Dommo Energia S.A.
Financial Statements as at December 31, 2018 and Independent Auditor’s Report
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Contents
Management report 3
Independent auditor’s report on the financial statements 12
Statements of financial position 18
Statement of operations 20
Statements of comprehensive income (loss) 21
Statement of changes in equity (net capital deficiency) 22
Statements of cash flows 23
Statements of value added 24
Notes to the financial statements 25
Management report
Dommo Energia S.A. (“Dommo Energia” or “Company”) Management, in compliance with legal and statutory provisions, presents its results for the fourth quarter of 2018 (“4Q18” or “Period”), as well as relevant subsequent events to the market. The values are presented in thousands of Brazilian Real, except when indicated otherwise.
1. Company’s highlights
Tubarão Martelo Field production reached 530.2 kbbls (thousand barrels of oil) in the 4Q18 and 2,382.4 kbbls in the year of 2018 (“Year”) Revenue of R$ 129,796, with 27.0% gross profit margin in 4Q18 Revenue of R$ 538,273, with 44.0% gross margin in the Year Adjusted EBITDA of R$ 28,355 and Adjusted EBITDA margin of 21.8% in the 4Q18 Adjusted EBITDA of R$ 192,345 and Adjusted EBITDA margin of 35.7% in the Year Cash balance of R$ 157,331 at the end of the period compared to R$ 42,537 in the fourth quarter of 2017 (“4Q17”)
2. Introduction
The year of 2018 was the first full year following the conclusion of the judicial reorganization proceeding. The year was highlighted by Management’s initiatives seeking to restore the Company’s operational stability, continuity and commitment to the restructuring process that the Company is undergoing.
The Management is aware of the significant challenges in the return to normalcy and the responsibilities and obligations with fiscal and regulatory authorities given the contingencies and legacy issues from previous periods. Management will continue to exert itself in the defense of the interests of the Company and its shareholders. The challenges mentioned should be diligently considered by potential investors and the current shareholders.
The major achievements in 2018 were the signing of a new amendment to the charter agreement for the FPSO OSX-3 vessel (“New Charter”) as well as costs optimization and expenses reduction. It is worth highlighting the energy cogeneration project installed at the FPSO OSX-3, which reduced the use of the turbines with the installation of generators, resulting in a significant decrease in diesel consumption. On the corporate side, contracts were reviewed, and consequently costs were reduced, as well as initiatives to reduce recurring general and administrative expenses.
From an economic perspective, two main factors related to the Company’s results presented high volatility during the year: (i) oil price, and (ii) foreign exchange rate.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Brent price
The average Brent price has presented high volatility, Chart 1: Brent price in US$ per barrel with a low of US$ 50.47 per barrel and a high of US$ 86.29 per barrel. The average price for 2017 was of US$ 54.75. The 4Q18 was marked by a bearish trend in prices, starting the period at US$ 84.98 and closing at US$ 53.80. whereas the average of US$ 68.39 in the 4Q18 was 9.8% lower than the average in the previous quarter. During the 4Q18, the USA’s decision to waive the sanctions of crude oil imports from Iran resulted in volatility and pressured the short-term crude oil prices, leading 4Q18 average price close to the 4Q17 levels, (Source: Bloomberg) and reverting the recovery registered in the 2Q18 and 3Q18, periods in which the USA’s sanctions on Iran oil had been effective.
Exchange rate In the international economic scenario, emerging Chart 2: Real-Dollar Exchange rate in R$/US$ countries’ currencies were negatively impacted during the most part of the year, due to local crisis and geopolitical events. However, during the 4Q18 the emerging countries’ currencies showed signs of stabilization, despite the volatile environment. The Brazilian Real presented significant fluctuation to US$ during the year, with a low of R$ 3.15 and high of R$ 4.19.
(Source: Bloomberg)
The average annual exchange rate, in turn, registered an average US$ appreciation of 14.5%, being the 2017 average rate R$ 3.19 and the 2018 average rate R$ 3.66.
The highest volatility period for the Brazilian currency was the second semester of the year, with a strong US$ appreciation in the 3Q18, followed by a 3.6% average depreciation in the 4T18 due to the results of the presidential elections.
Despite the volatility during the year, these factors were generally positive for the Company’s performance in 2018 that, as an oil exporter, has captured in its operational performance both the positive effect of Brent prices and the average US$ appreciation.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Operational performance During the year of 2018 there was one event that resulted in the interruption of production wells. On July 29th, 2018, 7-TBMT-2HP well had its production interrupted for undetermined time due to a failure in the electric submersible pump (“ESP”).
Apart from this event, the total production in 2018 reached 2,382.4 kbbls, a 2.0% contraction compared to 2017, when 2,431.6 kbbls were produced, indicating the high standards of the operational team in charge of TBMT’s operation.
The BS-4 Block, in which the Company holds a 40% stake and is object of an arbitration procedure, began its operation in May 2018, having produced a total of 2,923.8 kbbls during the year, as disclosed by the operator. Dommo Energia’s stake in the asset production is 1,169.5 kbbls.
Financial performance Net revenues in 2018 were 26.2% higher than in 2017, reaching R$ 538,278. This result was driven by the 30.9% average recovery of Brent price during the period and by the US$ 14.5% average appreciation, which, jointly, suppressed the 14.7% decrease in volume traded in 2018, which was 2,352.2 kbbls.
It is important to note that the main financial indicators cannot be easily compared to the 2017 results, since the effects of the 2017 settlement with the creditors, under the judicial reorganization proceeding, took place only in the 4Q17.
During 2018, Management reclassified certain accounting entries related to the ongoing BS-4 arbitration procedure in order to conform strictly with certain pronouncements from the Comitê de Pronunciamentos Contábeis – CPC. Such reclassifications do not express Management’s and its legal advisors understanding about the arbitration procedure effects, nor prejudice any legal strategy adopted by the Company in respect to each of the reclassifications.
Implemented initiatives As disclosed in the material fact on November 26th, 2018, after negotiations with OSX 3 Leasing B.V. (“OSX 3”), owner of the FPSO OSX-3 that operates in TBMT, the Company signed the New Charter, a relevant event in the process to restore the Company’s operation stability and continuity.
The new terms and conditions established in the New Charter gave the Company the necessary visibility and long- term commitment to keep investing in TBMT to further increase its production capacity. As a result, the planned and approved investments in TBMT are being resumed, with the beginning of the revitalization plan (“Revitalization”) consisting of the completion of the fifth well, 4HP, that has already been drilled and needs to be connected to the FPSO, as well as workover activities in four production wells, known as 2HP, 6HP, 8H, and 44HP. The main objective is to increase TBMT’s production to an estimated 10.0 kbbls per day by late 2019. The 5
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Company estimates the Revitalization expenditures to be US$ 77,900 (“Revitalization Expenditures”), which should be disbursed within the next 12 to 18 months and will be funded from existing cash balances and future cash generation.
The Revitalization will be performed in two campaigns and contemplates in the first phase the completion of 7- TBMT-4HP, which is drilled but not connected to the FPSO OSX-3, the workover of 7-TBMT-2HP and the acquisition of a backup ESP. The second phase addresses the remaining three producing wells and will consist of workover activities as they become necessary.
The execution and implementation of the Revitalization is the main activity during 2019. Nevertheless, Management will continue to develop studies and analysis seeking to optimize even more its activities, as well as implementing initiatives and disseminating a conscious costs and expenses control mindset, aiming to become more efficient in an industry subject to volatility caused by externalities beyond the Company’s control.
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 Rio de Janeiro State. 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 15.0 million barrels of oil produced.
The average daily production in 4Q18 was 5.8 kbbls, Chart 3: Production, Commercialization and Inventory in kbbls totaling 530.2 kbbls. The volume produced in the Period presented a reduction of 2.4% compared to 3Q18, when it was produced 543.5 kbbls. In the year of 2018 the total production was of 2,382.4 kbbls, a contraction of 2.0% in relation to 2017 when 2,431.6 kbbls were produced.
As disclosed on November 26th, 2018 by the Company, the New Charter signed provides the possibility to make long term investments in TBMT, seeking to increase its production capacity to approximately 10.0 kbbls per day.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
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 at Santos Basin post-salt area, approximately 185 km from the coast, in a water depth of about 1,550 meters.
As disclosed by Dommo Energia through the Material Fact on October 23rd, 2017, there is an arbitration procedure managed by London Court of International Arbitration – LCIA, concerning the Company and the other consortium partners ("Consortium"). On September 25th, 2018, the Company received the arbitration judgment issued by the Arbitration Court (“Decision”) in respect to the first phase of the arbitration procedure, which stated, among other things, that the notification issued by one of consortium partners on October 10th, 2017 (“Notification”), was effective at the time it was issued. The Notification intended 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 aforementioned Decision is not definitive and there is the possibility that the Notification effectiveness, which determined Dommo exclusion from the Consortium, to be annulled in a subsequent step of the arbitration, with the production of evidence supporting such annulment. Nevertheless, the Decision issued and eventual future decisions of subsequent steps will only be considered legally valid, effective and enforceable under Brazilian territory after the homologation procedures of foreign judgement, handled by the Brazilian Superior Court of Justice, Superior Tribunal de Justiça – STJ, under the Federal Constitution and the prevailing legislation. After the eventual homologation by STJ, the effective transfer of the stake in the asset, partially or entirely, by Dommo Energia could occur only after ANP’s approval.
Regarding Atlanta Field’s operational performance, as disclosed by the operator, 2,923.8 barrels were produced among 2018, registering an average daily production of approximately 12.0 kbbls by the Petrojarl I. During the 4Q18 there were 1,145.0 kbbls produced in the Atlanta Field, nearly 3.4% less than 3Q18’s production.
4. Other assets
Corporate stake The Company holds 4,958,471 shares issued by Eneva S.A. (“Eneva”) accounted as Marketable Securities. On December 31st, 2018, the shares marked-to-market value was R$ 79,385.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
As disclosed in the notice to the market on March 27th, 2019, the Company is taking part in Eneva’s secondary public offering as selling shareholder, with the totality of the shares held.
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 abandonment process of the wells, which was concluded in the first quarter of 2018. The decommissioning process of the field is currently ongoing.
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 4Q18 3Q18 Var. % 2018 2017 Var. % Average exchange rate (R$/US$) 3.81 3.95 -3.6% 3.66 3.19 14.5% Volume traded (kbbls) 598.7 643.6 -7.0% 2,352.2 2,757.0 -14.7%
Net revenue 129,796 165,487 -21.6% 538,273 426,481 26.2% Cost of goods sold (94,814) (87,491) -8.4% (301,591) (511,439) 41.0% Gross profit 34,982 77,996 -55.1% 236,682 (84,958) -378.6% Gross profit margin 27.0% 47.1% -20 p.p 44.0% -19.9% n.a. Adjusted EBITDA 28,355 58,635 -51.6% 192,345 (159,918) -220.3% Adjusted EBITDA margin 21.8% 35.4% -14 p.p 35.7% -37.5% n.a. Net profit (loss) (329,263) (610,713) -46.1% (670,977) (1,976,019) -66.0%
Earnings per share (R$) (0.12) (0.23) - (0.25) (0.74) - In the fourth quarter, the Company traded 598.7 kbbls, a reduction of 7.0% compared to 3Q18 when 643.6 kbbls were traded. The lower volume traded is due to the adjustment to the logistic availability in the Period, since in both quarters two offloadings were completed. The lower volume traded jointly with the lower Brent prices in the Period, and to a lesser extent the US$ depreciation, impacted net revenues by 21.6% in the quarter, ending at R$ 129,796.
In the Year, the Company traded 2,352.2 kbbls, a decrease of 14.7% compared to 2017. On the other hand, the 30.9% average Brent price recovery, which reached US$ 71.66 per barrel in 2018 compared to US$ 54.75 in 2017, together with the 14.5% US$ appreciation, suppressed the lower volume traded and contributed to the net revenues of R$ 538,273 in the Year, 26.2% above 2017’s result.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Gross Profit The Company posted gross profit of R$ 34.982 in 4Q18, a 55.1% contraction in relation to 3Q18, when R$ 77,996 was attained. The lower gross profit in 4Q18 in relation to the previous period is due to the 21.6% net revenues reduction combined with the higher production cost per barrel in the Period.
Consequently, the Company’s gross margin was also Chart 4: Gross Profit and Gross Margin in R$ million impacted, reducing from 47.1% in 3Q18 to 27.0% in the Period.
The annual gross profit of R$ 236,682, with a margin of 44.0%, reflects the better Brent and foreign exchange rates. In relation to 2017, this result is not comparable, as the first three quarters of 2017 reflect different charter agreement conditions.
The result of the last five quarters is shown in Chart 4 and reflects the terms of the charter agreement signed during the 3Q17, which remained effective between 4Q17 and 4Q18.
Adjusted EBITDA1 Chart 5: Adjusted EBITDA in R$ million Chart 5 shows the quarters in which the charter agreement, previous to the New Charter signed on November 26th, 2018, remained effective. The period between 4Q17 and 4Q18 had an Adjusted EBITDA margin of 34.0%.
In 2018 the Adjusted EBITDA margin was 35.7%, reaching R$ 192,345, whereas in 2017 the result was negative R$ 159,918.
The adjusted EBITDA in the 4Q18 reached R$ 28,355 with an Adjusted EBITDA margin of 21.8%
1 See Annex II for Adjusted EBITDA calculation
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Net Profit/Loss From a cash effect perspective, the net loss of R$ Chart 6: Net Profit/Loss Breakdown in R$ million 329,263 in the 4Q18 and the net loss of R$ 610,713 in the previous quarter must be adjusted since a significant part is due to non-recurring and non-cash events.
Chart 6 illustrates the net results breakdown, and is noticeable that when adjusted, in the 4Q18, the result would be a net profit of R$ 51,497. The same adjustment in the 3Q18 shows a net profit of R$ 8,218.
In 2018, the net loss registered was R$ 670,977. When adjusted the amount of R$ 746,390 related to non-recurring and non-cash events, the result is R$ 75,413 net profit. The 2017 result is not comparable as it accounts non-recurring and non-cash events resulted from the conversion of debt into equity, as per the settlement signed with creditors under the judicial reorganization proceeding.
Assets The Company’s total assets in 4Q18 were R$ Chart 7: Cash position in R$ million 639,231 out of which 44.4% was accounted as current asset and comprised mainly of: (i) cash and cash equivalents; (ii) Marketable securities; and (iii) inventories.
Chart 7 shows the improvement of the Company’s cash and cash equivalents position. The Year ended with R$ 157,311 in cash.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
When added the marketable securities position held by the Company, the liquidity reaches R$ 236,389.
Liabilities In the current liabilities, under other accounts payable, it is accounted the cash calls from the Consortium in the amount of R$ 94,052, whose payments were suspended by the Company.
