Original classification in New classification in Financial Asset accordance with CPC 38 / accordance with CPC 48 / IAS 39 IFRS 9 Marketable securities – Shares (Eneva S.A.) (i) Designated at FVTPL Mandatorily at FVTPL Trade accounts receivable and other receivables (ii) Loans and receivables Amortized cost Escrow deposits Loans and receivables Amortized cost Cash and cash equivalents Loans and receivables Amortized cost
(i) In accordance with CPC 38/IAS 39, these equity instruments were measured at FVTPF for being managed based on their fair value and their performance was monitored on that basis. These assets were mandatorily classified as measured at FVTPL pursuant to CPC 48/IFRS 9. (ii) Trade accounts receivable and other receivables previously classified as loans and receivables pursuant to CPC 38/IAS 39 are now classified as at amortized cost.
(ii) Impairment of financial assets CPC 48 (IFRS 9) replaces the CPC 38 (IAS 39) model of “incurred losses’ with an expected credit loss model. The new impairment model applies to financial assets measured at amortized cost, contractual assets and debt instruments measured at FVTOCI, but is not applied to investments in equity instruments (shares). In accordance with CPC 48 (IFRS 9), credit losses are recognized sooner than under CPC 38 (IAS 39). Financial assets at amortized cost consist of accounts receivable, cash and cash equivalents.
In accordance with CPC 48 (IFRS 9), provisions for losses are measured as follow: 12 month expected credit losses: credit losses that result from possible events of default within 12 months after the reporting date; and Full time expected credit losses: credit losses that result from all possible events of default over the expected life of a financial instrument.
31 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
The Company measures the provision for losses at an amount equal to the lifetime expected credit loss, except for those described below, which are measured based on the 12 month expected credit loss: Debt instruments with low credit risk on the reporting date; and Other debt instruments and bank balances for which the credit risk (i.e. the risk of default occurring on the financial instrument during its expected life) has not significantly increased since the initial recognition.
The Company elected to measure provisions for losses on accounts receivable and other receivables and contractual assets at an amount equal to the lifetime expected credit loss.
By determining whether the credit risk of a financial instrument has increased significantly since initial recognition and estimating expected credit losses, the Company considers reasonable and supportable information that is relevant and available without excessive effort or cost. This includes quantitative and qualitative analysis and information, based on the Company’s credit assessment experience.
The Company assumes that the credit risk of a financial asset has increased significantly when payments are more than 30 days past due.
The Company considers a financial asset to be in default when: It is unlikely that the borrower will fully pay its credit obligations to the Group without resorting to measures such as cashing a guarantee (if any); or The financial asset is more than 90 days overdue.
The maximum period considered in the estimate of expected credit loss is the maximum contractual period during which the Company is exposed to the credit risk.
Measurement of expected credit losses Expected credit losses are estimates weighted to reflect the probability of credit losses. Credit losses are measured at present value based on all cash shortfalls (i.e. the difference between the contractual cash flow owed to the Company and cash flow that the Company expects to receive). Expected credit losses are discounted at the effective interest rate of the financial asset.
Credit-impaired financial assets At each reporting period, the Company assesses whether financial assets accounted for at amortized cost and debt instruments measured at FVTOCI are credit-impaired. A financial asset is “credit-impaired” when one or more events that have occurred have a significant impact on the expected future cash flow of the financial asset.
32 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
4 Preparation of the interim financial information
The consolidated interim financial information includes data on all the companies listed below:
% interest
09/30/2018 12/31/2017 Direct subsidiaries: OGX International 100.00 100.00 OGX R-11 100.00 100.00
Indirect subsidiaries: OGX Austria 100.00 100.00 OGX Netherlands Holding 100.00 100.00 OGX Netherlands 100.00 100.00
Joint ventures: Atlanta Field (i) 40.00 40.00
(i) Joint arrangements with QGEP and Barra.
5 Cash and cash equivalents and marketable securities a. Cash and cash equivalents The Company’s Management defines as “cash and cash equivalents” the amounts held for the purpose of meeting short-term commitments rather than for investment or other purposes.
Company Consolidated
09/30/2018 12/31/2017 09/30/2018 12/31/2017
Cash and bank account 9,182 36,008 152,857 36,068 Investment fund Itaú Top DI Referenciado - - 1,976 6,469
9,182 36,008 154,833 42,537
The fair values of the balances maintained in current bank accounts are equivalent to the carrying amounts and are classified as financial assets at amortized cost.
Financial investments classified as cash and cash equivalents are immediately converted into cash and treated as financial assets measured at fair value through profit or loss. b. Marketable securities
Company and Consolidated
09/30/2018 12/31/2017
Eneva S.A. common shares 65,700 68,923
As at March 31, 2018, these refer to Eneva’s shares, representing 1.57% of the Company’s total capital stock.
These financial assets are recognized and measured at fair value; any restatement to fair value should be recorded as a contra entry to profit or loss.
33 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
6 Escrow deposits
The Company’s escrow deposits are classified as financial assets measured at FVTPL. Company and Consolidated
09/30/2018 12/31/2017 Current DVB Bank (ii) 3,356 72,505
Non-current Deutsche Bank - floating rate CDB (i) - 4,349 Glas Agency (iii) 150,938 56,327 150,938 60,676
Total current and non-current 154,294 133,181
(i) The Deutsche Bank CDB has been posted as a guarantee for the services contracted by the Company for the implementation of structured operations under the scope of its restructuring process. In June 2018, with the conclusion of the restructuring process, the Company redeemed the CDB. (ii) Escrow deposit related to the deactivation guarantee and/or abandonment funds for the Tubarão Azul field. (iii) Escrow deposit related to the deactivation guarantee and/or abandonment funds for the Tubarão Martelo field.
7 Trade accounts receivable
The balance of R$16,523 as at December 31, 2017 correspond to the sale of oil from the Tubarão Martelo Field. As at September 30, 2018, there are no outstanding balances receivable. The average receivable term of trade accounts receivable is lower than 30 days.
8 Inventory
Company Consolidated
09/30/18 12/31/2017 09/30/18 12/31/2017 Current assets Oil inventory 33,014 18,055 30,449 16,820
Non-current assets Exploration and production supplies (E&P) (i) 68,522 68,520 79,055 79,053 (-) Provision for loss (ii) (68,522) (68,520) (68,522) (68,520) - - 10,533 10,533
Total current and non-current 33,014 18,055 40,982 27,353
(i) Comprised basically of materials required for the Company’s exploratory drilling campaigns, such as pipelines and drill bits, for example. The Company currently does not operate in any drilling campaign and nor has perspective to operate in any other campaign. Therefore, a provision was made for losses on these materials. (ii) The Company periodically evaluates the opportunities to sell these supplies, and recorded a provision for losses so as to recognize the asset at its expected realizable value.
34 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Changes in consolidated oil inventory
12/31//2017 Production Cost of goods 09/30/2018 Initial inventory cost sold Final inventory
Leasing 1,245 29,207 (29,095) 1,357 O&M 6,102 62,002 (58,752) 9,352 Logistics 6,415 76,585 (71,221) 11,779 Other 848 2,039 expenditures 11,781 (10,590) Royalties 2,210 40,831 (37,119) 5,922
16,820 220,406 (206,777) 30,449
9 Other credits and prepaid expenses
Company Consolidated
09/30/2018 12/31/2017 09/30/2018 12/31/2017
Insurance premiums 1,755 6,789 1,755 6,789 Advances to suppliers 9,929 8,262 9,929 8,262 Advances to employees 442 786 456 798 Others 385 446 226 253
12,511 16,283 12,366 16,102
10 Non-current asset held for sale
In accordance with the ongoing arbitration, Dommo Energia reassessed the assumptions and conditions that led it to maintain part of its interest in BS-4 as held for sale and once again reclassified the amount of R$205,920.00 to fixed assets (R$101,602.00) and intangible assets (R$104,318.00). See Note 1.2.
11 Investments
Company Consolidated
09/30/2018 12/31/2017 09/30/2018 12/31/2017
OGX International 234,704 178,143 - - Atlanta Field B.V. - - 229,842 192,007 OGX R11 5,594 6,669 - - Equity adjustment - OGX Netherlands (i) - - 2,565 1,235
240,298 184,812 232,407 193,242
(i) Refers to revenue from the lease of OGX Netherlands eliminated upon consolidation against the production cost (inventory) at Dommo Energia.
35 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
a. Changes in Investments
Company Consolidated Balances as at January 1, 2017 178,957 178,107
Capital contribution in shareholding interests 5,673 14,647
Currency translation adjustments 16,147 (6,129)
Equity in the earnings of subsidiaries 114,201 (3,155)
Investment reclassification - OGX Austria (143,498) -
Balances as at September 30, 2017 171,480 183,470
Capital contribution in shareholding interests 359 -
Currency translation adjustments (57,053) 8,104
Equity in the earnings of subsidiaries (151,218) 1,668
Investment reclassification - OGX Austria 221,244 -
Balances as at December 31, 2017 184,812 193,242
Capital contribution in shareholding interests 1,052 -
Currency translation adjustments 38,572 38118
Equity in the earnings of subsidiaries (755,389) 1047
Investment reclassification - OGX Austria 771,251 -
Balances as at September 30, 2018 240,298 232,407
b. Data on shareholding interests
September 30, 2018
In Brazil Offshore
OGX OGX OGX Netherlands Atlanta R-11 OGX Austria OGX International Netherlands Holding Field (i)
Current assets 2,129 143,443 31 26 36 80,143 Long-term assets 11,146 13,014,897 15 135,033 2,555 6,507 Investments - - - - 357,079 - Fixed assets - - - 1,053 - 550,793
Total assets 13,275 13,158,340 46 136,112 359,670 637,443
Current liabilities 5 325 5 - 47,950 62,795 Non-current liabilities 7,676 15,484,224 2,091,546 8,875 11,812 43 Equity 5,594 (2,326,209) (2,091,505) 127,237 299,908 574,605
Total liabilities + equity 13,275 13,158,340 46 136,112 359,670 637,443
% interest 100% 100% 100% 100% 100% 40% Profit (loss) for the period (1,075) (771,760) (754,314) 22,304 19,171 (3,795)
36 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
December 31, 2017
In Brazil Offshore
OGX OGX OGX OGX Netherlands Atlanta R-11 OGX Austria International Netherlands Holding Field (i)
Current assets 6,473 6 15 27 20 13,304 Long-term assets 12,988 11,261,446 13 90,821 2,053 7,538 Investments - - - - 276,550 - Fixed assets - - - 870 - 467,862
Total assets 19,461 11,261,452 28 91,718 278,623 488,704
Current liabilities 641 274 - 13 38,379 8,013 Non-current liabilities 12,151 12,816,136 1,376,843 7,162 9,759 673 Equity 6,669 (1,554,958) (1,376,815) 84,543 230,485 480,018
Total liabilities + equity 19,461 11,261,452 28 91,718 278,623 488,704
% interest 100% 100% 100% 100% 100% 40% Profit (loss) for the period (2,064) (32,359) (11,672) 26,404 22,993 133
(i) These figures refer to the total equity and profit (loss) for the period.
37 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
12 Consolidated fixed assets Note Furniture and Machinery and Leasehold E&P fixed Consolidated fixed assets fixtures equipment IT equipment improvements Vehicles assets Total
Cost As qt January 01, 2017 5,278 889 10,879 - 404 537,873 555,323
Additions - - - 1,793 - 89,102 90,895 Additions - provision for ARO (a) - - - - - (40,126) (40,126) Additions - provision for environmental compensation - - - - - 4,857 4,857 Impairment BS-4) - - - 33 - (314,462) (314,429) Disposals (30) - (106) - - - (136) Non-current asset held for sale - - - - - (101,602) (101,602) Accumulated currency translation adjustments of offshore companies (c) - - - - - 14 14 As at December 31, 2017 5,248 889 10,773 1,826 404 175,656 194,796
Additions - - - - - (33,622) (33,622) Additions - provision for ARO (a) - - - - - (64,974) (64,974) Additions - provision for environmental compensation - - - - - 4,220 4,220 Impairment BS-4 1.2 & 12b - - - - - (193,297) (193,297) Reversal of provisions related to ARO - - - - - 12,418 12,418 Partial reversal impairment Tubarão Martelo Field 1.2 & 1.3 - - - - - 251,906 251,906 Non-current asset held for sale - - - - - 101,602 101,602 Disposals (376) - - - - - (376) Accumulated currency translation adjustments of offshore - - - - - 182 182 companies (c) As at September 30, 2018 4,872 889 10,773 1,826 404 254,091 272,855
Accumulated depreciation As at January 01, 2017 (3,277) (542) (10,602) - (387) - (14,808)
Depreciation and depletion in the year (510) (88) (164) (87) - (14,467) (15,316) Write-off of depreciation impairment - - - - - 14,467 14,467
As at December 31, 2017 (3,787) (630) (10,766) (87) (387) - (15,657)
Depreciation and depletion in the year (349) (62) (5) (154) - (13,133) (13,703) Write-off of depreciation impairment - - - - - 13,133 13,133 As at September 30, 2018 (4,136) (692) (10,771) (241) (387) - (16,227)
Annual percentage depreciation and depletion rates 10 10 20 10 20 (b)
Net residual value As at September 30, 2018 736 197 2 1,585 17 254,091 256,628 As at December 31, 2017 1,461 259 7 1,739 17 175,656 179,139
38 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
(a) See Note 17. This change has no cash effect. (b) The depreciation and depletion of E&P fixed assets begins upon the declaration of commercial viability and the commencement of production, based on the units of production (“DUP”) method. (c) Refers to the currency translation adjustments of the asset balances of the Company’s international subsidiaries OGX Netherlands and Parnaíba B.V.
Appraisal of indications of impairment The Company conducts a quarterly analysis of the status of its exploratory wells. If they are classified as dry or sub-commercial, the Company writes them off and charges them to the results.
According to technical pronouncement CPC-01, the entity must evaluate at least annually, if there are indications of possible impairment of assets (fixed and intangible assets). If there is any evidence, its recoverable amount should be calculated, which is determined by the greater monetary importance between the net sale value and its value in use.
a. Tubarão Martelo Field: History of Tubarão Martelo´s appraisal: In 2014, the discounted cash flow prepared for the Tubarão Martelo Field indicated that, based on the price scenario and the future projections used by the Company, the costs incurred made production economically unfeasible. This resulted in the recording of a provision for impairment of the assets related to the Tubarão Martelo Field in the amount of R$ 3,237,254 in fixed assets, of which R$ 691,758 was recorded in 2013 and R$ 2,602,681 in 2014. The amount of R$ 80,473 was recorded in intangible assets, R$ 23,288 of which was recorded in 2013 and R$ 57,185 in 2014.
During 2015, the Company carried out cost reduction initiatives that were insufficient to make the continuity of the Field economically feasible, mainly due to the drop in oil prices at the time. On January 19, 2016, the Company requested that the National Petroleum, Natural Gas and Biofuels Agency ("ANP") suspend production in the Tubarão Martelo Field, given that there is no expectation of recovery of these assets. On April 26, 2016, the Company filed a request with ANP to resume production at the Tubarão Martelo Field. On July 1, 2016, the Company received an official letter from the ANP authorizing the immediate resumption of production at the Martelo Tubarão Field, through FPSO OSX-3. The Tubarão Martelo Field is currently operational.
New fact that modifies the recoverability of Tubarão Martelo: The conclusion of the new FPSO OSX-3 charter agreement between the Company and OSX-3 in November 26, 2018 establishes new conditions that will allow for the realization of interventions in the Tubarão Martelo Field wells that will result in the production of 11 MM bbls by 2022 and incremental cash generation in the amount of R$ 251,906 MM. This new scenario is the decisive factor for the revaluation of the impairment whose cash flow projection takes into account the following key assumptions:
Approach: Unlevered cash flows, expressed in real terms and denominated in US dollars, were projected to be converted to the closing rate of 3Q18.
Term: The projection starts in September 2018 and extends until 2024, and the recoverability is estimated until 2022.
Selling price: The reference used is the average price of brent obtained in World Bank publications.
39 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Well intervention: The Revitalization consists of the completion of the fifth well, 4HP, which has already been drilled and needs to be connected to the FPSO, as well as workover activities in the four producing wells, known as 2HP, 6HP, 8H and 44HP.
Discount rate: The Company applies the Weighted Average Cost of Capital (WACC) approach in real terms and the discount rate used was 9.18% post tax (11.36% pretax).
Residual value: Residual value was not calculated in the last period, since the projection was structured based on the economic life of the assets.
It should be noted that, although Management uses the best expectations, these projections are subject to various uncertainties such as estimated costs and expenses, expected oil price, exchange rate, equipment and production team efficiency, legislation issued by authorities such as ANP and IBAMA, tax legislation, and geological aspects such as volume and reservoir behavior.
Additional information: During the negotiations and discussions regarding the New Charter with OSX 3, Dommo Energia prepared several studies ("Materials") regarding the potential production of TBMT, the Revitalization, and an energy efficiency project in the FPSO. Considering that the Materials were shared with third parties during the charter discussions, the Company decided to disclose the Materials to the market in general, clarifying, however, that the information contained therein should not be considered as the Company´s official forecasts, guidelines or future indications of expected operational and financial performance. The studies and conclusions contained in the Materials are subject to a significant number of internal assumptions that were part of the New Charter negotiation and investors should not consider or rely on the Materials in their decision- making process for investment in the Company's securities.
Materials that have been prepared and shared with third parties include: (A) TBMT internal production estimates; (B) TBMT Production Audit Report prepared by Gaffney Cline & Associates ("GCA"); (C) Cogeneration Study for FPSO.
(A) TBMT internal production estimates: Revitalization should extend the life of TBMT to at least 2024. The Company's projected production beginning in 3Q18 and ending in 2024, totals 13.60MM bbls, considering a P50 production curve profile and 12.15MM bbls when considering a P90 production curve profile. The base cash flow for the new recoverable value of Tubarão Martelo considers the production of 11 MM bbls until 2022.
(B) GCA Audit Report: In order to provide OSX 3 with an independent assessment of the production estimates prepared internally, in August of this year, Dommo Energia hired Gaffney, Cline and & Associates (“GCA”) to audit the TBMT production forecast. Prior to analyzing the data from the GCA report, it is critical that investors read the full report including the methodology and basis of opinion.
(C) Energy Efficiency Project: As stated in the Company's financial statements, the cost of diesel is currently one of the largest components of FPSO's operating expenses. To reduce diesel consumption, the Company’s internal technical team has been working alongside an external consultant specialized in energy efficiency solutions. The Company is working to implement in the short term the installation of diesel generators on the FPSO. The use of the generators should reduce the utilization of the existing gas/diesel turbines, which are inefficient given the FPSO’s current energy requirements. The FPSO currently consumes around 43,000 liters of diesel per day and following the installation of the generators, the Company hopes to
40 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
reduce the consumption to around 25,000 liters per day with potential net savings of BRL 1.5MM per month. b. Atlanta and Oliva Fields On December 31, 2017, the business plan was updated considering the following main assumptions: (i) recoverable volumes: 197.4 million barrels to the Atlanta and Oliva fields; (ii) long term Brent price, using the average of projections disclosed by different financial institutions, whose projected price up to December 2019 varies between US$62.82 and US$65.49 and is set at US$67.49 for subsequent years; (iii) US$14/bbl discount in the Brent oil price due to the characteristics and transportation costs of the oil.
This asset remains under arbitration dispute, as described in Note 1.2, and pursuant to the accounting law represented by CPC 01 – Impairment of Assets, and CPC 25 – Provisions, Contingent Liabilities and Contingent Assets, the Company revised the impairment calculated and recorded on September 30, 2017, further complementing the amount. As of September 30, 2018, the new balance totals R$1,083,838.00 (R$651,119.00 as of December 31, 2017).