The R$ 735,459 non-current liabilities are essentially comprised of (i) provisions for asset retirement obligations (ARO) in the amount of R$ 320,141; (ii) provisions for regulatory contingencies in the amount of R$ 154,101; and (iii) provisions for environmental compensations in the amount of R$ 65,883.
It is worth mentioning that since the conclusion of the judicial reorganization proceeding, the Company does not have any outstanding loans and financings with non-related parties.
As a result of the net loss registered in 2018, mainly due to impairment provision and exchange variation expenses, the Company ended the Year with a negative net worth of R$ 376,350, compared to net worth of R$ 392,412 by the end of 2017.
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, December 22nd, 2017 and November 26th, 2018 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 commission, and its reading is recommended as part of each investor’s individual evaluation.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Independent auditor's report (A free translation of the original in Portuguese).
To the Board of Directors and Stockholders Dommo Energia S.A.
Opinion
We have audited the accompanying parent company financial statements of Dommo Energia S.A. (the "Company"), which comprise the balance sheet as at December 31, 2018 and the statements of operations, comprehensive operations, changes in equity (net capital deficiency) and cash flows for the year then ended, as well as the accompanying consolidated financial statements of Dommo Energia S.A. and its subsidiaries ("Consolidated"), which comprise the consolidated balance sheet as at December 31, 2018 and the consolidated statements of operations, comprehensive operations, changes in equity (net capital deficiency) and cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dommo Energia S.A. and of Dommo Energia S.A. and its subsidiaries as at December 31, 2018, and the financial performance and the cash flows for the year then ended, as well as the consolidated financial performance and the cash flows for the year then ended, in accordance with accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
Basis for opinion
We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the parent company and consolidated financial statements section of our report. We are independent of the Company and its subsidiaries in accordance with the ethical requirements established in the Code of Professional Ethics and Professional Standards issued by the Brazilian Federal Accounting Council, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Material uncertainty related to going concern
We draw attention to Note 1.3 to these financial statements, which states that the Company incurred recurring losses and presented a net capital deficiency of R$ 376,350 thousand as at December 31, 2018. This, along with other matters as described in Note 1.3, raises a significant doubt about the ability of Dommo Energia S.A. to continue as a going concern. Our opinion is not qualified in respect of this matter.
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Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current Matters period. These matters were addressed in the context of our audit of the parent company and consolidated financial statements as a whole, and in forming Why it is a our opinion thereon, and we do not provide a separate opinion on these Key Audit matters. In addition to the matter described in the Material uncertainty Matter related to going concern section, we have determined the matters described below to be the key audit matters to be communicated in our report. How the matter was addressed
Why it is a key audit matter How the matter was addressed in the audit
Projections of result used in the assessment of the recoverable amount of property, plant and equipment, intangible assets, investments and deferred taxes (Notes 1.2, 3.f, 3.g, 11, 12.a, 14 and 33)
In 2018, the Company recognized additional Our audit procedures included, among others, the impairment losses in property, plant and equipment, understanding of the internal control environment intangible assets and investment related to the BS-4 of the processes for the measurement of the Consortium, in the amount of R$ 600,259 thousand, recoverable amounts of the Company’s assets. and derecognized deferred income tax and social contribution assets in the amount of R$ 146,300 We analyzed the contents of the arbitration award thousand, which had substantially been based on the related to BS-4 Block, checking the accounting projections of future taxable profit of the BS-4 records arising from the impairment losses Consortium. Also, in 2018, the Company recorded associated to the assets recorded until that date and R$ 251,906 thousand as recoverable amount of the discussed it with the Company’s internal and assets that comprise the Tubarão Martelo field. external legal advisors.
In the arbitration award issued on September 25, We analyzed the governance of the related 2018, the Company had its interest of 40% in BS-4 measurement processes, including the approval of Block excluded. Consequently, the Company the budgets used in this calculation and the reviews recognized impairment losses for all the property, of thecomputations prepared by the Company’s plant and equipment and intangible assets related to teams of specialists. BS-4 Consortium, including the investment in Atlanta Field B.V., and derecognized the We compared the internal estimates of volume of the corresponding deferred taxes, as aforementioned. oil reserves included in the projections with the estimates prepared by independent specialists, and Currently, the only Cash Generating Unit (CGU) we evaluated their technical competence. of the Company consists of the Tubarão Martelo field. The determination of expected cash flows We involved our specialists in financial projections to related to that field involves the definition of analyze the reasonableness of the main operating assumptions and critical judgments by and financial assumptions used by management, management, such as the performance of the comparing them with the available economic and economy and of the exploration and production industry forecasts. We also tested the logical and sectors under the Brazilian and foreign scenarios, arithmetical consistency of the projections and read the estimate of the volume of oil reserves, the the disclosures of management in the financial terms of the projections, considering the statements. remaining oil reserves and the schedule of production of the set of wells that comprise the Our audit procedures showed that the judgments Tubarão Martelo field, as well as the estimate of applied and assumptions used by management in future prices of oil, discount rates, investments the projection of the result were reasonable, and for its maintenance, tax bases and the that the disclosures were consistent with the data corresponding tax rates. The use of different
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Why it is a key audit matter How the matter was addressed in the audit assumptions and judgments could significantly and information obtained. modify the recoverable amount calculated by the Company.
Why it is a key audit matter How the matter was addressed in the audit
Provisions for abandonment obligation and environmental compensations (Note 17)
The Company has provisions for the Our audit procedures included, among others, the abandonment obligations of the wells related to understanding of the internal control environment the Tubarão Azul and Tubarão Martelo fields and of the processes of measurement of the provisions for environmental compensations of R$ 374,704 for abandonment of the Tubarão Azul and Tubarão thousand as at December 31, 2018. Martelo wells and for environmental compensations. The cost estimates for the aforementioned provisions are considered as critical because: (i) the obligations We assessed the nature and the composition of the will be in the long term; and (ii) the technologies and future expenditures expected for the abandonment costs related to the abandonment and environmental of the aforementioned wells, where the Company compensations are constantly changing. assumed legal and contractual liability with the National Agency of Petroleum, Natural Gas and Due to the significance of the provisions for Biofuels (ANP). abandonment of the aforementioned wells and for environment compensations, as well as the inherent We involved our specialists in financial projections to level of uncertainty to determine their estimates, we analyze the reasonableness of the assumptions used consider this a key audit matter. and the market information that support them. We also tested the logical and arithmetical consistency of the projections of future expenditures to incur, and read the disclosures of management in the financial statements.
Our audit procedures showed that the judgments applied and assumptions used by management in the related estimates of future expenditures were reasonable, and that the disclosures were consistent with the data and information obtained.
Other matters
Statements of Value Added
The parent company and consolidated Statements of Value Added for the year ended December 31, 2018, prepared under the responsibility of the Company's management and presented as supplementary information for IFRS purposes, were submitted to audit procedures performed in conjunction with the audit of the Company’s financial statements. For the purposes of forming our opinion, we evaluated whether these statements are reconciled with the financial statements and accounting records, as applicable, and if their form and content are in accordance with the criteria defined in Technical Pronouncement CPC 09 - "Statement of Value Added". In our opinion, these Statements of Value Added have been properly prepared in all material respects, in accordance with the criteria established in the Technical Pronouncement, and are consistent with the parent company and consolidated financial statements taken as a whole.
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Audit of prior-year information The audit of the financial statements for the year ended December 31, 2017, originally prepared before the adjustments described in Note 2 (e.1, e.2), was conducted by other independent auditors, who issued an unqualified audit report dated March 27, 2018, with an emphasis of matter paragraph related to the arbitration procedure involving the notice requesting the exclusion of the Company from the BS-4 Consortium. As part of our audit of the financial statements as of December 31, 2018, we also audited the adjustments described in Note 2 (e.1, e.2) that were made to restate the financial statements for the year ended December 31, 2017, presented for comparison purposes. In our opinion, such adjustments are appropriate and have been correctly made. We were not engaged to audit, review or apply any other procedures to the Company's financial statements for 2017 and therefore we do not express an opinion or any form of assurance on the financial statements for 2017 taken as a whole.
Other information accompanying the parent company and consolidated financial statements and the auditor's report
The Company’s management is responsible for the other information that comprises the Management Report.
Our opinion on the parent company and consolidated financial statements does not cover the Management Report, and we do not express any form of audit conclusion thereon.
In connection with the audit of the parent company and consolidated financial statements, our responsibility is to read the Management Report and, in doing so, consider whether this report is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement in the Management Report, we are required to communicate the matter to those charged with governance. We have nothing to report in this regard.
Responsibilities of management and those charged with governance for the parent company and consolidated financial statements
Management is responsible for the preparation and fair presentation of the parent company and consolidated financial statements in accordance with accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the parent company and consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the financial reporting process of the Company and its subsidiaries.
Auditor’s responsibilities for the audit of the parent company and consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the parent company and consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
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Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with Brazilian and International Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the parent company and consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control of the Company and its subsidiaries.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the ability of the Company to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the parent company and consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the parent company and consolidated financial statements, including the disclosures, and whether these financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the parent company and consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
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From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
Rio de Janeiro, March 28, 2019
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)
Balance sheet as at December 31, 2018 and 2017
(In thousands of Reais)
Company Consolidated
Note 12/31/2018 12/31/2017 12/31/2018 12/31/2017 (restated) (restated) Assets
Current Cash and cash equivalents 5a 51,922 36,008 157,311 42,537 Trade accounts receivable 7 - 16,523 - 16,523 Oil inventories 8 30,576 18,055 28,899 16,820 Marketable securities 5b - 68,923 79,078 68,923 Escrow deposits 6 3,245 72,505 3,245 72,505 Other credits and prepaid expenses 9 13.605 16,283 15,183 16,102
99,348 228,297 283,716 233,410
Non-current assets held for sale 10 - 205,920 - 205,920
Total current assets 99,348 434,217 283,716 439,330
Non-current Long-term assets Escrow deposits 6 - 60,676 - 60,676 Inventories 8 - - 10,533 10,533 Loans and financing with related parties 15 14,533,575 12,620,144 - 87,780 Income tax, social contribution and other recoverable taxes 14 89,620 87,971 99,272 89,444 Deferred income tax and social contribution 14 - 146,300 - 146,300 Credits with related parties 15 414,728 354,888 - 5,225 15,037,923 13,269,979 109,805 399,958
Investments 11 17,045 184,812 1,677 193,242 Fixed assets 12 243,003 178,268 244,023 179,139 Intangible assets 13 10 135,115 10 135,115
Total non-current assets 15,297,981 13,768,174 355,515 907,454
Total assets 15,397,329 14,202,391 639,231 1,346,784
The accompanying notes are an integral part of the financial statements.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. (Publicly Held Company)
Balance sheet as at December 31, 2018 and 2017
(In thousands of Reais)
Company Consolidated
Note 12/31/2018 12/31/2017 12/31/2018 12/31/2017 (restated) (restated) Liabilities Current Trade accounts payable 16 35,122 42,839 35,894 43,790 Income and social contribution taxes, government stakes and other taxes to be paid 14 35,369 29,947 35,381 29,948 Salaries and payroll charges 11,855 14,844 11,943 14,844 Accounts payable to related parties 15 199,363 84,587 72,152 2,185 Sundry provision 17 3,480 41,406 3,480 41,406 Other accounts payable 18 74,720 92,602 121,272 130,956
Total current liabilities 359,909 306,225 280,122 263,129
Non-current Loans and financing with related parties 15 14,268,774 12,462,921 - - Accounts payable to related parties 15 409,537 349,590 - - Sundry provision 17 596,589 654,068 596,589 654,068 Deferred PIS and COFINS 14 138,870 37,175 138,870 37,175
Total non-current liabilities 15,413,770 13,503,754 735,459 691,243
Equity (net capital deficiency) Capital stock 20 10,250.677 10,157,770 10,250.677 10,157,770 Shares held in Treasury (21,646) - (21,646) - Capital reserves 1,727,383 1,884,317 1,727,383 1,884,317 Currency translation adjustments 20 60.815 72,927 60.815 72,927 Accumulated losses (12,393,579) (11,722,602) (12,393,579) (11,722,602)
Total equity (net capital deficiency) (376,350) 392,412 (376,350) 392,412
Total liabilities and equity (net capital deficiency) 15,397,329 14,202,391 639,231 1,346,784
The accompanying notes are an integral part of the financial statements.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. (Publicly Held Company)
Statement of operations
Years ended December 31, 2018 and 2017
(In thousands of Reais, except for basic and diluted earnings [loss] per share)
Company Consolidated
Note 12/31/2018 12/31/2017 12/31/2018 12/31/2017 (restated) (restated)
Net sales revenue 21 523,336 426,481 538,273 426.481 Cost of goods sold 22 (321,787) (530,958) (301,591) (511,439)
Gross profit (loss) 201,549 (104,477) 236,682 (84,958)
Operating expenses General and administrative expenses 23 (50,065) (67,579) (51,746) (69,371) Other operating expenses 25 (100,917) (23,562) (106,597) (28,213) Provision for/realization of impairment 26 (419,522) (644,282) (403,539) (630,292) Provision for loss of subsidiaries 11 - - (223,273) - Provision for realization of currency translation adjustments ("CTA") - - 43,155 - Equity in the earnings of subsidiaries 11 (774,091) (37,017) 986 (1,487) (1,344,595) (772,440) (741,014) (729,363)
Results before financial results and taxes on income (1,143,046) (876,917) (504,332) (814,321)
Financial results Financial revenue 24 25,803 90,526 27,768 88,995 Financial expenses 24 (28,048) (1,347,690) (31,177) (1,353,090) Net exchange variation 24 620,614 140,467 (16,936) 84,802 618,369 (1,116,697) (20,345) (1,179,293)
Loss before taxes on income (524,677) (1,993,614) (524,677) (1,993,614)
Income tax and social contribution 14 (146,300) 17,622 (146,300) 17,622
Loss of continuing operations (670,977) (1,975,992) (670,977) (1,975,992)
Discontinued operations - (27) - (27)
Loss for the year (670,977) (1,976,019) (670,977) (1,976,019)
Basic and diluted loss per share (R$) 32 (0.25166) (5.21947) (0.25166) (5.21947)
The accompanying notes are an integral part of the financial statements.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. (Publicly Held Company)
Statements of comprehensive operations
Years ended December 31, 2018 and 2017
(In thousands of Reais)
Company and Consolidated
12/31/2018 12/31/2017 (restated)
Loss for the year (670,977) (1,976,019) Currency translation adjustments (12,115) (17,625)
Total comprehensive income (loss) (683,092) (1,993,644)
The accompanying notes are an integral part of the financial statements.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. (Publicly Held Company)
Statements of changes in equity (net capital deficiency)
Years ended December 31, 2018 and 2017
(In thousands of Reais)
Retained Currency earnings/ Capital Shares held Capital translation accumulated Note stock l In Treasury reserve adjustments losses Total
Balances as at January 1, 2017 8,607,471 - 117,273 90,552 (9,746.583) (931,287)
Capital increase 20 1,550,299 - - - - 1,550,299 Creation of a Capital Reserve – conversion of debt into equity instrument - - 1,767,044 - - 1,767,044 Currency translation adjustments 11 and 20 - - - (17,625) - (17,625) Loss for the year - - - - (1,976,019) (1,976,019) Balances as at December 31, 2017 10,157,770 - 1,884,317 72,927 (11,722,602) 392,412
Shares issued as a result of the Merger by OGPar shares 11 and 20 92,907 - - - - 92,907 Shares held in treasury (arising from the process of the Merger by OGPar shares fully carried out up to the date of publication of these financial statements ) 20 - (54,200) - - - (54,200) Shares held in treasury – Sale of shares in the period November 26 to December 31, 2018 20 - 16,215 - - - 16,215 Result of the Merger by OGPar shares 11 - - (140,595) - - (140,595) Accumulated translation adjustments - other subsidiaries (a) - - - (1,718) - (1,718) Accumulated translation adjustments – Atlanta Field (a) 11 - - - 32,761 - 32,761 Accumulated translation adjustments – write-off (100%) of Investment Atlanta Field (a) 11 - (43,155) - (43,155) Loss on disposal of reciprocal participation 20 - 16,339 (16,339) - - - Loss for the year - - - - (670,977) (670,977) Balances as at December 31, 2018 10,250,677 (21,646) 1,727,383 60,815 (12,393,579) (376,350)
(a) The amount of cumulative translation adjustments is R $ (12,115).