BS-4 impairment changes
Impairment balance December 31, 2017 651,119 Impairment addition to intangible assets in 3Q18 (Note 13) 239,422 Impariment addition to fixed assets in 3Q18 193,297 Impairment balance September 30, 2018 1,083,838
Depreciation The E&P fixed assets are depreciated from the declaration of commercial viability and the commencement of production, under the units of production (DUP) method.
41 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
13 Intangible assets (company and consolidated)
The Company’s intangible assets correspond to: (a) E&P intangible assets, represented by the subscription bonuses paid to obtain concessions for the exploration, development and production of the blocks, as well as the amounts paid for farm-ins; and (b) other intangible items, chiefly represented by computer software programs.
IT systems and E&P programs intangible assets Total Cost As at January 01, 2017 40,507 576,298 616,805
Additions 61 - 61 Impairment - (329,853) (329,853) Non-current assets held for sale (b) - (104,318) (104,318)
As at December 31, 2017 40,568 142,127 182,695
Non-current asset held for sale - 104,318 104,318 Impairment (note 12b) - (239,422) (239,422)
As at September 30, 2018 40,568 7,023 47,591
Accumulated amortization As at January 01, 2017 (39,995) (6,888) (46,883) Amortization (562) (135) (697)
As at December 31, 2017 (40,557) (7,023) (47,580)
Amortization (1) - (1)
As at September 30, 2018 (40,558) (7,023) (47,581)
Annual percentage amortization rates 20 (a)
Net residual value As at September 30, 2018 10 - 10 As at December 31, 2017 11 135,104 135,115
(a) Amortization of E&P intangible assets occurs from the declaration of commerciality and commencement of production, based on the units of production (DUP) method. (b) See Notes 1.2 and 10.
Write-offs and impairments As explained in Note 12, in the fourth quarter of 2014, the Company revised its Business Plan and recognized impairment of the Tubarão Martelo Field in the amount of R$ 57,185. As at September 30, 2018, the Company revaluated the recoverability of the assets related to the Tubarão Martelo Field and the results of the revaluation are presented in the fixed assets (Note 12).
In addition, as per described in the section “Appraisal of indications of impairment” in Note 12, the Company made a supplement provision for the impairment of the investments made in BS- 4.
Amortization The amortization of E&P intangible assets occurs from the declaration of commercial viability and the commencement of production, based on the units of production (DUP) method. On September 31, 2018, the only field with declared commercial viability and which was already producing was the Tubarão Martelo Field.
42 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
14 Income tax, social contribution, government stakes and other taxes and contributions
Company Consolidated 09/30/2018 12/31/2017 09/30/2018 12/31/2017 Non-current assets
Withheld income tax, social contribution and other recoverable taxes Withholding tax (IRRF) on financial investments 346 324 361 387 Income tax and social contribution prepaid 5,702 - 5,749 41 IRPJ tax losses 15 15 368 292 PIS offsettable 13,938 13,055 13,938 13,055 COFINS offsettable 65,929 73,155 65,929 73,155 State VAT (ICMS) recoverable 390 390 390 390 Other recoverable taxes 1,033 1,032 2,489 2,124
87,353 87,971 89,224 89,444
Deferred income tax and social contribution
Deferred IRPJ - 107,574 - 107,574 Deferred CSLL - 38,726 - 38,726
- 146,300 - 146,300
Current liabilities
Taxes, contributions and government stakes payable
IRPJ and CSLL on net income 1,559 - 1,559 -
IRRF 23,585 19,764 23,585 19,764 Social contributions withheld 142 546 145 546 COFINS payable - - 1 1
Royalties payable 4,391 2,967 4,391 2,967 Taxes levied on disposal of assets by OGX Colombia 6,263 6,263 6,263 6,263 Others 194 407 194 407 36,134 29,947 36,138 29,948
Non-current liabilities
Deferred PIS and COFINS
Deferred PIS (i) 22,868 5,197 22,868 5,197 Deferred COFINS (i) 140,723 31,978 140,723 31,978
163,591 37,175 163,591 37,175
(i) On April 1, 2015, Decree 8426 was published, establishing returns at the PIS and COFINS rates on financial income calculated by legal entities subject to the non-cumulative calculation system as at July 1, 2015. The rates are 0.65% for PIS and 4% for COFINS, except for certain cases provided for by the Decree, on which the rate is 0%. Considering that the Company taxes gains or losses on inflation adjustments based on the exchange rate on a cash basis, it recorded a provision for deferred PIS and COFINS on these unrealized gains on inflation adjustments.
43 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
The reconciliation of the IRPJ and CSLL expenses is as follows:
09/30/2018 09/30/2017
Consolidated Consolidated
IRPJ CSLL IRPJ CSLL
Profit (loss) for the period prior to IRPJ and CSLL - Continuing operations (193,855) (193,855) (1,964,595) (1,964,595) Discontinued operations - - (27) (27)
Permanent additions/exclusions: Other non-deductible additions 53,689 53,219 73,629 73,404 Adjustment - Transfer Price 3,171 3,171 8,868 8,868 Adjustment - Previous year’s result - - 70,069 70,069 Loss on debt converted into equity instrument - - 1,590,937 1,590,937 Results of offshore companies 754,314 754,314 (4,742) (4,742)
Taxable income for IRPJ and CSLL purposes 617,319 616,849 (225,861) (226,086)
15% + 15% + Additional Additional Tax rates (%) 10% 9% 10% 9%
Current and deferred IRPJ and CSLL (154,330) (55,516) 56,465 20,348
Current and deferred IRPJ and CSLL (154,330) (55,516) 56,465 20,348 (-) Tax incentives offset 29 - - - (+) Provision for non-realization of deferred IRPJ and CSLL 45,570 16,388 (50,021) (18,161) Breakdown of IRPJ and CSLL IRPJ and CSLL - current (1,157) (402) - - IRPJ and CSLL - deferred (107,574) (38,726) 6,444 2,187
Total recorded IRPJ and CSLL (i) (108,731) (39,128) 6,444 2,187
Effective tax rate 56.09% 20.18% (0.33%) (0.11%)
(i) On September 30, 2018 and 2017, the income tax and social contribution recorded in the statement of operations totaled R$147,859.00 and R$8,631.00, respectively. Of the R$ (147,859) related to the period of 2018, R$ 1,599 refers to the current period and R$ 146,300 are deferred.
Deferred taxes and Business Plan As at September 30, 2018, the accounting records of the Company and its subsidiaries showed a deferred income tax and social contribution asset balance of R$ 7.4 billion. In compliance with CPC 32 - Taxes on Income, the Company reversed the deferred taxes set up in 2017 because it was based on the cash flow projections of BS-4 that is subject to arbitration proceedings and for which a complementary impairment loss was recognized in 3Q18. No deferred tax asset was recognized for the new cash flows of Tubarão Martelo Field.
44 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
15 Related parties
Company Loans with related parties - Loans with related parties - Credits with related parties Accounts payable to related parties Assets Liabilities (non-current) (non-current) (current) (non-current) (non-current)
09/30/2018 12/31/2017 09/30/2018 12/31/2017 09/30/2018 12/31/2017 09/30/2018 12/31/2017 09/30/2018 12/31/2017
OGpar (i) 5,225 5,225 105,055 87,780 - - - - OGX Austria (ii) 423,135 349,590 15,061,090 12,466,545 - - (423,135) (349,590) (14,913,221) (12,462,921) OGX Netherlands (iii) - - 4,715 3,773 (123,089) (80,972) - - - - OGX International - - 62,470 49,969 ------OSX 3 Leasing B.V. (v) ------OSX Construção Naval S.A. - - - - - (52) - - - - OSX Serviços Operacionais (iv) - - - - - (1,500) - - - - OGX R-11 71 73 7,601 12,077 - (2,063) (46) - - - 428,431 354,888 15,240,931 12,620,144 (123,089) (84,587) (423,181) (349,590) (14,913,221) (12,462,921)
Consolidated Loans with related parties - Loans with related parties - Credits with related parties Accounts payable to related parties Assets Liabilities (non-current) (non-current) (current) (non-current) (non-current)
09/30/2018 12/31/2017 09/30/2018 12/31/2017 09/30/2018 12/31/2017 09/30/2018 12/31/2017 09/30/2018 12/31/2017
OGpar (i) 5,225 5,225 105,055 87,780 (633) (633) - - - -
OSX 3 Leasing B.V. (v) ------OSX Construção Naval S.A. - - - - - (52) - - - - OSX Serviços Operacionais (iv) - - - - - (1,500) - - - - 5,225 5,225 105,055 87,780 (633) (2,185) - - - -
Consolidated
Result
Related parties Composes Statement of income 09/30/2018 09/30/2017
OSX 3 Leasing B.V. - charter of FPSO OSX 3 Cost of goods sold (29,094) (272,422) OGpar - Interest income on loans (i) Financial Result 4,895 3,927 OSX Serviços Operacionais - OSX offsets (iv) Other operating (revenue) expenses 221 (2,359)
(23,978) (270,854)
45 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Further information on Loans and Financing - liabilities to related parties is given below:
Company
09/30/2018 12/31/2017
Loans and financing Currency Payment of Amortization of Interest rate Counterparty Principal Interest Total Total
interest principal
Export pre-payment (“PPE”) US$ Semi-annual 07/30/2034 9% p.a. OGX Austria 9,958,433 402,344 10,360,777 8,694,708 Law 12,431 infrastructure debentures R$ Semi-annual 07/30/2034 10.5% p.a. OGX Austria 2,025,000 126,553 2,151,553 2,151,553 at the end of Loan US$ 07/30/2034 LIBOR 6M + 2.5% OGX Austria 73,994 688 74,682 61,702 agreement Investment in OGX Austria (*) n/a n/a n/a n/a OGX Austria 2,326,209 - 2,326,209 1,554,958
14,383,636 529,585 14,913,221 12,462,921
Current - - - - Non-current 14,383,636 529,585 14,913,221 12,462,921
(*) Investments in OGX Austria with negative equity classified as loans and financing with related parties pursuant to CPC 39 – Financial Instruments: Presentation, regarding the equalization of amounts receivable and payable.