The accompanying notes are an integral part of the financial statements. 22
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. (Publicly Held Company)
Statements of cash flows
Years ended December 31, 2018 and 2017
(In thousands of Reais)
Company Consolidated
Note 12/31/2018 12/31/2017 12/31/2018 12/31/2017 (restated) (restated) Cash flow from operating activities Loss for the year from continuing operations (670,977) (1,975,992) (670,977) (1,975,992) Loss for the year from discontinued operations - (27) - (27) Adjustments to reconcile profit (loss) to cash flows from operating activities: Depreciation of fixed assets and amortization of intangible assets 8,809 1,546 25,754 16,013 Equity in the earnings of subsidiaries 11 774,091 37,017 (986) 1,487 Stock options (pro rata, cancellation/annulment and guarantees) 18 (519) 126 (519) 126 Impairment 12, 13 and 26 419,522 644,282 403,539 630,292 Provision for loss of subsidiaries 11 - - 223,273 - Provision for inventory losses 8 2 111,567 2 105,945 Sundry provision 17 (30,968) 869 (30,968) 869 Unrealized exchange variation on loans and financing (655,848) (129,964) (8,453) (93,913) Interest/charges on financing - provisioned assets and liabilities (9,207) (292,953) (6,498) (290,881) Deferred income tax and social contribution 14 146,300 (17,622) 146,300 (17,622) Deferred PIS and COFINS 14 and 25 101,695 9,537 101,695 9,537 Interest and exchange variation on provision for Asset Retirement Obligation ("ARO") 17 60,395 19,096 60,395 19,096 Fair value adjustment of financial assets 5 and 24 (5,454) (40,660) (10,155) (40,660) Loss on the conversion of debt into equity instruments 24 - 1,590,937 - 1,590,937 Others - (707) (44,446) (1,184) Cash provided by (used in) operations 137,841 (42,948) 187,956 (45,977)
Changes in assets and liabilities: Other credits and related parties 9 and 15 278,817 210,907 70,249 184,348 Income tax, social contribution and other recoverable taxes 14 (1,649) 11,903 (2,033) 11,629 Trade accounts receivable 7 16,523 (16,523) 16,523 (16,523) Inventories 8 (7,996) (51,002) (7,554) (51,002) Escrow deposits 6 129,936 30,710 129,936 30,710 Trade accounts payable 16 (7,717) 7,785 (8,252) 8,502 Salaries and payroll charges (2,989) (1,784) (2,989) (1,795) Income and social contribution taxes, government stakes and other taxes to be paid 14 5,422 4,720 5,431 4,719 Sundry provision 17 (63,164) (67,450) (63,164) (67,450) Other accounts payable 18 15,740 40,251 23,790 78,605 362,923 169,517 161,937 181,743
Net cash provided by (used in) operating activities 500,764 126,569 349,893 135,766
Cash flows from financing activities Marketable securities 20.b - (19,834) - (19,834) Capital increase in equity interest 11 (1,052) (6,032) - (14,647) Acquisition of fixed assets 12 (428) (90,895) (428) (90,895) Sale of fixed assets 12 376 136 376 136 Acquisition of intangible assets 13 (251,287) (61) (251,287) (61) Net cash provided by (used in) investment activities (252,391) (116,686) (251,339) (125,301)
Cash flows from financing activities Capital increase - 198 - 198 Sale of Dommo shares by OGpar - - 16,215 - Borrowings and financing from related parties 47,887 - - - Amortization of principal from financing from related parties 15 (280,346) - - - OGPar consolidation cash - - 5 - Net cash provided by (used in) financing activities (232,459) 198 16,220 198
Variation in cash and cash equivalents 15,914 10,081 114,774 10,663
Variation 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 51,922 36,008 157,311 42,537
Variation in cash and cash equivalents 15,914 10,081 114,774 10,663
The accompanying notes are an integral part of the financial statements. 23
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. (Publicly Held Company)
Statements of value added
Years ended December 31, 2018 and 2017
(In thousands of Reais)
Company Consolidated
Note 12/31/2018 12/31/2017 12/31/2018 12/31/2017 (restated) (restated)
Net sales revenue 21 523.336 426.481 538.273 426.481
Inputs acquired from third parties Costs of products, goods and services minus royalties, depreciation and amortization 22 (261.682) (490,197) (241,486) (470,678) Materials, energy, outsourced services and others 20,449 (11,666) 28,332 (5,054) Equity in the earnings of subsidiaries 11 (774,091) (37,017) 986 (1,487) Provision for loss of subsidiaries 11 - - (223,273) - Provision for realization of CTA - - 43,155 - Loss on the conversion of debt into equity instrument 24 - (1,590,937) - (1,590,937) (Provision for)/realization of impairment 26 (419,522) (644,282) (403,539) (630,292) (1,434,846) (2,774,099) (795,825) (2,698,448)
Gross added value (911,510) (2,347,618) (257,552) (2,271,967)
Retentions Depreciation of fixed assets and amortization of intangible assets (8,809) (1,546) (25,754) (16,013) (8,809) (1,546) (25,754) (16,013)
Net value added produced by the Company (920,319) (2,349,164) (283,306) (2,287,980)
Value added received in transfer Results of discontinued operations - (27) - (27) Financial revenue 24 25,803 90,526 27,768 88,995 25,803 90,499 27,768 88,968
Total value added to distribute (894,516) (2,258,665) (255,538) (2,199,012)
Distribution of value added Employees (i) Direct remuneration 42,952 51,402 43,013 51,524 Benefits 7,626 7,523 7,626 7,527 Accrued severance pay (FGTS) 3,936 3,139 3,936 3,139 54,514 62,064 54,575 62,190
Taxes Taxes, fees and contributions 262,456 (1,757) 260,694 (3,295) Royalties 52,057 40,761 52,057 40,761
Financial expenses and net exchange variation 24 (592,566) (383,714) 48,113 (322,649)
Value distributed to shareholders Loss for the year attributable to shareholders (670,977) (1,976,019) (670,977) (1,976,019)
Total value added distributed (894,516) (2,258,665) (255,538) (2,199,012)
(i) Comprises amounts allocated to projects, such as cost of goods sold and fixed assets, and amounts recorded as general and administrative expenses.
The accompanying notes are an integral part of the financial statements. 24
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Notes to the Financial Statements
(In thousands of Brazilian Reais, except when indicated otherwise)
1 Operations
1.1 Corporate structure
As at December 31, 2018, the corporate structure of Dommo Energia was as follows:
Dommo Energia S.A., formerly OGX Petróleo e Gás S.A., (“Dommo Energia” or the “Company”): Originally incorporated 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. By acting either directly or through subsidiaries, Dommo Energia may further carry out the activities that make up its purpose in Brazil or abroad and hold interests in other companies.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Dommo R-11 Petróleo e Gás S.A., formerly OGX R-11 Petróleo e Gás S.A., (“Dommo R- 11”): Incorporated on October 4, 2013 and headquartered in the city of Rio de Janeiro, the company has the same corporate purpose as Dommo Energia. Dommo International GmbH, formerly OGX International GmbH, (“Dommo International”): Incorporated on November 11, 2009, headquartered in the city of Vienna, Austria, the company’s purpose is to hold interests in other companies and engage in any type of business.
Dommo Austria GmbH, formerly OGX Austria GmbH, (“Dommo Austria”): Incorporated on November 11, 2009 and headquartered in the city of Vienna, Austria, this company’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 and lease agreements.
OGX Netherlands Holding B.V. (“OGX Netherlands Holding”): Incorporated on July 23, 2012, headquartered in Amstelveen, in the Netherlands, this company’s purpose is to engage in the exploration, production and sale of oil and its by-products, natural gas and other hydrocarbons. It may further hold interests in other companies and provide technical services for the O&G industry, and also engage in other activities associated with this industry. Its main operating activities currently consist of holding interests in other Dutch companies.
OGX Netherlands B.V. (“OGX Netherlands”): Incorporated on March 19, 2010 and headquartered in Amstelveen, in the Netherlands, this company’s corporate purpose is the exploration, production and sale of oil and its by-products, natural gas and other hydrocarbons. It may further provide technical services for the O&G industry, as well as engage in other activities associated with this industry. Its main operating activities currently consist of acquiring and leasing equipment to Dommo Energia for use in the O&G industry.
Atlanta Field B.V. (“Atlanta Field”): Incorporated on November 2, 2012 and headquartered in Rotterdam, Netherlands, the company's main operations currently consist of acquiring and leasing equipment to be used in O&G exploration and production by Consórcio BS-4, comprised of Dommo Energia, with an interest of 40%, 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 the “Consortium” or “BS-4 Consortium”).
Eneva S.A. (“Eneva”): This company was incorporated on April 25, 2001 under the name MPX Mineração e Energia Ltda., headquartered in the city of 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 envisages 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 said location. Dommo Energia classifies its interest in Eneva as a financial asset measured at fair value through profit or loss. On December 31, 2018, these assets were classified as marketable securities under current assets. See Note 5b.
Óleo e Gás Participações S.A. (“OGpar”): This company was founded on April 10, 2006, under the name Centennial Asset Participação Corumbá S.A. After a spin-off of the net assets associated to businesses other than oil and gas, on September 3, 2007 the name was changed to OGX Petróleo e Gás Participações S.A. and subsequently, on December 6, 2013, to the
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
current name. Headquartered in the city of Rio de Janeiro, the company’s purpose is to hold interests in other companies operating in the oil and gas segment, both Brazilian and foreign and organized in any business format.
(*) In December 2018, Dommo Energia merged with OGPar ("merger of shares") and now holds all OGPar shares. On the date of these financial statements, OGPar had a reciprocal interest of 0.83% in Dommo Energia. For further details on the merger of shares see Note 11.
1.2 Portfolio
As at December 31, 2018, the Company held interests in the following fields: % Coun Dommo Contractual try Basin Block Field Operator Energia period 1 Brazil Campos BMC 41 Tubarão Azul Dommo Energia 100% 05/09/2012 to 05/09/2039 2 Brazil Campos BMC 39 and 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 are located in the BS-4 block in the Santos Basin (“BS-4” or “Atlanta and Oliva Fields” or “Atlanta Field”), where the Company holds 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 the “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 would be exercising of the option to demand that the Company withdraw from the Joint Operating Agreement ("JOA") referring to the BS-4 Consortium and the Concession Agreement (the "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 alleged 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 that were sent (see Note 19e).
In this regard, on October 23, 2017, the Company informed the market that it started arbitration to be administere the London Court of International Arbitration, 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 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. Dommo also filed an application requesting that Barra and QGEP pay for the damages caused by said conduct (see Note 19e).
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
The Arbitration Court issued a preliminary decision, effective as of the second quarter of 2018 (“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 others costs 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 at 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 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 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 at 2Q18.
On September 25, 2018, the Company became aware of the judgment rendered by the Arbitration Court (the “Decision”) regarding the first stage of the arbitration, as per the 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 JOA, the Consortium Agreement and the Concession Agreement, all of which related to Block BS-4, as per the 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 later 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 in a 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 revoked the preliminary decision on the sale of the oil owned by Dommo produced in BS-4, but kept the oil revenue with Barra and GQEP, which is why Dommo remains not recording revenue and cash calls.
The effects and consequent enforceability of the decision in Brazil are subject to ratification by the Superior Court of Justice 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 – Provision, 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 accounting law, the Company complemented the impairment amount, which totaled R$1,084,369 on December 31, 2018, which is net of provision for ARO, in the amount of R$264,020 on December 31, 2018 (Note 17b) and cash calls received after October 2017, whose balance on December 31, 2018 was R$47,648 (Note 18). 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 comply with CPC 01 and CPC 25 and do not represent, 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.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Tubarão Martelo Tubarão Martelo field, located in the 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, entered into a new amendment to the charter agreement (“New Charter Agreement”) with OSX 3 to extend the existing charter for a period of up to 20 years. OSX 3 owns FPSO OSX-3 (“FPSO”), which is used as a production unit at TBMT and currently produces approximately 6,000 barrels of oil per day. In addition to the New Charter Agreement, the Company and OSX 3 cancelled the call option for acquisition of TBMT, which was held by OSX 3 after the court-supervised reorganization.
Under the previous charter agreement (“Former Charter Agreement”), which had been negotiated as part of the Company’s debt restructuring while it was still under court-supervised reorganization (as informed by the Material Fact of July 24, 2017), OSX 3 could notify the Company at any time of its intention to remove the vessel from TBMT. Moreover, as additional protection to OSX 3, the Company granted a call option that would allow OSX 3 to acquire TBMT for US$1.00 under certain conditions.
The terms of the Former Charter Agreement made it difficult for Dommo Energia to carry out planned and approved investments at TBMT, given the uncertainty as to whether FPSO would remain as a production unit of TBMT. The New Charter Agreement was negotiated by the parties in order to provide Dommo Energia with necessary visibility and long-term commitment to invest in TBMT and increase its production capacity.
As a result of the New Charter Agreement, the Company will be able to resume planned and approved investments at TBMT (the “Refurbishment”). The Refurbishment consists of the conclusion of the fifth well (4HP), which has already been drilled, but needs to be connected to FPSO, as well as workover activities in the four producing wells (2HP, 6HP, 8H and 44HP). The objective of the Refurbishment is to increase TBMT production to an estimated 10,000 barrels of oil per day by the end of 2019. The Company estimates that the Refurbishment will cost US$ 77,900 (“Refurbishment Costs”), to be paid over the next 12 to 18 months and funded by existing cash balances and future cash generation.
The general terms of the Former Charter Agreement, effective as of the implementation of the agreement entered into with the Company’s creditors on July 24, 2017 (the “Omnibus Deed” or “Creditors Agreement”) are: (i) the granting, by Dommo Energia to OSX 3, of a call option for acquisition of TBMT, by means of payment of US$1.00 plus other amounts ("TBMT Call Option"); (ii) the granting, under certain conditions precedent, by OSX 3 à Dommo Energia, of a call option on the 4,958,471 shares issued by Eneva and held by OSX 3, by means of payment of US$1.00 ("Eneva Call Option"); (iii) the lack of a specific term. Dommo Energia, when notified at any time, would have to take all the necessary measures to conclude the process of returning FPSO within 240 days as of receipt of the notification; (iv) charter payments based on an established formula, effective until the return of FPSO to OSX 3.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
The General Terms of the New Charter Agreement are:
(i) cancellation of TBMT Call Option; (ii) cancellation of Eneva Call Option; (iii) twenty (20)-year term of the charter, subject to early termination provisions, as described below; (iv) the charter payments will be calculated and paid each offload, based on a formula that will distribute the cash flows provided by TBMT among the parties, as follows:
TBMT Gross Revenue minus Agência Nacional de Petróleo, Gás Natural e Biocombustíveis (“ANP”) royalties minus TBMT Refurbishment Costs minus abandonment fund deposits (as applicable) = TBMT Gross Cash Flow (“TBMT- FCB”).
The division of TBMT-FCB between the parties will be as follows (pro rata calculation based on the number of days elapsed between offloads): Payment by Dommo Energia (“PD”): 100% of TBMT-FCB up to US$ 58,500 per year; Charter Payment (“PA”): 100% of TBMT-FCB up to US$ 47,200 per year – equivalent to a daily rate of US$129.
After the above payments, TBMT’s remaining cash flow will be divided as follows: 20% for Dommo Energia, Dommo Energia’s variable payment (“PVD”), and 80% for OSX 3, the charter’s variable payment (“PVA”).
(v) to guarantee this new long-term charter agreement and cancel the TBMT Purchase Option, on November 27, 2018, Dommo Energia made a payment to OSX-3 totaling USD 50,000, with funds from the corporate cash and related deposit (Note 6), and will make another payment of USD 15,000 up to September 30, 2019 (Note 15), which was equivalent to BRL 251,287 (USD 65,000) at December 31, 2018, classified as intangible assets (Notes 1.3 and 13). In the case of termination of the New Charter Agreement by OSX 3 before its maturity, OSX 3 will have to pay an early termination fee to Dommo Energia, as follows: USD 65,000 up to 2019, USD 50,000 up to 2020, USD 25,000 up to 2021, USD 12,000 up to 2022 and USD 6,000 up to 2023.
In addition to the financial terms described above, the New Charter Agreement includes additional terms guarantees (seizure of oil field and receivables), default penalties (to both parties), collection account for disbursement of payments and other terms negotiated by the parties.
Field in the process of decommissioning
Tubarão Azul As per the Material Fact of January 22, 2016, the Company concluded the decommissioning of production ship FPSO OSX-1, which operated in the field. The ARO of the wells was concluded in first quarter of 2018 and the field decommissioning is in progress.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
1.3 Going concern assumption
The new charter agreement of FPSO OSX-3 between the Company and OSX-3 established new conditions authorizing interventions in wells of the Tubarão Martelo Field, which will lead to the production of 10.5 MMbls (million barrels) by 2022 and, therefore, an additional cash generation of BRL 251,906. This new scenario is the grounds to reevaluate the impairment of the property, plant and equipment items of Tubarão Martelo, with assumptions described in Note 12. These actions related to Tubarão Martelo will lead the Company to obtain the necessary cash flow to maintain its operations and to meet production costs, and operating expenses over the estimated production period up to 2022. It should be noted that the total reserve of Tubarão Martelo is 13.9 MMbls. In addition to the 10.5 MMbls classified as proven (1P) and to be produced by 2022, there are another 3.4 MMbls classified as probable (2P) that may be produced by 2024 depending on new economic valuations that justify the review of the economic cut. This volume of 13.9 MMbls is supported by the report issued by Gaffney, Cline & Associates on September 5, 2018, which was used to negotiate the new charter agreement and to carry out the economic evaluation that led to the impairment revaluation. This extension of Tubarão Martelo’s lifespan is the main foundation supporting the Company’s going concern assumption.
Regardless of the aforementioned interventions that contribute to the cash generation in the medium term, the Company’s Management highlights aspects that indicate the existence of significant uncertainties regarding the capacity for long-term operational continuity. Dommo has been recording recurring losses in its operations and had unsecured liabilities at December 31, 2018 totaling BRL 376,350. Additionally, the Company has significant long-term liabilities totaling BRL 596,589 at December 31, 2018, which are disclosed in Note 17. It should be noted that the moment when these liabilities will be recorded is still uncertain, such as the abandonment of Tubarão Martelo Field. The ability to pay off these liabilities depends on several scenarios, whose assessment, after solving the cash generation in the medium-term (2022), will be intensified by the Company as of 2019. Thus, the Company’s Management has been working on plans to reverse this situation.
One of the alternatives to mitigate these uncertainties, still under feasibility studies by Dommo Energia’s Management, is implementing a new development plan for Tubarão Martelo Field, with the purpose of exploiting the potential volume of 33.4 MMbls, in addition to the reserve of 13.9 MMbls, with 4.7 MMbls classified as possible (3P) and 28.7 MMbls as contingent resources. The volume of 4.7 MMbls is linked to the possible connection of a well already drilled but still under evaluation. Another option of exploration and development, in preliminary stage, considered to exploit the potential volume of 28.7 MMbls, is the use of water injection and drilling new producing wells. This new development plan depends, among other things, on the future geological reevaluation of the Field, as well as the forecast of long-term oil price, which, if favorable, may lead to making the new development plan economically feasible, extending lifespan of the Field and cash generation. Latest data available from the US Energy Information Association – EIA (Annual Energy Outlook 2019) estimate an actual growth of 1.20% per annum of average oil prices between 2018-2050.
Also concerning the possible new development plan, we highlight the geological and price risks that significantly affect this evaluation. The geological risks include the difficult extraction and accessible reserves in any deposit being smaller than estimated. Oil and gas geologists work hard to minimize the geological risks by frequently testing these evaluations and reducing the variations in these estimates. The confidence level of results related to the estimated volume of
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
reserves is expressed as: “proven” or “1P”, “probable” or "2P" and “possible” or “3P”. In addition to geological risks, the oil and gas prices are the main factors to decide if a reserve is economically feasible. Basically, with more relevant geological barriers to carry out extraction, there is higher price risk in a certain project, because unconventional extraction usually costs more than a vertical drilling to a reservoir. This does not mean that oil and gas companies automatically suspend operations on a project that becomes unprofitable due to a price decrease. Usually, these projects cannot be quickly deactivated and restarted. Monitoring and studying probable prices throughout the project are key to the decision-making process on the investment.
If the feasibility studies are positive, the Company will need funding sources to finance the project. In this sense, there are several structures that may be exploited, from similar ones to the recent new FPSO OSX-3 charter agreement to access credit and capital markets, since the Company currently has no financial leverage, thus having conditions to structure the usual financing agreements of the oil and gas industry.
Another significant aspect is the tax contingencies classified as possible and disclosed in Note 19, totaling BRL 2,753,461. The understanding of the Company and its legal counsel is that there are arguments and grounds supporting our defense regarding the claims from tax authorities. In addition, it should be considered that there is significant uncertainty on the term for the conclusion of these matters.
We highlight that the proceedings that resulted from the extension of the production term of Tubarão Martelo sought to address the short and medium-term liquidity issues. And, as said above, the Company continues to strive for a long-term financial balance.
Furthermore, as described in Note 17, the Company is discussing with ANP the amount of the guarantee referring to the provisions to abandon the Tubarão Martelo well. As described in said Note, the escrow deposit will be of around USD 65 million. However, this amount will not lead to a significant imbalance in the Company’s cash flow, since the deposit will reduce the variable component of the FPSO OSX-3 rent.
Regarding the BS-4 asset, the Company recorded an impairment in the total amount invested to comply with the accounting norms (see Note 12). This asset remains in arbitration dispute (see Note 1.2).
Based on the plans described above, the Company can continue operating and the financial statements were prepared on a going concern basis.
2 Presentation of financial statements
Basis of preparation a. Statement of compliance with IFRS and CPCs 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”).
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
All significant information pertaining to the financial statements, and this information alone, is being evidenced and corresponds to that used by Management in its activities. b. Basis of measurement The individual and consolidated financial statements have been prepared based on historical cost, except for derivative financial instruments, when applicable, and other financial instruments, which have been measured at fair value. c. Functional and reporting currency These financial statements are being presented in Brazilian Reais, which is the Company’s functional currency. All balances have been rounded to the nearest thousand, except when indicated otherwise. d. Use of estimates and judgments When preparing these financial statements, 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, revenues 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 adjustment in the next financial reporting year is included in the following Notes:
Note 1.3 - The financial statements were prepared considering the Company's continuity. 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 11 and 33 - Investment in Atlanta Field BV ("AFBV"). 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 - Provision for ARO - discount rate assumptions and environment compensation. 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 that control commences until the date 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 parent company's individual financial statements using the equity accounting method.
Intergroup balances and transactions and any revenues and expenses arising from intergroup transactions have been eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with subsidiaries and recognized by the equity accounting 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.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
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 debenture 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 fifth amendment to the Indenture of the Third Debenture Issue. However, such provision was not complied with upon capitalization, which unduly considered the restatement. Therefore, based on 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) to five hundred and five thousand, two hundred and ten Reais (R$505,210). 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 to R$10,157,770. 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 Dommo 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 under 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.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
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 12/31/2017
Equity in the earnings of subsidiaries (13,736) (23,281) (37,017) Loss for the period (1,952,738) (23,281) (1,976,019)
Statement of Cash Flows Company 01/01/2017 to 12/31/2017 Net results of continuing operations (1,952,711) (23,281) (1,975,992) Equity in the earnings of subsidiaries (13,736) (23,281) (37,017)
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 12/31/2017
Net exchange variation 108,083 (23,281) 84,802 Loss for the period (1,952,738) (23,281) (1,976,019)
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Statement of Cash Flows Consolidated 01/01/2017 to 12/31/2017
Net results of continuing operations (1,952,711) (23,281) (1,975,992) Net exchange variation (117,.194) 23,281 (93,913)
f. Disclosure of the financial statements Management examined the financial statements of December 31, 2018 and authorized their disclosure on March 25, 2019.
3 Summary of significant accounting practices
The Company and its subsidiaries consistently applied the accounting policies described below to all the years presented in these financial statements. a. Calculation of profit (loss) Profit (loss) is calculated in accordance with the accrual basis. b. Financial instruments
O 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) retained most of the requirements provided for in CPC 38 (IAS 39) for the classification and measurement of financial liabilities. However, it eliminated 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”; “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 and on its contractual cash flow characteristics.
A financial asset is measured at amortized cost if it complies with both 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 in order to collect contractual cash flows; and its contractual terms give rise, on specified dates, to cash flows that are related to the payment of principal and interest on the principal amount outstanding.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
A debt instrument is measured at FVTOCI if both 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 flows and selling financial assets; and its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding.
At the initial recognition of an investment in an equity instrument not held for trading, the Company can make an irrevocable election 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 FVTOCI, as described above, are classified as FVTPL. That includes all derivative financial assets. At initial recognition, the Company can irrevocably designate a financial asset that would otherwise comply with the requirements 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).
A financial asset (unless it is a trade accounts 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 from derecognition is recognized in profit or loss. Debt instruments designated at FVTOCI: These assets are measured subsequently to the 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 result in OCI is reclassified to profit or loss. Equity instruments designated at FVTOCI: These assets are measured subsequently to the fair value. Dividends are recognized as a gain in profit or loss, unless it clearly represents a recovery of a portion of the investment cost. Other net profit or loss 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.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 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 base. 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 at amortized cost.
(ii) Impairment of financial assets CPC 48 (IFRS 9) replaces the CPC 38 (IAS 39) model of “incurred losses” by 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 and cash and cash equivalents.
In accordance with CPC 48 (IFRS 9), provision for losses is measured as follows: 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.
The Company measures the provision for loss in an amount equal to the lifetime expected credit loss, except for those described below, which are measured as 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 initial recognition.
The Company elected to measure provision for losses with accounts receivables and other receivables and contractual assets at an amount equal to the lifetime expected credit loss.
By determining if 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 at no 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.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
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 by the probability of credit losses. Credit losses are measured at present value based on all cash shortfalls (i.e. the difference between contractual cash flows owed to the Company and cash flows 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 if 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 flows of the financial asset. c. Foreign currency The Company’s Management has defined that its functional currency is the Brazilian Real (R$).Transactions in foreign currency are translated to the functional currency at the exchange rate in effect on the date of each transaction. On the reporting dates, monetary assets and liabilities in foreign currency are translated to the functional currency at the closing exchange rate and the exchange variation gains and losses are recognized in the Statement of Income. Non-monetary assets and liabilities acquired or contracted in foreign currency are translated on the reporting dates based on the exchange rates in effect on the transaction dates and thus do not generate exchange variations.
The assets and liabilities of foreign subsidiaries and associates operating in stable economic environments with functional currencies other than that of the parent company are translated to Reais for consolidation purposes at the exchange rate in effect on the reporting dates, while their equity is translated at the historical rate and results at the average monthly exchange rate. The difference generated by translating currencies at such distinct rates is recognized in Equity under OCI, as CTA and recognized in the Statements of Income when such investments are disposed of either in whole or in part. The foreign subsidiaries have defined their functional currency as the United States Dollar (US$). Brazilian subsidiaries use the Real as their functional currency. It is worth noting that as at January 1, 2018, the exchange variation from specific transactions carried out with Dommo Austria GmbH were being recorded as profit (loss) for the year and the balances of these transactions recorded as currency translation adjustments under equity by December 31, 2017 were reclassified to accumulated losses, also under equity, as disclosed in Note 2e. d. Inventories The inventories are represented by assets acquired from third parties in the form of materials and supplies to be consumed or used in the exploratory drilling campaign and in the production of oil. Once used, such materials and supplies are reclassified from inventories to fixed assets.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Inventories are recorded at the cost of acquisition or production and adjusted to their realizable amounts when applicable. Oil inventories are represented by crude oil produced or acquired by the Company and its subsidiaries. These inventories are recorded at the cost of production and adjusted to their realizable amounts when applicable. The Company uses the average cost method to calculate the cost of products sold. If there is a halt in production for a period exceeding that required for routine maintenance work, expenditures on production operations (such as costs of leasing, O&M, fuel, logistic expenditures, etc.) are recognized directly in results, without transiting through inventories. e. Investments These are recognized under the equity accounting method in the company financial statements. In the consolidated financial statements, they are also recognized under the equity accounting method if the Company does not retain control, except when they are classified as non-current assets held for sale. The data on jointly held subsidiaries (“joint arrangements”) is also recorded under the equity accounting method, both in the Company and consolidated financial statements. The data on subsidiaries is included in the consolidated financial statements from the date on which control begins through the date on which control ceases to exist. The accounting information on the associates is recorded in the company and consolidated financial statements under the equity accounting method.