Changes in liabilities “Loans and Financing - liabilities with related parties”
Company
Balances as at December 31, 2017 12,462,921
(+) Interest incurred/reversed - (-) Amortization of principal and interest (157,797) (+) Exchange variation 1,836,846 (+) Adjustment - OGX Austria 771,251
Balances as at September 30, 2018 14,913,221
46 Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
(i) Refers mainly to intercompany loans. (ii) Loans with related parties: Under Assets, referring to the credits held against OGX Austria, in consideration for the assumption of the debt relating to the senior unsecured notes guaranteed by Dommo Energia, as prescribed in the Court-supervised Reorganization Plan. The R$2,450,300 balance variation between December 31, 2017 and September 30, 2018 refers solely to exchange variations. Under Liabilities, referring to the export pre-payments, non-convertible debentures and the intercompany loan payable to OGX Austria. (iii) Refers substantially to the amount payable relating to the agreement for lease of subsea equipment signed between the Company and investee OGX Netherlands and advances for the purchase of equipment made by the Company to OGX Netherlands. (iv) Refers to the compensation agreement between the Company and OSX Serviços Operacionais. (v) Refers to the leasing of FPSO OSX 3.
Other information on loans and financing with related parties (liabilities)
US$2.6 billion in Senior Unsecured Notes and US$2.6 billion PPE On June 3, 2011, OGPar issued Senior Unsecured Notes (“2018 Bonds”) on the international market in the amount of US$2.6 billion (equivalent to R$4.0 billion). Settlement of the principal of this issue was to occur in 2018, while interest was due semi-annually at the rate of 8.5% p.a. in the months of June and December. The funds were mainly intended for financing the development of production in the Campos and Parnaíba basins. The funding costs for this issue, in the amount of US$46.072 million (equivalent to R$74,310), have been recognized under liabilities, thus reducing the amount funded. This amount was accrued to profit or loss over the loan term using the effective interest rate method. In October 2011, an amendment to the instrument for the issue of the 2018 Bonds was signed in the amount of US$2.6 billion, whereby OGPar was substituted by its subsidiary OGX Austria as issuer and principal debtor of such bonds. As consideration for this operation, OGpar and its subsidiary at the time OGX Austria signed an agreement whereby the former granted to the latter the funds obtained from the issue of the above-cited notes (plus the interest revenue generated through the investment of the funds obtained through the grant date, as well as issuing cost discounts). Further, in October 2011, by means of an export pre-payment (“PPE”) agreement, OGX Austria granted to Dommo Energia an early payment of US$2.6 billion, in order to finance the development and production of oil to be exported by Dommo Energia to OGX Austria. In consideration for this early payment, Dommo Energia undertook to export the number of barrels of oil required to settle the early payment through one or more shipments to OGX Austria prior to May 27, 2018. The amount paid in advance and not yet settled through oil exports is subject to semi-annual interest payments at the rate of 9.0% p.a.
Following the approval of the court-supervised reorganization plan on June 3, 2014, Dommo Energia, as the guarantor for the debts, recognized the 2018 Bonds as liabilities by debiting an asset held against OGX Austria. In turn, OGX Austria no longer recognizes the debt to the bondholders and recorded another debt at the same amount to the guarantor, Dommo Energia. On September 30, 2014, after fulfillment of all the conditions precedent prescribed in the court- supervised reorganization plan for the conversion of the debt into equity instruments, Dommo Energia recorded the extinction of such notes. The court-supervised reorganization plan postponed maturity of the PPE and Dommo Energia’s credit with OGX Austria through the subrogation of the bonds to July 30, 2034. The court-supervised reorganization plan further calls for the PPE interest between Dommo Energia and OGX Austria to be frozen from the date on which the court-supervised reorganization petition was filed. Exchange variations have continued to occur.
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
US$1.1 billion in Senior Unsecured Notes and R$2.0 billion in Debentures under Law 12.431/11 for infrastructure projects: On March 30, 2012, OGX issued Senior Unsecured Notes (“2022 Bonds”) on the international market in the amount of US$1.1 billion (equivalent to R$1.9 billion). The principal matures in April 2022, while interest is due semi-annually at the rate of 8.375% p.a. in the months of April and October. The funding costs of US$17.8 million (equivalent to R$39.0 million) have been recognized under liabilities, thus reducing the amount of funding. This amount was accrued to profit or loss over the loan term using the effective interest rate method. On September 28, 2012, Dommo Energia issued simple, unsecured debentures not convertible into shares on the Brazilian securities market in the amount of R$2.0 billion, under CVM Instruction 476. The operation was offset in October 2012. The said debentures are securities under Law 12,431/11, and the proceeds from the issue have been fully used to reimburse capital expenditure incurred on the issue during the exploratory campaign in the Campos Basin, as expressly provided for in Article 1, paragraph 1, item VI of the abovementioned law. The debentures pay semi-annual interest at the rate of 10.5% p.a. The principal matures in March of 2022. As at the debenture issue date, the abovementioned securities were fully subscribed by OGX Austria GmbH.
Following the approval of the plans on June 3, 2014, Dommo Energia, as guarantor of the debts, recognized the 2022 Bonds as liabilities by debiting an asset held against OGX Austria. In turn, OGX Austria no longer recognizes the debt to the bondholders, and instead recorded another debt for the same amount to the guarantor, Dommo Energia. On September 30, 2014, after having complied with all of the conditions precedent provided for in the court-supervised reorganization plan for the conversion of the debt into equity instruments, Dommo Energia recorded the extinction of these notes. The Plan postponed the maturity of the Debentures and Dommo Energia’s credit with OGX Austria through the subrogation of the Bonds to July 30, 2034.
Pursuant to Law 12,431/11, the Plan further calls for the interest on debentures between Dommo Energia and OGX Austria to be frozen as of the date on which the court-supervised reorganization petition was filed. Exchange variations continue to occur.
Intercompany loans The cash of the companies that are subsidiaries of Dommo Energia is managed in an integrated fashion, such that a cash surplus at one Group company may be transferred to the others through loan agreements between the parties.
OGpar On August 2, 2017, the Judge of the 4th Business Court of the Judicial District of the Capital of Rio de Janeiro declared the conclusion of the court-supervised reorganization of the companies under reorganization.
The Court-Supervised Reorganization Plan establishes that the Managements of Dommo and OGpar adopt the procedures required to the merger of OGpar into Dommo Energia.
In 3Q18, Dommo had R$ 5,225 and R$ 105,055 in loans receivable from OGpar in the short and long term respectively. In line with its Court-Supervised Reorganization Plan, the Company has been taking out loans for OGpar in order to maintain its expenses at regular levels and ensure its continuity until the conclusion of the merger, when these amounts will be settled. See details of the merger in explanatory note 33.
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
16 Trade accounts payable
Company Consolidated
09/30/2018 12/31/2017 09/30/2018 12/31/2017
Domestic suppliers 22,786 29,505 22,786 30,144 Foreign suppliers 9,134 11,824 9,463 12,136 E&P provisions (i) 2,158 1,510 2,158 1,510 34,078 42,839 34,407 43,790
(i) The E&P provisions basically reflect the costs incurred on subsea installation services and production of O&G that have not yet been billed for. The provisions for production are based on the contractual daily rates.
These balances are classified as Other financial liabilities and recognized at amortized cost.
17 Sundry provisions
Company and Consolidated
09/30/2018 12/31/2017 Current Provision for ARO - Tubarão Azul (a) - 37,406 Provision for guaranteed minimum payment - stock options (b) 3,460 4,000 3,460 41,406 Non-current Provision for ARO (a) Tubarão Azul Field 62,344 72,776 Tubarão Martelo Field 284,419 240,411 BS-4 - 38,231 346,763 351,418 Provision for environmental compensation (c) Tubarão Azul Field 11,626 11,092 Tubarão Martelo Field 42,115 40,180 Campos Basin 2,040 1,943 Santos Basin 9,556 7,903 65,337 61,118
Provisions for regulatory contingencies (d) 185,689 185,744 Provision for regulatory commitments (Note 28) 53,743 53,743 Provisions for labor proceedings 2,964 2,045
Total non-current 654,496 654,068
(a) Provision for the Asset Retirement Obligation (“ARO”) for E&P fields: From the declaration of commercial viability of its fields and the beginning of development activities, the Company makes a provision for the abandonment or ARO at the end of the concession period. This provision reflects the estimated expenditure to be incurred in the future, chiefly with respect to: (i) plugging of the wells; and (ii) removal of the lines and production equipment. (b) Provision for guaranteed minimum payment - stock options: This provision refers to the guaranteed minimum payment associated with former stock option contracts which have already ended. Over the course of the third quarter of 2014, the Company renegotiated the terms of the agreement with the beneficiaries regarding the guaranteed minimum payment. For those beneficiaries accepting the proposal, the Company undertook to pay in the month of the agreement 10% of the amount provided for plus a further 40% in eight equal and consecutive monthly installments in the
49
Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
immediately subsequent months. The beneficiaries accepting the agreement accepted the fact that the remaining 50%
would no longer be due from the Company, thus reducing the immediate impact on its cash flow by at least R$ 37,796. (c) Provision for environmental compensation: In order to obtain environmental licenses, the Company has undertaken with the Brazilian Environmental Protection Agency (“IBAMA”) to make certain environmental compensations, with the transfer of resources to conservation units. (d) Provisions for regulatory contingencies: Refers to the provisions for fines applied by the ANP or for which the taxable event is already known.
18 Other accounts payable
Company Consolidated
09/30/2018 12/31/2017 09/30/2018 12/31/2017
BS-4 Consortium (i) 47,909 81,745 95,859 120,099 Others 28,181 10,857 28,181 10,857
76,090 92,602 124,040 130,956
(i) In accordance with the decision of the first stage of Block BS-4 arbitration, in 3Q18 the Company reversed cash calls and billings received and recorded as of October 2017. See Note 1.2 for further information.
Reconciliation with the Statement of Cash Flows Company Consolidated Balance other accounts payable as of December 31, 2017 92,602 130,956 Balance other accounts payable as of September 30, 2018 76,090 124,040 Variation "other accounts payable" Balance Sheet (16,512) (6,916)
Billings fixed asset BS-4 received and registered - no cash effect 33,622 33,622 Variation "other accounts payable" Statement of Cash Flows 17,110 26,706
19 Contingencies
As of September 30, 2018, the Company was not a defendant in any litigation with a expectations for loss were ranked as probable, except for the “Provisions for regulatory contingencies” and “Provisions for labor proceedings” described in Note 17. On the above- mentioned date, the Company was a defendant in the following litigation involving material amounts and potential losses ranked as possible, in the opinion of its external legal counsel. Based on the opinions of the Company’s external legal counsel and on the accounting practices adopted in Brazil, no provision for losses was created for any of the amounts mentioned below.
a. Federal contribution for intervention in the economic domain (CIDE - a sort of fuel tax) and IRRF on payments made to foreign companies under vessel charter party agreements, in the amount of R$104,490.
b. Acceptance of the capacity of guarantor claimed for it in relation to federal taxes suspended on the basis of temporary admission under the Repetro system with respect to the FPSO OSX-3 unit, in the amount of R$760.706.
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
c. Labor grievance cases claiming overtime pay, nighttime pay, pain and suffering damages, etc., in the amount of R$18,636. d. Writ of Debt - IBM Brasil - Indústria Máquinas e Serviços Limitada (“IBM”): On October 29, 2013, the Company terminated the service agreement entered into with IBM. IBM claimed that the termination was not valid and continued to render services without receiving payment, even after the court-supervised reorganization petition was filed on October 30, 2013. Also according to IBM, the updated amount (R$ 9,153) was not subject to the court-supervised reorganization. Among other arguments, the Company claims that any services rendered were residual and related to the demobilization of the agreement, and for this reason any amount due would be covered by the court-supervised reorganization. e. Notice of exclusion of BS-4: In October 2017, Barra sent a notification to Dommo Energia informing the exercise of the option to demand that the Company withdraw from the Joint Operating Agreement ("JOA") referring to BS-4 Consortium and the concession agreement ("Notice"), without any offer to pay a price of indemnification. According to the Notice, the requirement was founded on Dommo Energia’s incapacity to remedy its default until the sixtieth (60th) day after the date the notifications of default related to the cash calls to cover expenditure of the BS-4 Consortium.
In this regard, on October 23, 2017, the Company informed the market that it began arbitration before the London Court of International Arbitration (LCIA), pursuant to the arbitration rules of UNCITRAL, against Barra and QGEP, to challenge (i) the exercise by Barra of the alleged option to demand that Dommo completely withdraw from the JOA referring to BS-4, from the BS-4 Consortium Agreement and from the Concession Agreement of BS-4, without any offer to pay a price of indemnification; (ii) the state of default of QGEP, as the operator of the BS-4 Consortium; and (iii) the illegality of certain JOA clauses, which would supposedly authorize the initiatives attempted by Barra and QGEP. There is also a request that Barra and QGEP pay compensatory damages for the losses and injuries caused by said conduct.
On September 25, 2018, the Company became aware of the judgment rendered by the Arbitration Court (“Decision”) regarding the first stage of the arbitration conducted by the London Court of International Arbitration (LCIA), started by Dommo Energia against Queiroz Galvão Exploração e Produção S.A. (“QGEP”) and Barra Energia do Brasil Petróleo e Gás Ltda. (“Barra”), as per Material Fact of October 23, 2017. The above-mentioned decision stated, among other things, that the notification issued by Barra on October 10, 2017, in order to exercise, without offering any payment, the option to demand the withdrawal of the Company from the Joint Operating Agreement (JOA), the Consortium Agreement and the Concession Agreement, all of which referring to BS-4, as per Material Fact of October 20, 2017,valid at the time, and it should produce effects, from the date the Company received such notice, i.e., on October 11, 2017, without prejudice to a possible annulment of said withdrawal at a latter stage of the arbitration, with the production of new evidence that supports said annulment. The first stage of the arbitration did not support the production of evidence, as that the Decision established that in a new stage of the arbitration that includes the production of evicence, Dommo Energia can still plead for the annulment of its withdrawal and the mandatory transfer of its interest in Block BS-4 and/or award for damages from QGEP and Barra.
The decision is still subject to requests for clarification of the parties, which may alter its content.
The effects and consequent enforceability of the decision in Brazil are subject to ratification by the Superior Court of Justice (STJ) of a judgement rendered abroad, in accordance with the Federal Constitution and effective legislation.
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
f. Tax administrative proceedings in which the plaintiff is the Brazilian Federal Revenue Service, demanding the payment of withholding income tax (“IRRF”) on offshore remittances, as interest arising from Export Prepayment Agreements (“PPE”) in the amount of R$ 662,196.
g. Tax administrative proceedings in which the plaintiff is the Brazilian Federal Revenue Service, demanding the disallowance of expenses corresponding to non-deductible interest from the calculation of taxable income and CSLL tax basis arising from PPEs in the amount of R$ 593,677.
h. Tax-administrative proceeding whose adverse party is the Brazilian Federal Revenue Service, which demands the disallowance of PIS and COFINS credits on exploratory expenses. Amount: R$481,560.00.
20 Equity
a. Capital stock The following table shows the changes in the Company’s capital stock during 2018 and 2017.
Capital stock as at January 1, 2017 8,607,471
(+) capital increase 1,550,299
Capital stock as at December 31, 2017 10,157,770
(+) capital increase -
Capital stock as at September 30, 2018 10,157,770
The capital stock as at September 30, 2018 is represented by 2,665,444,020 registered, book- entry common shares with no par value.
On August 3, 2018, the Company rectified the minutes of December 21, 2017, regarding the capital increase; the corresponding effects on the capital stock and capital reserves are shown in Note 2e.
b. Dividends The Company’s Bylaws require the distribution of minimum mandatory dividends of 0.001% of the profit for the year, adjusted pursuant to Article 202 of Law 6,404/1976 (as amended by Law 10,303/2001). At Management’s discretion, the Company may pay interest on equity, the net amount of which should be imputed to minimum mandatory dividends, pursuant to Article 9 of Law 9,249/1995.
c. Accumulated translation adjustment Due to currency conversion relating to investments in foreign subsidiaries, accumulated translation adjustments were recognized under comprehensive income.
d. Capital reserves Refer to goodwill on the issue of new shares in the Company.
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
21 Net sales revenue
Company Consolidated
09/30/2018 09/30/2017 09/30/2018 09/30/2017
Oil
Gross sales revenue 400,787 342,055 408,477 342,055
(-) Taxes on sales - - - -
Net sales revenue 400,787 342,055 408,477 342,055
Volume sold in thousands of barrels (i) 1,753.50 2,359.70
(i) Information not reviewed by the independent auditors
In 2018, the upturn in average oil price to R$232,900 per barrel, compared to R$145,000 per barrel in 2017, resulted in an increase in net revenues.
22 Cost of goods sold
Company Consolidated
09/30/2018 09/30/2017 09/30/2018 09/30/2017
Leasing (i) 43,046 288,280 29,095 272,422 O&M 58,752 60,662 58,752 60,662 Logistics 71,221 80,956 71,221 80,956 Other expenditure 10,590 13,323 10,590 13,323 183,609 443,221 169,658 427,363
Royalties 37,119 34,206 37,119 34,206
220,728 477,427 206,777 461,569
Leasing: In the consolidated, it refers to the lease costs of FPSO OSX-3. In the Company, such costs include the leasing of subsea equipment between Dommo Energia and OGX Netherlands, the effect of which is eliminated at the Consolidated level. O&M: refers to the costs for operations and maintenance of FPSO OSX-3 and the submerged centrifugal pumps (BCS). Logistics: refer to costs incurred on support vessels, helicopters and fuel for support vessels and FPSO units. Other expenditure: Includes, among other aspects, the allocation of G&A expenses and the cost of chemical products.
(i) As part of the agreement signed on July 24, 2017 with certain creditors, among them OSX-3 Leasing B.V. and Nordic Trustee ASA (the “Omnibus Deed”), all the unpaid liabilities relating to platform chartering were settled against the conversion of credits into equity instruments of Dommo Energia. Addicionally, the charter costs initially provided for in the contract were reduced, and the rental costs of FPSO OSX-3, currently allocated to Tubaraão Martelo Field, were limited to one third of the monthly revenue over US$ 8 million, after the payment of royalties.
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
23 General and administrative expenses
Company Consolidated
09/30/2018 09/30/2017 09/30/2018 09/30/2017
Personnel expenses 4,931 4,432 4,931 4,557 Management compensation (Note 27) 5,720 5,237 5,720 5,237 Guaranteed minimum payment - stock options (539) 75 (539) 75 Depreciation and amortization 501 438 501 438 Office expenses 4,683 4,847 4,749 5,047 Outsourced services (i) 15,322 37,317 16,294 38,290 Others 2,504 1,219 2,512 1,232
33,122 53,565 34,168 54,876
(i) Due to the completion of the judicial recovery, the Company significantly reduced the expenses for legal advice.