In the case of investments in subsidiaries, associates or jointly owned subsidiaries with negative equity (net capital deficiency), these are presented as non-current liabilities. The Company’s Management believes there is no difference between the accounting practices adopted in Brazil and IFRS, given that the Company has joint and several liability on the debt of its subsidiaries with unsecured liabilities.
Loss of control When an entity loses the control over a subsidiary, it no longer recognizes assets, liabilities and any minority interest and other items recorded under the equity of said subsidiary. Any gain or loss arising from the loss of control is recorded in profit (loss). In the case of retention of interest in the former subsidiary, said interest is measured at fair value on the date the control is lost. f. Fixed assets The Company’s fixed assets are recorded at construction or acquisition or cost, adjusted when applicable to their recoverable value. Fixed assets are chiefly represented by assets associated with the phases for exploration and development of oil and natural gas production, such as, for example, expenditures on well drilling and completion, support vessels and E&P equipment. They further include machinery and equipment and other tangible assets used for administrative purposes, such as furniture, telephone and information processing equipment and vehicles.
Successful efforts Expenditures on exploration and development of oil production are recorded under the successful efforts method. This method determines that the costs for development of all production wells and successful exploration wells linked to economically viable reserves are to be capitalized, while the costs of geological, geophysical and seismic surveys should be considered as expenses for the period when incurred. In addition, exploration wells that turn out dry and expenditures related to un-commercial reserves must be recorded in profit (loss) when identified as such.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
ARO expenditures The Company’s expenditures related to abandoning the areas for development and production of oil are recorded under fixed assets, with a contra entry to the provision for ARO under liabilities. See Notes 3h and 17.
Depreciation Expenditures on exploration and development of production are depreciated as from the declaration of commerciality and commencement of production under the units of production("DUP") method. According to this method, the monthly depreciation rate is obtained by dividing the monthly production by the total estimated balance of the reserves (proved plus probable) at the beginning of the month. The Company’s Management reviews the total balance of its reserves on an annual basis. Machinery and equipment is depreciated under the straight- line method at the rates mentioned in Note 12, which take into consideration the estimated useful life of the assets with their respective residual values. When a provision is set up for complete loss of the fixed assets of a project, depreciation thereof is halted.
Intangible assets These assets are recognized at acquisition cost and adjusted to their recoverable value, when applicable. They are mainly represented by the signature bonuses paid to obtain concessions to engage in oil and natural gas E&P activities in certain blocks and other expenses of a similar nature. They further include the expenditures associated with the acquisition of information processing systems and programs.
Amortization The signature bonuses are amortized as from the declaration of commerciality and commencement of production under the DUP method. Other intangible assets are amortized on a straight-line basis at the rates mentioned in Note 13, which take into consideration the estimated utilization period. When a provision is set up for complete loss of the intangible assets of a project, depreciation thereof is halted. g. Impairment
Analysis of indications of impairment The carrying amounts of the Company’s non-financial assets are reviewed as at each reporting date to check whether there are any indications of impairment. In the case such indications are found, then the recoverable value of the asset is determined. Specifically regarding assets related to oil exploration activities, the Company considers certain factors as indications that an asset will not be recoverable, such as: (i) there is no approved budget for the feasibility studies of the wells drilled; (ii) the concession period is nearing the end, the exploration activities are still in the initial phase and concession renewal is not likely to occur; (iii) the wells drilled are considered dry wells; (iv) the hydrocarbons found are not sufficient to constitute a reserve, that is, they are not recoverable given present economic and technological conditions. If the appraisal indicates potential impairment and the Company’s Management believes that in fact there is unrecoverable loss, then such impairment loss is recorded in profit (loss) for the year. The main cash flow assumptions are: Volumes of reserves and production estimated by the Company's internal experts or third parties. Barrel price estimated based on projections made by banks and specialized agencies; and Average discount rate of 9.18%, considering the oil industry benchmark.
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Dommo Energia S.A. Financial Statements on December 31, 2018
h. Provisions A provision is recognized in the statement of financial position when the Company and its associates have a legal or construed obligation as a result of a past event and it is probable that economic resources will be required to settle the obligation. Provision is recorded based on Management’s best estimates of the risks involved.
Provision for ARO for E&P fields Prior to the declaration of commerciality of a determined area, the Company does not provide for the expenditures forecast for abandonment at the end of the concession or production period. No provision is created since, given the stage of the operation, it is not yet possible to reliably measure the expenditures to be incurred or to predict the date for abandonment of the area. When the asset enters into the development phase and there are more inputs for making a reasonable estimate of such expenditures, an ARO provision is created with a contra entry under fixed assets. The methodology for calculating the ARO provision consists of estimating as at the reporting date how much the Company would have to disburse if it abandoned the area at that moment. The estimated amount is adjusted by the inflation rate until the date scheduled for abandonment and subsequently discounted to present value at a risk-free rate. The risk associated with the ARO provision is considered in the estimated flow of payments. The risk- free rate used is the rate for a government bond with currency and term similar to that of the provision. The inflation and discount rates are periodically reviewed and any increases or decreases in the ARO provision are recorded as a contra entry under fixed assets. In addition, each month the provision is increased by the effect of the discount rate (accretion of interest), with a contra entry under financial results. The provision is also periodically increased with execution of activities that give rise to the obligation to abandon a field, such as for example the drilling of wells, installation of lines and FPSO vessels, etc. Changes in the estimated provision involving new activities or changes in the estimated cost of the services are also shown against fixed assets.
Provision for contingencies Each month the Company’s Management appraises the forecast for success or loss in cases in which the Company is a defendant. If the chance of success is remote (probable loss), a provision for contingencies is recorded. i. Income tax and social contribution The corporate income tax ("IRPJ") and social contribution on net income ("CSLL") of the Company and its subsidiaries are calculated based on the IRPJ rate of 15% plus a 10% surtax on taxable income exceeding R$240 thousand per year, and 9% for CSLL. Tax loss carry- forwards are limited to 30% of taxable income. j. Leasing A leasing operation is classified as a finance lease if it transfers substantially all the risks and benefits of ownership from the lessor to the lessee; otherwise, it is classified as an operating lease. The payments made for operating leases are recognized in the income statement over the term of the lease. Finance leases are capitalized at the beginning of the lease term at the lower of the fair value of the leased asset and the present value of the minimum lease payments. The contra entry for the capitalized amount is recorded as either a current or non- current liability, depending on the period for settlement. Management has not identified any operation that would characterize the need to record a finance lease.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Due to the material effect from the first-time adoption of IFRS 16 – Leases as at January 1, 2019, the Company recommends the reading of the item(s) of this Note.
k. Expenditures associated with joint E&P operations In their capacity as operators of concessions for oil and gas E&P, one of the obligations of companies is to represent a joint venture before third parties. In this sense, operators are responsible for contracting and paying the suppliers of such joint ventures and, for this reason, the invoices received by the operators include the total amount of the materials and services acquired for the operation. Even so, the impacts on the individual results of companies merely reflect their shares in the concessions, since the portions associated with the other joint venture partners are recharged to them. Such recharging takes place each month. The operators estimate the disbursements expected for the subsequent month, based on the total expenditures already incurred by the joint ventures, regardless of whether or not they are billed by the suppliers, and report to the partners through a billing statement. Such disbursement estimates are compared with the balance of the checking accounts maintained for the joint ventures’ expenditures and the differences are charged from the partners through cash calls.
l. Earnings (loss) per share The basic earnings per share are calculated by dividing the profit (loss) for the year attributable to the controlling shareholders by the weighted average number of common shares outstanding during the period, since the Company does not have preferred shares. Diluted earnings (loss) per share are calculated using the above-mentioned average number of outstanding shares adjusted by the instruments potentially convertible into shares, with diluting effect, in the years reported. m. Segment reporting An operating segment is a Company component that engages in business activities from which revenues can be obtained and expenses are incurred, including revenues and expenses related to transactions with other components of the Company. Management believes that the Company engages in a single operating segment, namely oil and gas exploration and production in Brazil.
n. Assets and liabilities held for sale and discontinued operations When the Company is committed to a plan for sale of an asset or set of assets and they are available for immediate sale, they are classified as assets held for sale. A discontinued operation is a component of the entity that has been written off or is classified as held for sale and represents an important line of business or geographic area of operations. The Company’s assets held for sale are recorded under non-current assets, separate from the other assets. The same applies to the liabilities associated with these assets held for sale. Profit (loss) for the year, OCI (loss), cash flows and statement of value added relating to discontinued operations are shown separately from the profit (loss) of the Company’s continuing operations. Assets and liabilities held for sale are measured at the lower of their carrying amount and fair value minus selling expenses. The Company discontinues the use of the equity accounting method as at the date on which an investment no longer qualifies as an associate, subsidiary or joint venture.
o. Financial revenues and expenses These basically encompass interest on loans, financing, financial investments, changes in the fair value of financial assets measured at FVTPL, gains and losses on derivative financial instruments, gains and losses on the conversion of debt into equity instruments and amortization of funding costs. Exchange gains and losses are also recognized as financial
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
revenues or expenses. Interest paid on loans and financing is being fully classified in the financing activity in the statement of cash flows. p. Settlement of financial liabilities with equity instruments When the Company issues its own securities and turns them over to its creditors in order to extinguish all or part of a financial liability, such equity instruments are initially recognized under equity and measured at fair value. If the fair value of such instruments cannot be measured, the Company’s own equity instruments must be measured at the fair value of the extinguished financial liability. The difference between the fair value recognized directly in equity and the carrying amount of the financial liability is recorded in profit (loss) for the year as a gain or loss. q. Oil and gas reserves The estimated recovery of oil and gas reserves is the basis for evaluation of some financial statement items, including the provision for impairment, depreciation based on the units of production method, provision for ARO, deferred taxes, as well as significant impact on the evaluation of the ability to continue as a going concern. r. Revenue from Contracts with Clients 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 effect method (with no practical expedients), reflecting the effect of first-time adoption of the standard recognized on 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 the related interpretations.
In accordance with CPC 47 (IFRS 15), revenue is recognized when a customer obtains the control of goods or services. Determining the time of transfer of control – whether at a specific point in time or over time – requires judgment. Revenue from an oil sale contract whose purpose is the sale of oil from the Tubarão Martelo field is governed by Free on Board agreements. Therefore, this type of agreement does not require a separate performance obligation given that, as 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 determines that revenue from sales should 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 the control over the asset. It should be noted that the Company has only one contract and revenue is recognized considering prices and discounts resulting from this agreement.
Based on the above, the Company fully recognizes revenue from the sale of oil from the Tubarão Martelo field upon conclusion of the offloading. s. New accounting standards and interpretations not yet effective
CPC 06 (R2) – Leases (“IFRS 16”)
As the Company is required to adopt CPC 06(R2) – Leases (“IFRS 16”) as of January 1, 2019, it assessed the potential effect that the first-time adoption of this standard will have on the consolidated financial statements, as described below. The actual impacts from the adoption of 44
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
the standard as of January 1, 2019 may change because the new accounting policies are subject to changes until the Company’s presentation of the first financial statements that include the date the standard was initially adopted.
CPC 06 (R2) – Leases (“IFRS 16”) introduces a single accounting model, requiring lessees to recognize in the statement of financial position an asset that represents their right to use the leased asset, and a liability that represents their obligation to pay the lease. Exemptions are available for short-term leases and low-value items. Lessors’ accounting remains similar to the current standard, i.e., lessors continue to classify leases as finance or operating leases.
CPC 06 (R2) – Leases (“IFRS 16”) replaces existing standards for leases, including CPC 06 (R1) Leases and ICPC 03 Complementary Aspects of Leases.
The most significant impact identified is that the Company will recognize new assets and liabilities for its operating leases: (a) Leased administrative properties; (b) Leased logistics bases; and (c) Charter of sundry vessels.
(i) Leases in which the Company is the lessee
The Company will recognize new assets and liabilities for its leases currently classified as operating leases. The nature of the expenses related to said leases will change because the Company will recognize depreciation expenses of right-of-use assets and interest expenses on lease liabilities.
The Company previously recorded a straight-line expense from operating leases during the term of the lease, as well as assets and liabilities, when there was a time difference between actual lease payments and recorded expenses.
Based on the information currently available, the Company estimates that it will record additional lease obligations of approximately of R$ 1 billion on January 1, 2019. Of this amount, approximately 84% refers to the lease of FPSO OSX 3, 15% refers to support vessels and the remainder to other leasing contracts of the Company.
(ii) Transition
The Company will initially adopt CPC 06(R2) on January 1, 2019, using the modified retrospective approach. Therefore, the cumulative effect of the adoption of CPC 06(R2) will be recorded as an adjustment to the opening balance of retained earnings on January 1, 2019, without restating the comparative information.
The Company intends to adopt the practical expedient regarding the definition of lease agreements during transition. It means that the Company will adopt CPC 06(R2) for all agreements entered into before January 1, 2019 identified as leases in accordance with CPC 06(R1) and ICPC 03.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Other standards
The following amended standards and interpretations should not have significant effect on the Company’s consolidated financial statements.
ICPC 22 Uncertainty over Income Tax Treatments (“IFRIC 23”) Amendments to CPC 48 related to Prepayment Features with Negative Compensation (“IFRS 9”). Amendments to CPC 18 (R2) Investment in Affiliates, Subsidiaries and Joint Ventures (“IAS 28”). Amendments to CPC 33 Plans, Reductions or Plan Settlements (“IAS 19”). Changes in references to the conceptual framework of IFRS.
4 Preparation of the financial statements
The consolidated financial statements include information on all the companies listed below:
% interest
12/31/2018 12/31/2017 Direct subsidiaries: Dommo International 100.00 100.00 Dommo R-11 100.00 100.00 OGPar (i) 100.00 -
Indirect subsidiaries: Dommo Austria 100.00 100.00 OGX Netherlands Holding 100.00 100.00 OGX Netherlands 100.00 100.00
Joint ventures: Atlanta Field (ii) 40.00 40.00
(i) Incorporated by shares on November 26, 2018 (Note 11) (ii) Joint arrangements with QGEP and Barra (Notes 11 and 33).