24 Financial results
Company Consolidated
Ref. 09/30/2018 09/30/2017 09/30/2018 09/30/2017 Financial expenses Interest/charges and premiums on financing (a) - 286,167 - 286,167 Interest on provision for ARO (13,282) (9,296) (13,282) (9,296) Sundry interest (b) (174) (701) (1,477) (2,790) Fair value of financial instruments (c) (9,917) (13,239) (9,917) (13,239) Other financial liabilities (861) (2,962) (2,094) (5,205)
(24,234) 259,969 (26,770) 255,637 Financial revenue Interest 6,837 5,492 4,895 3,927 Fair value of financial instruments (c) 6,694 62,080 6,694 62,080 Yields from financial investments 1,084 701 1,262 1,009 Other financial liabilities 1 20,863 39 20,906
14,616 89,136 12,890 87,922
Loss on debt converted into equity instrument - (1,590,937) - (1,590,937)
Net exchange variations 750,404 (6,066) (29,995) 95,256
Net financial result 740,786 (1,247,898) (43,875) (1,152,122)
(a) In 2018, the Company did not have loans and financing liabilities with third parties. (b) As at September 30, 2017, it refers to interest on unpaid liabilities related to the leasing for OSX-3. Due to the conversion of these liabilities into equity instruments in 3Q17, the accrued interest was reversed. (c) The effects of fair value adjustments to the shares that the Company holds in Eneva S.A.
Gains from exchange variation recorded in 3Q18 arise from the net liability exchange exposure of R$42,337.00 (Note 29 b2).
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
25 Other operating income (expenses)
Company Consolidated
Description Ref. 09/30/2018 09/30/2017 09/30/2018 09/30/2017
Provision for inventory losses (a) 317 47,001 317 47,001 PIS/COFINS offsetable (b) 18,186 14,095 18,186 14,095 Deferred PIS/COFINS (c) (126,416) 16,078 (126,416) 16,078 Provision for losses on taxes recoverable (914) (808) (6,224) (5,486) Net loss on sale of inventory of E&P supplies (d) - (31,871) - (31,871) Provision for loss of reimbursable asset retirement costs in the Tubarão
Azul Field (17,444) (13,252) (5,829) (2,740) OSX offsets 221 (2,653) 221 (2,653) Provisions for labor proceedings (919) - (919) -
Costs of OGX Netherlands - - (11,817) (10,409)
Others (30.825) (21,884) (29.497) (20,715)
(157.794) 6,706 (161.978) 3,300
a) Provision for inventory losses: set up to maintain inventory at their expected realizable amounts. b) PIS/COFINS offsetable: See Note 14. c) Deferred PIS/COFINS: See Note 14. d) In 2018 there were no sales of stock of E&P materials.
26 Impairment
Company Consolidated
09/30/2018 09/30/2017 09/30/2018 09/30/2017
Fixed assets Impairment adjustment (i) (168,395) (648,667) (168,395) (648,667) Depreciation of OGX Netherlands equipment - - 13,133 9,285 Currency Translation Adjustments (ii) - - (1,319) 1,154
Effect on profit or loss (168,395) (648,667) (156,581) (638,228)
(i) Refers substantially to the impairment of Block BS-4 and partial impairment reversal for Tubarão Martelo Field. See note 12, section " Appraisal of indications of impairment”; (ii) Currency Translation Adjustments affecting the impairment of offshore companies.
27 Management Compensation
The compensation paid to the Company’s Management is as follows:
Company and Consolidated
09/30/2018 09/30/2017
Board of Directors (charges and fees) 2,161 273 Audit Committee (charges and fees) 389 270 Information Disclosure Committee (charges and fees) - 61 Fiscal Council (charges and fees) 329 163 Management (compensation, salaries, benefits and charges) 2,841 4,560
Total management compensation (Note 23) 5,720 5,327
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
28 Commitments Assumed
Minimum Exploratory Program (“PEM”) In the third quarter of 2016, the Company received a correspondence from ExxonMobil, the partner and operator of Block POT-M-762, stating that it had received an Official Letter from the ANP on July 4, 2016, requesting that both parties, Dommo Energia and ExxonMobil, paid R$107,487 thousand, corresponding to the 1,004.55 Work Units not complied with in the aforementioned Concession Agreement. In the correspondence, ExxonMobil advised Dommo Energia to settle 50% of the amount (R$53,743 thousand), due to the obligations assumed in the Joint Operation Agreement. In this regard, Dommo Energia’s legal counsels understand that the credit related to the PEM that has not been complied with should not receive special treatment, given that said credit was recorded before Dommo Energia’s court-supervised reorganization, which could only be required after the implementation of specific conditions. As a result, Dommo Energia presented a delayed proof of claim before the Court judging its court- supervised reorganization case, requesting the inclusion of said credit in the list of creditors, given that the PEM commitment stems from an event occurred in the first half of 2013, i.e. before the filing for court-supervised reorganization. On March 2, 2018, the judgement rendered by the court that presided over the court-supervised reorganization understood that the case should be dismissed without prejudice. Given the above-mentioned decision, the Company filed the applicable appeal, which was granted on July 12, 2018, by the 14th Civil Chamber of the Rio de Janeiro Court of Appeals (“CCRJ”), which determined the late filing of the claim, totaling R$53,743, in the general list of creditors. On that decision, ExxonMobil submitted a Special Appeal to CCRJ, the outcome of which is still pending. Thus, even considering the above mentioned favorable decision to the Company, the provision for this liability was maintained (note 17).
29 Financial instruments and risk management
The Company has operations involving financial instruments. These instruments are managed by means of operating strategies and internal controls aimed at ensuring liquidity, security and profitability.
The control policy involves the continuous monitoring of the contractual terms compared to those prevailing in the market and future expectations. The Company does not make any investments of a speculative nature in derivatives. The results obtained from operations are in compliance with the policies and strategies defined by the Company’s Management.
The estimated realizable amounts of the Company’s financial assets and liabilities have been determined by means of information available in the market, and appropriate appraisal methodologies. However, considerable judgment has been required to interpret market data to produce the most appropriate estimate of realizable amounts. As a result, the following estimates do not necessarily indicate the amounts that could be realized in the current market. The use of different market methodologies can have a material effect on the estimated realizable amounts.
Derivatives and risk management
a. Risk management objectives and strategies The Company has a formal risk management policy. Financial instruments for hedge purposes are contracted by conducting a periodic analysis of the exposure to the risk that Management wishes to hedge against, as approved by the Board of Directors. The hedge guidelines are
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applied according to the type of exposure. Whenever risk factors related to foreign currencies, interest rates and inflation arising from assets and liabilities acquired are deemed to be material, they may be neutralized in accordance with Management’s appraisal of the economic and operational context. The contracting of instruments to hedge against oil price swings is subject to the limits of physical exposure and volatility set forth in the Company’s Sales Policy.
b. Market risk Risk of swings in the prices of commodities, exchange rates and interest rates. b.1 Risk of change in oil prices
Risk management
The Company has a formal policy for sales and inventory management that defines the levels of decision-making for oil sales and the criteria for the management of oil sales prices. The guidelines for hedging the price of this commodity provide for the possibility of using derivative instruments to set the sales prices in order to assure enhanced stability and predictability for the Company’s flow of revenue. The volatility of Brent prices is one of the Company’s assumptions to carry out impairment testing. See Notes 12 and 26.
Operations hedged by derivative instruments against changes in prices Pursuant to its Sales Policy, the Company can use derivative instruments to establish the sales price of the oil produced, and may also set the price for up to three months of production, or occasionally any other horizon that is approved by the Board of Directors. The derivative instruments used in such hedging operations could involve oil futures, swaps, collars and options. The operations may be carried out on the following exchanges: the New York Mercantile Exchange (“NYMEX”) and the Intercontinental Exchange (“ICE”), as well as on the over-the-counter (“OTC”) market.
Sensitivity analysis - stress testing As at September 30, 2018, the Company is not presenting any sensitivity analysis for petroleum derivatives, since on the base date in question there were no outstanding positions. b.2 Exchange risk Risk of fluctuations in exchange rates associated with the Company’s assets and liabilities.
Risk management The Company manages exchange risk at the consolidated level in order to identify and mitigate the risks associated with fluctuations in the value of currencies to which assets and liabilities are pegged. The objective is to identify or create natural hedges, taking advantage of the synergy between the operations of the Company’s subsidiaries. The idea is to minimize the use of hedge derivatives by managing exchange risk over net exposure. Derivative instruments may be used in cases in which it is not possible to use the natural hedge strategy. The Company may contract derivative operations within the following limits:
For amounts effectively committed or contracted, in which there are agreements signed with suppliers, a coverage position of up to 100% may be adopted, irrespective of the period of exposure. For estimated amounts, a position with coverage period limited to 12 months may be adopted and the coverage position may be under 100%, weighted based on conservative prospects for realization.
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Net exchange exposure
Consolidated
09/30/2018
Assets (i) 11,349,639 Liabilities (ii) (11,391,976)
Net foreign currency assets (42,337)
(i) Refers largely to the balance of cash and cash equivalents, escrow deposits maintained in US$, accounts receivable in foreign currency, loans and financing in US dollars and the subrogated credit of the Bonds. (ii) Refers to the PPE liability in US$ between Dommo Energia and OGX Austria [see Note 15 item (i)], the investment in the subsidiary OGX Austria (see Note 15), and the provision for future ARO for the Atlanta, Oliva and Tubarão Martelo fields. See Note 17.
Sensitivity analysis for exchange risk The scenarios defined in this analysis are based on the exchange rate in effect on September 30, 2018:
Scenario I: appreciation of the US$ against the R$ - by 25%. Scenario II: appreciation of the US$ against the R$ - by 50%.
The following table details the sensitivity analysis of the net balance of outstanding assets and liabilities in US$ as of September 30, 2018. Positive amounts represent revenues and negative amounts, expenses.
Notional amount Scenario I Scenario II (US$) (R$) (R$) Net foreign currency assets (10,574) (*) (10,585) (21,169)
(*) Corresponding to the amount of R$42,337 presented in the section above entitled “Net exchange exposure” in Note 29b.2, translated into US$ at the closing rate for September 30, 2018 of R$4.00.
c. Credit risk The credit risk derives from the possibility that the Company may incur losses due to the default of its counterparts or the financial institutions with which its funds are deposited or where it has financial investments. This risk factor may arise from commercial and cash management operations. To mitigate such risks, the Company has adopted a practice of analyzing the financial and equity situation of their counterparts, and also conducting ongoing tracking of outstanding positions. To appraise the financial institutions through which they conduct operations, the Company employs the Risk Bank Index put out by the consulting firm Lopes Filho e Associados and the rating of the risk rating agency Standard & Poor’s (S&P). In order to appraise its commercial counterparts, the Company has a norm whereby a set of criteria and guidelines are established that represent the basis for granting credit to its domestic and foreign customers. The basic fundamentals that guide this instrument are providing enhanced security for realization of the credits granted and minimizing any risks in commercial relations.
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Maximum exposure to credit risk The Company’s maximum exposure to credit risk corresponds to the total set out below:
Company Consolidated
Credit risk 09/30/2018 12/31/2017 09/30/2018 12/31/2017
Cash and cash equivalents 9,182 36,008 154,833 42,537 Escrow deposits 154,294 133,181 154,294 133,181 Trade accounts receivable - 16,523 - 16,523 Other credits (except prepaid expenses) 10,756 9,494 10,611 9,313 Loans/Credits with related parties 15,669,362 12,975,032 110,280 93,005 Marketable securities 65,700 68,923 65,700 68,923
15,909,294 13,239,161 495,718 363,482
d. Liquidity risk The Company monitors its level of liquidity considering the expected cash flows, in comparison with the amount of cash and cash equivalents available. Management of liquidity risk entails keeping on hand sufficient cash and marketable securities and having capacity to settle short- term market positions. The following chart sets out the Company’s financial liabilities per due date (aging list).
09/30/2018 - Consolidated Overdue Overdue Total Overdue Overdue from 6 for more Overdue up to 6 from 1 to 2 months to than 2 months years 1 year years
Trade accounts payable 12,851 21,556 - - - 34,407 Other accounts payable – BS-4 Consortium (i) 95,859 - - - - 95,859
Other accounts payable - 28,181 - - - 28,181 Accounts payable to related parties - 633 - - - 633
Total 108,710 50,370 - - - 159,080
(i) Refers to cash calls due by the Company to the BS-4 Consortium.
e. Share price volatility risk The Company is exposed to the risk of changes in share price due to investments maintained by the Company and classified in the consolidated statement of financial position as measured at fair value through profit or loss. The profit for the year would fluctuate depending on the gains or losses over the price of the shares measured at fair value through profit or loss.
Fair value of financial assets and liabilities The concept of fair value calls for the appraisal of assets and liabilities based on market prices, in the case of liquid assets, or on mathematical pricing methodologies otherwise. The hierarchical level of fair value grants priority to unadjusted quoted prices on an active market. The hierarchy of fair value for financial instruments is structured as follows:
Prices Pricing model based on Pricing model observable on prices observable on without use of active market active market observable prices (Level I) (Level II) (Level III)
Financial investments - 1,976 - Marketable securities 65,700 - - Balances as of September 30, 2018 65,700 1,976 -
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Prices Pricing model based on Pricing model observable on prices observable on without use of active market active market observable prices (Level I) (Level II) (Level III)
Financial investments - 6,469 - Marketable securities 68,923 - - Balances as of December 31, 2017 68,923 6,469 -
There was no reclassification between the fair value hierarchy categories of the securities and financial investments as of September 30, 2018 and December 31, 2017.
30 Insurance Coverage
The Company took out a continuous Petroleum Risk insurance policy that took effect when its exploratory campaign began, including the following coverage: Third Party Civil Liability for material damages and/or personal injury; Well Control Insurance, which covers such accidents as kick- and blow-outs, well eruption due to uncontrolled pressure, which may lead to abandonment of same, in addition to expenses, such as re-drilling wells or cleaning and decontamination. On March 1, 2018, the latter coverage was renewed for a further 12 months, offering coverage through March 1, 2019. The policy was issued by FairFax Brasil.
On February 20, 2018, the P&I insurance was renewed. This vessel insurance refers exclusively to pollution and waste removal. The policy, issued by Gard, is valid until February 20, 2019.
On July 31, 2018, the insurance coverage for General Civil Liability, by Fairfax Brasil, maturing on July 31, 2019, was renewed, while the Property insurance, by Fairfax do Brasil, was renewed on October 07, 2018, remaining in effect through October 07, 2019.
On September 01, 2018, the Company contracted the Hull & Machinery insurance, valid until September 01, 2019. This insurance covers any physical damage to the hull and machinery of a vessel, including general average, particular average, total loss, rescue and salvage.
Tokio Marine renewed the D&O civil liability policy for another 12 months, valid until August 2, 2019.
As of September 30, 2018, the main assets or interests covered by insurance policies and the respective amounts thereof are as follows:
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Insured Type of insurance amounts
US$ Exploratory campaign thousands
Offshore blow-out risks in the Campos basin 57,500 Protection and Indemnity OSX-3 (P&I) 500,000 Hull & Machinery 850,000
R$ Other insurance thousands
Operating risks to property 9,000 General civil liability 20,000 Civil liability of administrators – D&O 60,000
31 Segment reporting
Oil and gas exploration and production is the only segment where the Company operates.
32 Earnings (Loss) per Share
Consolidated
Basic and diluted earnings (loss) per share 09/30/2018 09/30/2017
Basic and diluted numerator: Profit (loss) attributable to shareholders (341,714) (1,955,964)
Basic and diluted denominator: Weighted average number of shares (i) 2,665,444,020 133,272,201 Earnings (Loss) per Share (0.12820) (14.67646)
(i) Due to the conversion of the Company’s financial debt into equity instruments in 2017, in an amount exceeding R$2.0 billion, the Company issued 2,532,171,819 new common shares.
33 Subsequent events
Merger of shares of OGpar
On November 26, 2018, pursuant to Article 157, paragraph 4, of Law 6,404/76 and CVM Instruction No. 358/02, the shareholders of the Company and of OGPar approved in General Shareholders’ Meetings a share deal through which Dommo Energia issued own shares and exchanged them against 100% of the shares of OGPar ("Merger of Shares"), as well as the waiver for Dommo Energia to adhere, at this moment, due to the Merger of Shares, to the Novo Mercado corporate governance segment of B3 S.A. - Brasil, Bolsa, Balcão. According to Law No. 6,404/76, the dissenting shareholders of both Companies that do not agree with the Merger of Shares shall have the legal term of 30 (thirty) days as from the publication of the minutes of the mentioned General Shareholders’ Meetings to exercise the withdrawal right, as disclosed by the Companies, provided that the management of both Companies reserves the right set forth in Article 137, paragraph 3rd of Law No. 6,404/76.
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
The Companies inform that the shareholders also approved the issuance, by Dommo Energia, of subscription bonus to the OGPar’s shareholders as an additional advantage to the shares issued within the scope of the Merger of Shares. The subscription bonus will only be issued to the shareholders of OGPar that do not exercise the withdrawal right and, therefore, will only be delivered after the period for the exercise of such right.
Finally, it should be noted that the shares of both Dommo Energia and OGPar will continue to be negotiated separately until the disclosure, by the Companies, of a notice informing the end of the withdrawal period and the possible exercise of the prerogative set forth in paragraph 3rd of Article 137 of Law No. 6,404/76.
History of the Merger of Shares of OGpar
On October 25, 2018, the Company convened its shareholders for an Extraordinary Shareholders' Meeting to be held at 11:00 a.m., on November 26, 2018, at Rua Lauro Müller, 116, 38º andar, sala 3802, Botafogo, in the City and State of Rio de Janeiro, to deliberate on the following agenda:
(a) To approve the merger of shares of Óleo e Gás Participações S.A. ("OGPar") by the Company; (b) To approve the Protocol and Justification of Incorporation of Shares issued by OGPar by the Company; (c) To ratify the appointment of Apsis Consultoria Empresarial Ltda. as the company responsible for evaluating the shares issued by OGPar to be merged by the Company; (d) To approve the Appraisal Report of OGPar's shares; (e) To authorize the managers to perform the necessary acts for the implementation of the merger of shares; and (f) To approve the issue of subscription warrants.
Recitals As described in the protocol and justification for the incorporation of the shares issued by Óleo e Gas Participações S.A. by Dommo Energia S.A. ("Protocol and Justification"), the reasons or purposes of the operation and interest of the Companies in their realization are:
a) The Merger of Shares is the last step of the financial restructuring through which the Companies pass. It will allow the leveling of the stakeholders in the same company and grant all the shareholders access to the capital market through an asset holding company and source of funds, with greater liquidity and with the possibility of negotiating their shares and monetizing them, as they deem appropriate. Moreover, it will allow the shareholders to participate equally in the possible valuation of the assets, as provided for in the Recovery Plans. b) In addition, the sale of Dommo Shares by OGPar, cumulatively to the Merger of Shares, in the manner agreed by the Companies´ managements, will allow the reinforcement of the consolidated cash of Dommo, including due to the possible payment of intercompany loans made by Dommo in favor of OGPar for its recurring expenses. c) The Merger of Shares will result in a significant reduction of costs and expenses, since OGPar, by becoming a wholly owned subsidiary of Dommo, will have even lower costs, including the exit of the Novo Mercado segment of B3 SA - Brasil, Bolsa, Balcão ("B3") and the eventual cancellation of registration as a publicly held company.
Replacement ratio The substitution ratio arises from the provisions of the Recovery Plans, which the shareholders
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
of OGPar expressly ratified at the Extraordinary General Meeting held on August 21, 2017, in the sense that OGPar´s shareholders shall have exactly the same percentage as OGPar has in Dommo prior to the Merger of Shares. The proposed exchange ratio is subject to approval by the Shareholders' Meetings on the occasion of the resolution on the Merger of Shares.