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
12/31/2018 12/31/2017 12/31/2018 12/31/2017
Cash and bank account 51,922 36,008 142,233 36,068 Bank deposit certificate (“CDB”) - - 13,478 - Investment Fund - - 1,600 6,469
51,922 36,008 157,311 42,537
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
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.The CBD is issued and guaranteed to Banco Itaú. It has daily liquidity and its fixed remuneration is 95.5% of the CDI and the Itaú TOP RF Referenced DI Investment Fund, managed by Banco Itaú, is basically backed by private securities issued by first-tier financial institutions, all linked to post-fixed. These assets are classified as cash and cash equivalents because they have immediate convertibility characteristics. b. Marketable securities
Company Consolidated
12/31/2018 12/31/2017 12/31/2018 12/31/2017
- 68,923 79,078 68,923 Eneva S.A. common shares (i)
(i) Capital increase at Dommo Austria GmbH using the shares of Eneva.
6 Escrow deposits
The Company’s escrow deposits are classified as financial assets measured at FVTPL.
Company and Consolidated
12/31/2018 12/31/2017 Current DVB Bank (i) 3,245 72,505
Non-current Deutsche Bank – floating rate CDB (ii) - 4,349 Glas Agency (iii) - 56,327 - 60,676
Total current and non-current 3,245 133,181
(i) Escrow deposit related to the deactivation guarantee and/or abandonment fund for the Tubarão Azul field (ii) CDB linked to the guarantee for the services contracted by the Company for 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. (iii) Escrow deposit, under the Creditors Agreement, related to the abandonment of the Tubarão Martelo field and used as established in the New Charter Agreement.
7 Trade accounts receivable
The balance of R$16,523 on December 31, 2017 corresponds to the sale of oil from the Tubarão Martelo field. On December 31, 2018, there were no outstanding balances receivable. The average receivable term of trade accounts receivable is lower than 30 days.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
8 Inventories
Company Consolidated
12/31/2018 12/31/2017 12/31/2018 12/31/2017 Current assets Oil inventories 30,576 18,055 28,899 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 30,576 18,055 39,432 27,353
(i) Consists basically of materials required for the Company’s exploratory drilling campaigns, such as pipelines and drill bits. The Company is not currently undergoing any drilling campaign, nor does it expect to carry out any other one. As a result, Dommo recorded a provision for loss of these materials. (ii) The Company periodically evaluates the opportunities to sell such supplies and recorded a provision for loss in order to recognize the asset at its expected realizable value.
Changes in consolidated oil inventory
12/31/2017 Production Cost of goods 12/31/2018 Initial inventory cost sold Final inventory
Leasing 1,245 46,121 (41,918) 5,448 O&M 6,102 81,840 (82,056) 5,886 Logistics 6,415 103,037 (101,592) 7,860 Other expenditures 848 16,542 (15,920) 1,470 Depreciation - 12,575 (8,048) 4,527 Royalties 2,210 53,555 (52,057) 3,708
16,820 313,670 (301,591) 28,899
9 Other credits and prepaid expenses
Company Consolidated
12/31/2018 12/31/2017 12/31/2018 12/31/2017
Insurance premiums 936 6,789 936 6,789 Advances to suppliers 11,755 8,262 11,758 8,262 Advances to employees 356 786 369 798 Others 558 446 2,120 253
13,605 16,283 15,183 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) and intangible assets (R$104,318). See Note 1.2.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
11 Investments
Company Consolidated
12/31/2018 12/31/2017 12/31/2018 12/31/2017
Dommo International 11,844 178,143 - - Atlanta Field B.V - - - 192,007 OGX R11 5,201 6,669 - - Equity adjustment - OGX Netherlands (i) - - 1,677 1,235
17,045 184,812 1,677 193,242
(i) This refers to revenues from the lease of OGX Netherlands eliminated upon consolidation against the cost of production (inventories) at Dommo Energia.
a. Changes in investments
Company Consolidated Balances as at January 1, 2017 178,957 178,107
Capital contribution in shareholding interests 6,032 14,647
Currency translation adjustments (40,906) 1,975
Equity in the earnings of subsidiaries (37,017) (1,487)
Investment reclassification - OGX Austria 77,746 -
Balances as at December 31, 2017 184,812 193,242
Capital contribution in shareholding interests 75,429 -
Currency translation adjustments (ii) (11,086) 30,722
Provision for loss of subsidiaries - (223,273) Equity in the earnings of subsidiaries (774,091) 986
Investment reclassification - Dommo Austria (i) 541,981 -
Balances as at December 31, 2018 17,045 1,677
(i) The balance of BRL 541,277 refers to the movement of the shareholders’ equity of Dommo Austria, detailed in item (b) of this Note and in Note 15 (ii) Including BRL 32,761 referring to Atlanta Field and other amounts of the other investees
Provision for loss on investment (Atlanta Field B.V. or AFBV) Linked to BS-4 arbitration process described in Note 12, the Company received a notice, detailed described in Note 33, requesting the delivery of its interest to the other AFBV shareholders. Specifically considering the accounting law represented by CPC 01 - Impairment of Assets and by CPC 25 - Provisions, Contingent Liabilities and Contingent Assets, on December 31, 2018, the Company recorded a provision for impairment totaling BRL 223,273. Additionally, the Company transferred the cumulative foreign exchange adjustments resulting from this investment of BRL 43,155 from shareholders’ equity to the income statement. Therefore, the net impact on the Company's results for 2018 was R $ 180,118.
We highlight that this change in the accounting record essentially complies with determinations of CPC 01 and CPC 25, and does not represent the Company's and its legal counsel's understanding of the notification and does not prejudice any legal strategy to eventually be implemented.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Investment in OGPar - incorporation of shares On November 26, 2018, pursuant to Article 157, Paragraph 4 of Law 6404/76 and CVM Instruction 358/02, the Shareholders’ Meetings of the Companies approved the incorporation of OGPar’s shares by Dommo Energia (“Incorporation of Shares”), as well as the exemption of Dommo Energia from joining, due to the Incorporation of Shares, the corporate governance segment of B3 S.A. - Brasil, Bolsa, Balcão.
Due to the incorporation of shares, OGPar becomes a wholly-owned subsidiary of Dommo Energia and the Company consolidates the financial statements of this subsidiary.
The term for shareholders who did not approve or abstained from voting on the incorporation of Oleo and Gás Participações S.A. (“OGPar”) shares by the Company - as resolved at the Extraordinary Shareholders’ Meeting (“ESM”) held on November 26, 2018 - or that did not attend the said Meeting, to exercise the right of withdrawal from the Company ended on December 27, 2018. During this period, Dommo’s and OGPar’s investors exercised their right to withdrawal and the Companies reimbursed to these shareholders the amount of seven hundred and eighty-three reais and ninety-two cents (BRL 783.92) and one hundred and fifty-six reais and thirty-four cents (156.34), respectively.
The Company’s and OGPar’s Managements did not use the option provided in Paragraph 3 of Article 137 of the Brazilian Corporation Law. Therefore, the approval of the incorporation of OGPar’s shares by the Company in the ESM is irrevocable and irreversible and has not been subject to reconsideration or ratification.
The shares issued by Dommo Energia and OGPar continued to be traded separately until January 10, 2019. As of that date, OGPar’s shares cease to be traded, so that from January 11, 2019 onwards, only the shares of the Company are traded.
Breakdown of the Shares Capital of the Companies On the date of the incorporation, OGPar’s capital was of BRL 9,058,105, fully subscribed and paid-in, represented by thirty-two million, three hundred and sixty thousand, one hundred and sixty-eight (32,360,168) registered, common shares, book-entry shares and with no par value.
On that same date, Dommo’s share capital was of BRL 10,157,770, fully subscribed and paid- in, represented by two billion, six hundred and sixty-five million, four hundred and forty-four thousand and twenty (2,665,444,020) registered, common, book-entry shares with no par value, and OGPar has thirty-four million, five hundred and two thousand, three hundred and ninety-four (34,502,394) shares, representing, at the base date, 1.2944332630% of Dommo’s capital and represent, after the Incorporation of Shares, 1.2776777000% of Dommo’s capital
After ratifying and approving the appointment of the Valuation Company, the Appraisal Report and the Incorporation of Shares, Dommo’s capital increased by BRL 92,907 (Note 20), issuing New Shares (“Capital Increase”), to BRL 10,250,677, divided into two billion, seven hundred million, three hundred and ninety-eight thousand, eight hundred and eighty-one (2,700,398,881) shares. Dommo’s shareholders will not have preemptive rights in the subscription of the Capital Increase, pursuant to Article 252, Paragraph 1, of the Brazilian Corporation Law. The Incorporation of Shares was approved by OGPar’s shareholders, the New Shares were fully subscribed by the OGPar’s Management, for and on behalf of OGPar’s shareholders, pursuant to Article 252, Paragraph 2, of the Brazilian Corporation Law, and paid-in fully through the contribution of all shares issued by OGPar to the shareholders’ equity of Dommo. This capital increase through the exchange of shares among the Companies generated a loss of BRL 140,595 arising from the calculation of the fair value of the shares, which is recorded in the shareholders' equity, reducing the capital reserve. 50
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Replacement Ratio The replacement ratio results from the amount foreseen in the Recovery Plans, which was expressly ratified by the shareholders of OGPar at the Extraordinary Shareholders’ Meeting held on August 21, 2017. Therefore, OGPar’s shareholders have exactly the same percentage as OGPar has in Dommo prior to the Incorporation of Shares. The proposed exchange ratio is subject to the approval of the Shareholders' Meetings when resolving on the Incorporation of Shares. In accordance with the above information, OGPar’s shareholders were assigned thirty-four million, nine hundred and fifty-four thousand, eight hundred and sixty-one (34,954,861) registered, common, book-entry shares with no par value issued by Dommo, representing 1.2944332630% of Dommo’s share capital (“New Shares”). Dommo’s remaining shareholders will hold two billion, six hundred and sixty-five million, four hundred and forty-four thousand and twenty (2,665,444,020) registered, common, book-entry shares with no par value issued by Dommo, which now represent 98.7055667370% of Dommo’s share capital. Thus, OGPar’s shareholders received 1.0801817020 registered, common, book-entry shares with no par value issued by Dommo for each one (1) registered, common, book-entry share with no par value issued by OGPar held by them on the date of the Incorporation of Shares (“Replacement Ratio”).
Dommo’s common shares assigned to OGPar's shareholders, replacing their OGPar’s common shares, have the same rights assigned to Dommo’s current shares, fully entitled to all benefits, including dividends and capital to be declared by Dommo from the Incorporation of Shares.
Criterion for the Appraisal of OGPar’s Shares and Treatment of Equity Changes. Appraisal Criteria and Appraisal Base Date. The Companies’ Managements established that OGPar’s shares incorporated by Dommo were valued at their market price, based on the weighted average of the daily trading price (weighted by volume) of the shares in the stock exchange, for the last 90 (ninety) to the base date of September 30, 2018 (“Base Date”).
Dommo’s Management hired Apsis Consultoria Empresarial Ltda., a company of professionals based at Rua do Passeio, 6, 6º. Andar, in the City of Rio de Janeiro, State of Rio de Janeiro, Corporate Taxpayer’s ID 27.281.922/0001-70, originally registered at the Regional Council of Accounting of the State of Rio de Janeiro under number 02052 (“Appraiser Company”) as a specialized company responsible for the valuating OGPar’s shares incorporated by Dommo due to the transaction described in the Protocol and Reasoning. The appointment of the company, pursuant to Article 252, Paragraph 1, of the Brazilian Corporation Law, was submitted and approved by the Shareholders’ Meeting of Dommo held on November 26, 2018.
Due to its appraisal, considering all the information and documents requested from the Companies' Managements, as well as the information available to the general audience and the valuation company’s own information, as necessary to carry out the evaluation, the Appraiser Company prepared the appraisal report (“Appraisal Report”), included in Exhibit 3.3 of the Protocol and Reasoning, disclosed in a Material Fact of October 25, 2018.
Accounting of Equity Changes. The equity changes arising from the Incorporation of Shares are recorded and disclosed in Dommo’s financial statements of December 31, 2018. It should be noted that Dommo started to consolidate OGPar’s financial statements after the incorporation of shares.
Subscription Bonus As provided in Clause 10.4 of Dommo’s Judicial Recovery Plan, as an additional advantage to the subscription of the New Shares, the Company issued a subscription bonus to OGPar’s shareholders, as approved by the Shareholders’ Meeting held on November 26, 2018, with the 51
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
following main conditions (“Subscription Bonus”): (i) term of five (5) years from the issue date, and Dommo may define windows in which the holders of the subscription bonus may exercise their bonus and subscribe the shares resulting from it; and (ii) a number of common shares to be subscribed representing, in total, fifteen percent (15%) of Dommo’s shares, considering the share capital on the date of its approval (subject to all usual adjustments that will appear in the certificate of the subscription bonus), considering an exercise price per share, at the time of exercise, based on Dommo’s equity value in national currency equivalent, on the issue date of the subscription bonus, at USD 1,500,000. The fixed price in national currency will be restated by IGP-M as of the date of the meeting of Dommo’ Board of Directors that resolved on the subscription bonus.
b. Information on shareholding interests
December 31, 2018
In Brazil Offshore OGX Dommo Dommo Dommo OGX Atlanta Netherlands OGPar R-11 Áustria International Netherlands Field (ii) Holding
Current assets 1,608 168,581 24 15 35 24,215 137,428
Long-term assets 11,149 12,586,185 14 138,771 2,466 - 7,934
Investments - - - - 131,097 - -
Fixed assets - - - 1,019 - - 524,916
Total assets 12,757 12,754,766 38 139,805 133,598 24,215 670,278
Current liabilities 4 428 52 47 46,445 110,915 111,985
Non-current liabilities 7,552 14,8510277 2,085,080 8,662 11,431 - 110
Equity 5,201 (i) (2,096,939) (2,085,094) 131,096 75,722 (86,700) 558,183
Total liabilities + equity 12,757 12,754,766 38 139,805 133,598 24,215 670,278
% interest 100% 100% 100% 100% 100% 100% 40%
Profit (loss) for the period (1,469) (616,866) (771,595) 30,132 (152,338) (18,398) (1,728)
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
December 31, 2017
In Brazil Offshore OGX Dommo Dommo Dommo OGX Atlanta Netherlands OGPar R-11 Áustria International Netherlands Field (i) Holding
Current assets 6,473 6 15 27 20 45,071 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 45,071 488,704
Current liabilities 641 274 - 13 38,379 93,754 8,013
Non-current liabilities 12,151 12,816,136 1,376,843 7,162 9,759 - 673
Equity 6,669 (i) (1,554,958) (1,376,815) 84,543 230,485 (48,683) 480,018
Total liabilities + equity 19,461 11,261,452 28 91,718 278,623 45,071 488,704
% interest 100% 100% 100% 100% 100% 100% 40%
Profit (loss) for the period (2,064) (32,359) (11,672) 26,404 22,993 357,172 133
(i) Changes in the shareholders' equity of Dommo Austria: Balance as at December 31, 2018 (2.096.939) Balance as at December 31, 2017 (1.554.958) Movement shown in item (a) of this Note 541.981
(ii) These figures refer to total equity and profit /(loss) for the period.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
12 Consolidated fixed assets Furniture Machinery and Leasehold E&P fixed Consolidated fixed assets Note and fixtures equipment IT equipment improvements Vehicles assets Total Cost As at January 1, 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 - - - - - (321,266) (321,266) Adjustment for impairment related to ARO and other assets - - - 33 - 6,804 6,837 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 - - 192 - - (33,386) (33,194) Additions - provision for ARO (a) - - - - - (65,915) (65,915) Additions - provision for environmental compensation - - - - - 4,766 4,766 Impairment BS-4 1.2 and 12b - - - - - (193,828) (193,828) Adjustment for impairment related to ARO and other assets - - - - - 13,109 13,109 Partial impairment reversal - Tubarão Martelo field 1.2 and 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 companies (c) - - - - - 149 149 As at December 31, 2018 4,872 889 10,965 1,826 404 254,059 273,015
Accumulated depreciation As at January 1, 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 (456) (82) (16) (206) - (29,520) (30,280) Write-off of depreciation impairment - - - - - 16,945 16,945 As at December 31, 2018 (4,243) (712) (10,782) (293) (387) (12,575) (28,992)
Annual percentage depreciation and depletion rates (a) 10 10 20 10 20 (b)
Net residual value As at December 31, 2018 629 177 183 1,533 17 241,484 244,023 As at December 31, 2017 1,461 259 7 1,739 17 175,656 179,139 54
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
(a) See Note 17. This change has no cash effect. (b) Depreciation and depletion of E&P fixed assets occur as from the declaration of commerciality and commencement of production, based on the DUP method. (c) Refers to the currency translation adjustments of the asset balances of the Company’s international subsidiary OGX Netherlands.
Appraisal of indications of impairment The Company conducts quarterly analyses 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 profit (loss).
According to technical pronouncement CPC-01, the entity must assess at least annually whether there are indications of possible devaluation in the value of an asset (fixed and intangible assets). If there is any evidence, the entity must calculate the asset’s recoverable value, measured at the highest value between its net sale value and the value in use.
a. Tubarão Martelo Field:
Record of the assessment of Tubarão Martelo: 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, R$691,758 of which was recorded in 2013 and R$2,602,681 in 2014. In addition, R$80,473 was recorded in intangible assets, R$23,288 of which in 2013 and R$57,185 in 2014.
In 2015, the Company carried out cost-reduction initiatives that were insufficient to render the maintenance of the field economically feasible, chiefly due to the drop in oil prices at the time. On January 19, 2016, the Company requested that the ANP temporarily suspended production in the Tubarão Martelo field, given that these assets are not expected to be recovered in the future. On April 26, 2016, the Company filed a request with the 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 Tubarão Martelo field, through FPSO OSX-3. The Tubarão Martelo field is currently operational.
New fact that changes the recoverability of the Tubarão Martelo field: The signature of a New Charter Agreement of FPSO OSX-3 between the Company and OSX-3 establishes new conditions that will allow interventions in Tubarão Martelo field wells, thus resulting in the production of 10.5 million barrels (1P) by 2022 and additional cash generation of R$251,906. This new scenario sets the basis for reassessing the impairment test, whose cash flow estimate takes into consideration the following key assumptions:
Approach: projection of unlevered cash flows, expressed in actual terms and presented in US Dollars translated at the closing rate of the third quarter of 2018 ("3Q18"). Term: from September 2018 to 2024, whereby recoverability is estimated until 2022, considering the proved reserves (1P) and probable (2P), being that the recovery is up to 2022 (1P), whose details are in Note 1.3. Sale price: the reference used is the average Brent price obtained in World Bank publications. Intervention in the wells: the Refurbishment consists of the conclusion of the fifth well
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
(4HP), which has already been drilled but needs to be connected to FPSO, as well as workover activities in the four producing wells (2HP, 6HP, 8H and 44HP). Discount rate: The Company uses the Weighted Average Capital Cost ("WACC") in actual terms at an after-tax discount rate of 9.18% (11.36% pretax). Residual value: a residual value was not calculated in the latest period, since the projection was based on the economic useful life of the assets.
It is worth noting that, although Management uses the best expectations, said projections are subject to diverse uncertainties, such as estimated costs and expenses, expected oil price, exchange rate, efficiency of equipment and production teams, laws issued by authorities such as ANP and the Brazilian Environmental Protection Agency ("IBAMA"), tax law, and geological aspects, such as the volume and behavior of reservoirs.
Additional information: During the negotiations and discussions referring to the New Charter Agreement with OSX 3, Dommo Energia prepared several studies (“Materials”) regarding the potential production of TBMT, the Refurbishment, and an energy efficiency project at FPSO. Considering that the Materials were discussed with third parties during the chartering dialogues, the Company decided to disclose them to the market in general, clarifying, however, that the information in the Materials should not be considered as official Company forecasts, guidelines or future indication of operational and financial performance expectation. The studies and conclusions included in the Materials are subject to a significant number of internal assumptions that were part of negotiations of the New Charter Agreement and investors should not consider or rely on the Materials during their process to decide whether to invest in the Company’s securities.
The Materials that have been prepared and discussed with third parties include: (A) internal forecast of TBMT’s production; (B) Audit Report on the Production of TBMT prepared by Gaffney Cline & Associates (“GCA”); (C) Cogeneration Study for FPSO.
(a) Internal forecast of TBMT’s production: The Refurbishment should extend TBMT’s useful life until at least 2024. The Company’s projected production from 3Q18 to 2024 totals 13.9 million barrels considering a P2 production curve. The reference cash flow for the new recoverable value of Tubarão Martelo considers a production of 10.5 million barrels (1P) until 2022.
(b) Audit Report prepared by GCA: in order to provide OSX 3 with an independent appraisal on production estimates internally prepared, in August 2018, Dommo Energia hired GCA to audit TBMT’s production projections. Before analyzing the information contained in GCA’s report, it is essential that investors read the entire report, including the methodology adopted and the auditor’s opinion.
(c) Energy Efficiency Project: as provided for in the Company’s financial statements, diesel costs are currently one of the largest items of FPSO’s operating expenses. In order to reduce diesel consumption, the Company’s technical team has been working with an external advisor specialized in energy efficiency solutions. The Company has been working to install diesel generators at FPSO in the short term. The use of generators should reduce the operation of existing gas/diesel turbines, which are inefficient due to FPSO’s current energy needs. FPSO’s turbines currently use approximately 43,000 liters of diesel per day. After the generators are installed, the Company expects to reduce diesel consumption to approximately 25,000 liters per day, with a potential reduction of R$1.500 in net costs per month.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
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, 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/barrel discount in the Brent oil price due to the characteristics and transportation costs of the oil.
This asset remains under arbitration, as described in Note 1.2, and pursuant to the accounting law represented by CPC 01 – Impairment of Assets, and CPC 25 – Provision, Contingent Liabilities and Contingent Assets, the Company revised the impairment calculated and recorded on September 30, 2017, further complementing the amount. As at December 31, 2018, the new balance totaled R$1,084,369 (R$651,119 as at December 31, 2017).
Changes of BS-4 impairment
Impairment balance on December 31, 2017 651,119 Addition to intangible assets’ impairment in 2018 (Note 13) 239,422 Addition to fixed assets’ impairment in 2018 193,828 Impairment balance on December 31, 2018 1,084,369
Depreciation E&P fixed assets are depreciated as from declaration of commerciality and commencement of production, under the DUP method.
Reconciliation of depreciation and amortization - Cash flow Parent Company Consolidated
Depreciation 13,335 30,280 Amortization (Note 13) 1 1 Depreciation in oil inventories (Note 8) (4,527) (4,527) Depreciation and amortization - Cash flow 8,809 25,754
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
13 Intangible assets (company and consolidated)
The Company’s intangible assets correspond to: (a) E&P intangible assets, represented by the signature bonuses paid in order to obtain concessions for exploration, development and production of the blocks, as well as 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 1, 2017 40,507 576,298 616,805
Additions 61 - 61 Impairment - (329,853) (329,853) Non-current asset held for sale (a) - (104,318) (104,318)
As at December 31, 2017 40,568 142,127 182,695
Additions - 251,287 251,287 Non-current asset held for sale - 104,318 104,318 Impairment (Note 12b) - (490,709) (490,709)
As at December 31, 2018 40,568 7,023 47,591
Accumulated amortization As at January 1, 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 December 31, 2018 (40,558) (7,023) (47,581)
Amortization rates (% p.a.) 20 Net residual value As at December 31, 2018 10 - 10 As at December 31, 2017 11 135,104 135,115
(a) See Notes 1.2 and 10.
Amendment and impairment concerning Tubarão Martelo’s Charter Agreement The amount of BRL 251,287 (USD 65,000) corresponds to the investment made by the Company with the purpose of ensuring a charter agreement for 20 years and canceling the OSX-3 Leasing BV Purchase Option of Tubarão Martelo. However, given the uncertainties inherent to the activity and considering the preliminary stage of appraisal of these funds, the Company recorded an impairment of BRL 251,287 (Note 1.3)
Write-offs and impairments As explained in Note 12, in the fourth quarter of 2014, the Company revised its Business Plan and recorded impairment of the Tubarão Martelo field in the amount of R$57,185. As at December 31, 2018, the Company revised the estimate for recoverability of the Tubarão Martelo field and the effects of this revision are represented in fixed assets (Note 12). In addition, as described in the section “Appraisal of indications of impairment” in Note 12, the Company made an addition to the provision for impairment of the investments made in BS-4.
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Dommo Energia S.A. Financial Statements on December 31, 2018
Amortization Amortization of E&P intangible assets occurs as from the declaration of commerciality and commencement of production, based on the DUP method. On December 31, 2018, the only field with declared commerciality and already producing was Tubarão Martelo.
14 Income tax, social contribution, government stakes and other taxes and contributions
Company Consolidated 12/31/2018 12/31/2017 12/31/2018 12/31/2017 Non-current assets
Withheld income tax, social contribution and other recoverable taxes Withholding tax ("IRRF") on financial investments 346 324 367 387 Income tax and social contribution prepaid 5,702 - 5,750 41 IRPJ tax losses 15 15 8.165 292 PIS offsettable 14,183 13,055 14,183 13,055 COFINS offsettable 67,952 73,155 67,952 73,155 State VAT ("ICMS") recoverable 390 390 390 390 Other recoverable taxes 1,032 1,032 2,465 2,124
89,620 87,971 99,272 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
IRRF 24,946 19,764 24,947 19,764 Social contributions withheld 105 546 113 546 COFINS payable - - 3 1
Royalties payable 3,997 2,967 3,997 2,967 Others 6,321 6,670 6,321 6,670 35,369 29,947 35,381 29,948
Non-current liabilities
Deferred PIS and COFINS
Deferred PIS (i) 19,412 5,197 19,412 5,197 Deferred COFINS (i) 119,458 31,978 119,458 31,978
138,870 37,175 138,870 37,175
(i) On April 1, 2015, Decree 8426 was published, establishing the return of PIS and COFINS rate on financial income calculated by legal entities subject to the non-cumulative calculation system as of July 1, 2015. The rates will be 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.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Reconciliation of the IRPJ and CSLL expenses is as follows:
12/31/2018 12/31/2017
Consolidated Consolidated
IRPJ CSLL IRPJ CSLL
Loss for the year prior to IRPJ and CSLL (524,677) (524,677) (1,993,614) (1,970,333) Discontinued operations - - (27) (27)
Permanent additions/exclusions: Adjustment - Transfer price 3,171 3,171 8,868 8,868 Loss on the conversion of debt into equity instrument - - 1,590,937 1,590,937 Other non-deductible additions 63,912 58,941 107,398 106,947 Results of offshore companies 771,595 771,595 11,672 11,672
Taxable income for IRPJ and CSLL purposes 314,001 309,030 (274,766) (275,217)
15% + 15% + Additional Additional Tax rates (%) 10% 9% 10% 9%
Current and deferred IRPJ and CSLL (78,500) (27,813) 68,692 24,770
Current and deferred IRPJ and CSLL (78,500) (27,813) 68,692 24,770 Provision for non-realization of deferred IRPJ and CSLL (29,074) (10,913) (55,636) (20,204)
Breakdown of IRPJ and CSLL IRPJ and CSLL – current - - - - IRPJ and CSLL – deferred (107,574) (38,726) 13,056 4,566
Total recorded IRPJ and CSLL (i) (107,574) (38,726) 13,056 4,566
Effective tax rate (31.28%) (11.26%) (0.65%) (0.23%)
(i) On December 31, 2018 and 2017, income tax and social contribution recorded in the statement of operations totaled R$(146,300) and R$17,622, respectively.
Deferred taxes and Business Plan
During 2018, the Company carried out the write-off of deferred income tax assets in the amount of R $ 146,300, which was directly associated with the cash flow projections of BS-4, whose assets were 100% written off (Note 12).
In addition, the Company and its subsidiaries have unrecorded tax loss carry-forwards in the amount of R $ 7,400 thousand.