In accordance with the above, the shareholders of OGPar shall receive 34,954,861 (thirty-four million, nine hundred and fifty-four thousand, eight hundred and sixty-one) common, nominative, book-entry shares with no par value issued by Dommo, representing 1.2944332630% of the capital stock of Dommo ("New Shares"), with the remaining shareholders of Dommo holding 2,665,444,020 (two billion, six hundred and sixty-five million, four hundred and forty-four thousand and twenty) common, nominative, book-entry shares with no par value issued by Dommo, which will be representative of 98.7055667370% of the capital stock of Dommo. As a consequence, OGPar shareholders will receive 1.0801817020 common, nominative, book-entry shares with no par value issued by Dommo for each 1 (one) common, nominative, book-entry share with no par value issued by OGPar held by them on the date of the Merger of Shares ("Replacement Ratio").
The Replacement Ratio shall be proportionately adjusted in the event of a split, reverse split, bonus or any other similar event prior to the consummation of the Merger of Shares, with the respective delivery of shares to OGPar shareholders, resulting in a change in the number of shares in which the share capital of OGPar or Dommo is divided without any change of its shareholders' equity.
The fractions of shares resulting from the replacement of the position of each OGPar shareholder that is not composed of other OGPar shareholders in order to form whole numbers within 30 (thirty) days of the Merger of Shares shall be collected and sold in the B3 by Dommo, and the respective amount, uncorrected and net of any incident costs, shall be paid by Dommo, in national currency, to the holders of the respective fractions, within 30 (thirty) Business Days from the receipt of the funds resulting from the alienation.
Dommo's common shares to be attributed to OGPar's shareholders, in replacement of the common shares issued by OGPar held by them, shall grant the same rights as the existing Dommo shares, and shall be entitled to all the benefits, including any dividends and remunerations of capital that may be declared by Dommo as of the date of the Merger of Shares.
Criterion for evaluating OGPar shares and treatment of equity variations. Evaluation Criteria and Base Date. The management of the Companies defined that the shares issued by OGPar to be merged by Dommo should be valued at their market value, calculated by the arithmetic average (volume-weighted) methodology of stock prices on the stock exchange in the last 90 (ninety) days prior to the base date of September 30, 2018 ("Base Date").
The management of Dommo hired Apsis Consultoria Empresarial Ltda., a company headquartered at Rua do Passeio, 6, 6º Andar, in the City and State of Rio de Janeiro, enrolled with CNPJ/MF under No. 27.281.922/0001-70, originally registered at the Regional Accounting Council of the State of Rio de Janeiro under no. 02052 ("Valuation Company") as a specialized company responsible for evaluating the shares issued by OGPar to be merged by Dommo as a result of the operation described in this Protocol and Justification, whose indication will be submitted for ratification by Dommo´s Shareholders´ Meeting, pursuant to article 252, paragraph 1, of the Brazilian Corporate Law.
As a result of its evaluation, considering all the information and documents requested to the
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Company's managements, as well as the information available to the general public and the evaluator's own, as necessary to conduct the evaluation, the Valuation Company prepared the appraisal report ("Valuation Report"), which constitutes Appendix 3.3 of the Protocol and Justification, being the evaluation embodied in the Valuation Report, as well as the amounts specified therein, subject to the analysis and approval of the shareholders of Dommo, pursuant to the Brazilian Corporate Law.
Accounting for Changes in Equity. The changes in equity occurring in OGPar between the Base Date and the date on which the Merger of Shares takes place shall be borne exclusively by OGPar and reflected in Dommo because of the application of the equity method.
Composition of Companies' Capital Stock On this date, the capital stock of OGPar is R$ 9,058,105,645.30 (nine billion, fifty-eight million, one hundred and five thousand, six hundred and forty-five reais and thirty centavos), fully subscribed and paid in, represented by 32,360,168 (thirty-two million, three hundred and sixty thousand, one hundred and sixty-eight) common, nominative, book-entry shares with no par value.
On this date, Dommo's capital stock is R$ 10,157,770,020.36 (ten billion, one hundred and fifty- seven million, seven hundred and seventy thousand and twenty reais and thirty-six centavos), fully subscribed and paid in, represented by 2,665,444,020 (two billion, six hundred and sixty- five million, four hundred and forty-four thousand and twenty) common, nominative and book- entry shares with no par value, and OGPar owns 34,502,394 (thirty-four million, five hundred and two thousand, three hundred and ninety-four) shares, representing, on this date, 1.2944332630% of Dommo's capital stock (and which will represent, after the Merger of Shares, 1.2776777000% of Dommo's capital stock).
In the event that the appointment of the Valuation Company, the Valuation Report and the Merger of Shares are ratified and/or approved, Dommo's capital stock will be increased by R$ 92,907,009.82 (ninety-two million, nine hundred and seven thousand and nine reais and eighty- two centavos) with the issue of the New Shares ("Capital Increase"), to R$ 10,250,677,030.18 (ten billion, two hundred and fifty million, six hundred and seventy-seven thousand and thirty reais and eighteen centavos), divided into 2,700,398,881 (two billion, seven hundred million, three hundred and ninety-eight thousand, eight hundred and eighty-one) shares. The shareholders of Dommo shall not have preemptive rights in the subscription of the Capital Increase, pursuant to article 252, paragraph 1, of the Brazilian Corporate Law.
If the Merger of Shares is approved by the shareholders of OGPar, the New Shares will be fully subscribed by the managers of OGPar, for and on behalf of OGPar´s shareholders, pursuant to article 252, paragraph 2, of the Corporate Law, and paid in the contribution of the totality of the shares issued by OGPar to the net equity of Dommo.
With the Merger of Shares, all the shares issued by OGPar shall become the property of Dommo, the former becoming a wholly owned subsidiary of the latter.
As a result of the Merger of Shares, Dommo will hold all of OGPar's common shares and OGPar, in turn, will continue to hold 34,502,394 (thirty-four million, five hundred and two thousand, three hundred and ninety-four) shares of Dommo, representing 1.2944332630% of the share capital of Dommo (and, after the Merger of Shares, 1.2776777000% of the share capital of Dommo). Pursuant to article 244, paragraph 5, of the Brazilian Corporate Law, such participation held by OGPar in Dommo will be sold within a period of up to 1 (one) year.
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Subscription Warrants As provided in Clause 10.4 of Dommo´s Judicial Recovery Plan, as an additional advantage to the subscription of the New Shares, Dommo's shareholders must resolve, at the Shareholders´ Meeting, on the receipt by the shareholders of OGPar of subscription warrants to be issued by Dommo at the Shareholders´ Meeting provided for in Clause 7.2 (b) below, with the following main conditions ("Subscription Warrants"): (i) 5 (five) year-term from the date of issue, and Dommo may define windows in which the holders of the warrants may exercise their warrants and subscribe to the shares resulting therefrom; and (ii) a number of common shares to be subscribed representing, in the total aggregate, 15% (fifteen percent) of Dommo shares, considering the share capital at the date of its approval (subject to all usual adjustments that will appear in the certificate of subscription warrants), and an exercise price per share, at the time of exercise, based on the value of Dommo (equity value) in national currency equivalent, on the date of issue of the warrants, to US$ 1,500,000,000.00 (one billion and five hundred million US dollars). The price fixed in national currency shall be adjusted by the IGP-M as from the date of Dommo´s Board of Directors' meeting that resolved on the issue of the warrants.
Right of Withdrawal Pursuant to article 252, paragraphs 1 and 2 of the Brazilian Corporate Law, the right of withdrawal is granted to the shareholders of the Companies that dissent or abstain from voting in the resolution of the Merger of Shares, or do not attend the Shareholders’ Meetings, as the case may be, and expressly declare their intention to exercise the right of withdrawal, within a period of 30 (thirty) days as of the date of publication of the minutes of the Shareholders’ Meetings approving the Merger of Shares. The reimbursement to the shareholders exercising the withdrawal right shall be calculated based on the equity value of the shares, whether of the merged or the merging company. Payment of the respective reimbursement will depend on the effectiveness of the Merger of Shares, as provided for in Articles 137, paragraph 3 and 230 of the Brazilian Corporate Law, and shall be made by Dommo within 30 (thirty) Business Days as of the date on which the Merger of Shares is carried out. The reimbursement of the value of the shares will only be assured in relation to the shares of which the shareholder is, evidently, holder, on October 24, 2018, provided that shares acquired after October 25, 2018, inclusive, willl not grant the withdrawal right provided for in this item, according to paragraph 1st of article 137 of the Corporate Law.
Condition Precedent It is a condition precedent for the approval of the Merger of Shares by the shareholders of the Companies, the approval by the minority shareholders of OGPar of the waiver of Dommo's obligation to join the Novo Mercado, pursuant to Article 46 of the Novo Mercado Regulation. Therefore, if the minority shareholders of OGPar do not approve said waiver at the Shareholders´ Meeting of OGPar (or at another general meeting convened for such purpose), so that the condition precedent is not fulfilled, the other deliberations provided for in this Protocol and Justification shall be withdrawn from the agenda at OGPar´s Shareholders´ Meeting and will not be voted on.
All documents mentioned in the Protocol and Justification are available to shareholders at their respective registered offices from October 25, 2018, the date of convening the Shareholders' Meetings, at OGPar's Investor Relations website (ri.ogpar.com.br/) and Dommo´s (dommoenergia.com.br/), as well as on the websites of the Brazilian Securities and Exchange Commission (www.cvm.gov.br) and B3 (www.b3.com.br).
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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR)
Signing of new OSX-3 lease agreement As mentioned in Notes 1.2, 1.3 and 12, Dommo signed the new FPSO OSX-3 lease agreement on November 26, 2018.
Board of Executive Officers
Paulo Souza Queiroz Figueiredo CEO
Eduardo Yuji Tsuji Chief Financial and Investor Relations Officer
Controller and Accountant in charge
Luciano Magalhães Janoni CRC-RJ 115869/O-9
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