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
15 Related parties
Loans and financing with Loans and financing with Credits with Accounts payable to related parties related parties - Assets related parties - Liabilities related parties (current) (non-current) (current) (non-current) (non-current)
12/31/2018 12/31/2017 12/31/2018 12/31/2017 12/31/2018 12/31/2017 12/31/2018 12/31/2017 12/31/2018 12/31/2017
OGPar (i) 5,237 5,225 18,534 87,780 ------
Dommo Austria (ii) 409,491 349,590 14,441,786 12,466,545 - - (409,491) (349,590) (14,268,774) (12,462,921)
OGX Netherlands (iii) - - 4,615 3,773 (127,211) (80,972) - - - -
Dommo International - - 61,162 49,969 ------
OSX 3 Leasing B.V. (v) - - - - (72,152) - - - - -
OSX Construção Naval S.A. - - - - - (52) - - - -
OSX Serviços Operacionais (iv) - - - - - (1,500) - - - -
Dommo R-11 - 73 7,478 12,077 - (2,063) (46) - - -
414,728 354,888 14,533,575 12,620,144 (199,363) (84,587) (409,537) (349,590) (14,268,774) (12,462,921)
Credits with Loans and financing with Loans and financing with Accounts payable to related parties related parties related parties - Assets related parties - Liabilities
(current) (non-current) (current) (non-current) (non-current)
12/31/2018 12/31/2017 12/31/2018 12/31/2017 12/31/2018 12/31/2017 12/31/2018 12/31/2017 12/31/2018 12/31/2017
OGPar (i) - 5,225 - 87,780 - (633) - - - -
OSX 3 Leasing B.V. (v) - - - - (72,152) - - - - -
OSX Construção Naval S.A. - - - - - (52) - - - -
OSX Serviços Operacionais (iv) - - - - - (1,500) - - - -
- 5,225 - 87,780 (72,152) (2,185) - - - -
Consolidated Result
Related parties Composes Statement of income 12/31/2018 12/31/2017
OSX-3 Leasing B.V. – charter of OSX 3 Cost of goods sold (41,918) (276,110) OGpar – interest income on loans (i) Financial results - 4,721 OSX Serviços Operacionais - OSX offsets (iv) Other operating (revenues) expenses 221 (4,882)
(41,697) (276,271)
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Further information on loans and financing - liabilities with related parties is as follows:
Company
12/31/2018 12/31/2017
Curren Loans and financing Payment of Amortization of Interest rate Counterparty Principal Interest Total Total cy interest principal
Export prepayment (PPE) US$ Semi-annual 07/30/2034 9% p.a. Dommo Austria 9,511,820 389,371 9,901,191 8,694,708 Law 12,431 infrastructure debentures R$ Semi-annual 07/30/2034 10.5% p.a. Dommo Austria 2,025,000 125,701 2,150,701 2,151,553 at the end of Loan US$ 07/30/2034 Libor 6M + 2.5% Dommo Austria 119,279 665 119,943 61,702 agreement Investment in Dommo Austria (*) n/a n/a n/a n/a Dommo Austria 2,096,939 - 2,096,939 1,554,958
13,753,037 515,737 14,268,774 12,462,921
Current - - - - Non-current 13,753,037 515,737 14,268,774 12,462,921
(*) Investments in Dommo 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
(+) New funding 47,887 (+) Interest incurred/reversed - (-) Amortization of principal and interest (280,346) (+) Exchange variation 1,496,331 (+) Adjustment - Dommo Austria 541,981
Balance as at December 31, 2018 14,268,774
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Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
(i) Refers basically to intercompany loans. (ii) Loans with related parties: Under Assets, referring to the credits held against Dommo Austria, in consideration for the assumption of the debt relating to the Senior Unsecured Notes that was guaranteed by Dommo Energia, as prescribed in the Court-supervised reorganization Plan. Under Liabilities, referring to the export pre-payments, non- convertible debentures and the intercompany loan payable to Dommo Austria. (iii) Refers substantially to the amount payable relating to the agreement for lease of subsea equipment signed between the Company and the investee OGX Netherlands and advances for purchases of equipment made by the Company to OGX Netherlands. (iv) Refers to the compensation agreement between the Company and OSX Serviços Operacionais. (v) Under Assets, refers to charter advance, in the amount of US$50,000, and under Liabilities, refers to the lease of FPSO OSX 3.
Liabilities current Advance of US$ 15,000 payable in September 2019 (58,122) OSX 3 lease December 2018 to be paid (14,030) (72,152)
Other information on loans and financing with related parties (liabilities)
US$2.6 billion in Senior Unsecured Notes and US$2.6 billion in PPE On June 3, 2011, OGPar issued Senior Unsecured Notes (“2018 Bonds”) in the international market in the amount of US$ 2,600,000 (equivalent to R$ 4,000,000). 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 (equivalent to R$ 74,310), were recognized under liabilities, thus reducing the amount funded. This amount was accrued to profit or loss over the loan term by employing the effective interest rate method. In October 2011, an amendment to the instrument for issue of the 2018 Bonds was signed in the amount of US$ 2,600,000, whereby OGPar was replaced by its subsidiary Dommo Austria as issuer and the principal debtor of such bonds. In consideration for such operation, OGPar and its subsidiary at the time Dommo Austria signed an agreement whereby the former granted to the latter the funds obtained from issue of the above-mentioned notes (plus interest revenue from investment of the funds raised through the grant date, as well as issue cost discounts). In October 2011, by means of an export prepayment (“PPE”) agreement, Dommo Austria granted to Dommo Energia an early payment of US$ 2,600,000 billion, in order to finance the development and production of oil to be exported by Dommo Energia to Dommo Austria. In consideration for the 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 Dommo Austria by 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.
With the approval of the Court-Supervised Reorganization Plan on June 3, 2014, Dommo Energia, in its capacity as guarantor for the debts, recognized the 2018 Bonds as liabilities by debiting an asset held against Dommo Austria. In turn, Dommo Austria no longer recognizes the debt to the bondholders and recorded another debt in 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 conversion of the debt into equity instruments, Dommo Energia recorded the extinction of such notes. The Court-Supervised 63
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Reorganization Plan postponed maturity of the PPE and Dommo Energia’s credit with Dommo Austria through subrogation of the bonds to July 30, 2034. The Court-Supervised Reorganization Plan further calls for the PPE interest between Dommo Energia and Dommo Austria to be frozen as of the date the court-supervised reorganization petition was filed. Exchange variation continues to occur.
US$1.1 billion in Senior Unsecured Notes and R$2.0 billion in Debentures under Law 12.431/11 for infrastructure projects On March 30, 2012, Dommo issued Senior Unsecured Notes (“2022 Bonds”) in the international market in the amount of US$ 1,100,000 (equivalent to R$ 1,900,000). Settlement of the principal of this issue was to occur in April 2022, while interest was due semi-annually at the rate of 8.375% p.a. in the months of April and October. The funding costs of US$ 17,800 (equivalent to R$ 39,000) have been recognized under liabilities, thus reducing the amount funded. This amount was accrued to profit or loss over the loan term by employing the effective interest rate method. On September 28, 2012, Dommo Energia issued simple, unsecured debentures not convertible into shares in the Brazilian securities market in the amount of R$ 2,000,000, under CVM Instruction 476. The operation was offset in October 2012. Said debentures are securities under Law 12,431/11 and the funds raised with the issue have been fully used to reimburse capital expenditures 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 above-mentioned law. The debentures call for remuneration in the form of semi-annual interest at the rate of 10.5% p.a. The principal matures in March of 2022. On the debenture issue date, the above-mentioned securities were fully subscribed by Dommo Austria GmbH.
With the approval of the Plan on June 3, 2014, Dommo Energia, as guarantor for the debts, recognized the 2022 Bonds as liabilities by debiting an asset held against Dommo Austria. In turn, Dommo Austria no longer recognizes the debt to the bondholders and recorded another debt in 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 conversion of the debt into equity instruments, Dommo Energia recorded the extinction of such notes. The Plan postponed the maturity of the Debentures and Dommo Energia’s credit with Dommo Austria through subrogation of the Bonds to July 30, 2034.
Pursuant to Law 12,431/11, the Plan further calls for the interest of debentures between Dommo Energia and Dommo Austria to be frozen as of the date the court-supervised reorganization petition was filed. Exchange variation continues 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.
On August 2, 2017, the Judge of the Fourth 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.
64
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
At December 31, 2018, Dommo Energia’s current and non-current receivables from OGPar arising from loans amounted to BRL 5,225 and BRL 105,234, respectively, whose balance started in 2014 totaling BRL 95,548. The non-current loan is presented at BRL 40,180, net of OGPar’s net capital deficiency of BRL 65,054 at December 31, 2018. In accordance with the provisions of the Judicial Recovery Plan, the Company had been making regular loans to OGPar to maintain its expenses covered and ensure its continuity until the conclusion of the incorporation, which occurred on November 26, 2018. See details of the incorporation of shares in Notes 11 and 20.
The non-current loan of BRL 105,234 was partially settled in the amount of BRL 35,411 by the wholly-owned subsidiary OGPar subsequently to December 31, 2018 up to the presentation of these financial statements. This cash was generated by the incorporation of shares (Note 11) and the consequent sale of the shares of Dommo Energia (DMMO3) held by OGPar (treasury shares) (Note 20).
On February 27, 2019, the Board of Directors authorized Dommo Energia to capitalize the remaining balance of loans between the companies (“Final Balance”), considering the end of the process for the sale of DOMMO3 shares held by OGPar.
16 Trade accounts payable Company Consolidated
12/31/2018 12/31/2017 12/31/2018 12/31/2017
Domestic suppliers 23,239 29,505 23,443 30,144 Foreign suppliers 9,852 11,824 10,420 12,136 E&P provision (i) 2,031 1,510 2,031 1,510 35,122 42,839 35,894 43,790
(i) The E&P provision basically considers the costs incurred on subsea installation services and production of O&G that have not yet been billed. The provision for production is based on the contractual daily rates.
These balances are classified as other financial liabilities and recognized at their amortized cost.
65
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
17 Sundry provision Company and Consolidated Current Non-current 12/31/2018 12/31/2017 12/31/2018 12/31/2017 Provision for guaranteed minimum payment (a) 3,480 4,000 - -
Provision for ARO (b) Tubarão Azul - 37,406 56,121 72,776 Tubarão Martelo - - 264,020 240,411 BS-4 - - - 38,231
Provision for regulatory contingencies (c) - - 154,101 185,744
Provision for environmental compensation (d) Tubarão Azul field - - 11,803 11,092 Tubarão Martelo field - - 42,760 40,180 Campos basin - - 2,119 1,943 Santos basin - - 9,201 7,903
Provision for regulatory contingencies assumed (note 28) - - 53,743 53,743
Labor provision - - 2,721 2,045
3,480 41,406 596,589 654,068
a) Provision for guaranteed minimum payment - stock options: This provision refers to the guaranteed minimum payment associated with former stock option contracts, already ended. Over the course of the third quarter of 2014, the Company renegotiated the terms of the agreement with the beneficiaries of 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 provisioned for plus a further 40% in eight equal and consecutive monthly installments in the immediately subsequent months. The beneficiaries accepting the agreement accepted the fact that the remaining 50% would no longer be due by the Company. b) Provision for ARO for E&P fields: As from the declaration of commerciality of its fields and beginning of development activities, the Company begins to create a provision for abandonment or ARO at the end of the concession period. Such provision reflects the estimated expenditures to be incurred in the future, chiefly with respect to: (i) plugging of the wells; and (ii) removal of the lines and production equipment. i. In accordance with the decision of the first stage of Block BS-4 arbitration, the Company reduced the provision for ARO. ii. The Company concluded Tubarão Azul’s abandonment phase related to the plugging of the wells and the remaining provision refers to the removal of subsea equipment, which is under discussion with the ANP. iii. Regarding the guarantee required in the Concession Agreements, the Company is in the process of discussion and ratification with ANP, which amounts to around USD 65 million. When the process of discussion and evaluation of the exact amount to be deposited is concluded, the Company will evaluate with ANP the method and deadlines in which the deposits will be made. The Company has no expectation of any relevant financial disbursement for the next 12 months as a result of this matter. It should be mentioned that escrow deposits influence the financial disbursements related to the calculation of the variable payment of FPSO OSX 3 rental costs. As provided in the FPSO OSX 3 lease agreement signed on November 26, 2018, the Company, when making the escrow deposits, will reduce the monthly variable payment of the rent to the FPSO owner. c) Provision for regulatory contingencies refers to estimated fines related to the ANP regulations or whose taxable event is already known. The Company has no expectation of any relevant financial disbursement for the next 12 months related to these contingencies. d) Provision for environmental compensation related to environmental licenses. The Company has undertaken with IBAMA to make certain environmental compensations, with transfer of resources to conservation units.
66
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
18 Other accounts payable
Company Consolidated Note
12/31/2018 12/31/2017 12/31/2018 12/31/2017
BS-4 Consortium (i) 1.2 47,648 81,745 47,648 81,745 Atlanta Field B.V. 33 - - 46,404 38,354 Success fees and other provisions 27,072 10,857 27,220 10,857
74,720 92,602 121,272 130,956
(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 at October 2017. See Note 1.2 for further information.
Reconciliation with the statement of cash flow Company Consolidated Balance of other accounts payable as at December 31, 2017 92,602 130,956 Balance of other accounts payable as at December 31, 2018 74,720 121,272 Changes in "other accounts payable” – statement of financial position (17,882) (9,684)
Billings Capex BS-4 received and recorded – non-cash effect 33,622 33,622 Other accounts payable OGPar disregarded in cash flow - (148) Changes in "other accounts payable" statement of cash flows 15,740 23,790
19 Contingencies
Dommo Energia complies with CPC 25 - Provision, Contingent Liabilities and Contingent Assets both on the recording of provision in amounts sufficient to cover probable losses and for which a reliable estimate can be made, and on the disclosure of contingent liabilities.
When preparing the financial statements for the year ended December 31, 2018, the Company considered all available information relating to lawsuits in which it is a party in order to estimate the amounts of the obligations and the probability of disbursing funds.
The amounts whose losses are deemed probable are accrued and disclosed as “Provision for regulatory contingencies” and “Labor provision” in Note 17.
Lawsuits, whose likelihood of loss is possible, based on Management’s judgment and on the external counsel’s opinions, have not been accrued and are disclosed in this Note in accordance with the accounting practices adopted in Brazil. Contingent liabilities, plus interest and monetary restatement, estimated for such disputes on December 31, 2018, are as follows:
67
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Company and Consolidated
Nature 12/31/2018 12/31/2017
Tax 2,753,461 2,106,118 Labor 19,073 17,860 Civil 11,924 11,924 2,784,458 2,135,902
In 2018, the main change was in the provision that arises from tax deficiency notices issued by the Brazilian Federal Revenue Office in 2018, referring to PIS and COFINS credits.
The table below details the main tax, civil, environmental and labor lawsuits, whose likelihood of loss is possible.
Company and Consolidated Description of tax lawsuits 12/31/2018 12/31/2017
Plaintiff: Brazilian Federal Revenue Office (“RFB”) Nature: Levy of IRRF and Contribution of Intervention in the Economic Domain ("CIDE") over remittance of funds abroad in 2009 to pay foreign companies under vessel charter party agreements. Current situation: The legal discussion related to the levy of IRRF addresses the legality of RFB regulations that guarantee a zero rate for said remittances. The Company ratifies the classification of loss as possible, as it understands that there are favorable statements in the Superior Courts, and will seek to secure its rights. Lawsuits involving CIDE are under administrative phase and, on November 28, 2018, Dommo was granted a favorable decision by the Administrative Council of Tax Appeals ("CARF"). These disputes are deemed possible as the legal provision is in line with the Company’s understanding. 104,490 103,858
Plaintiff: RFB Nature: Acceptance of the capacity of guarantor in relation to federal taxes suspended on the basis of temporary admission under the Repetro system. Current situation: The Company filed a Writ of Mandamus to challenge the issue of three tax deficiency notices related to collection of Import Tax, PIS and COFINS, referring to the alleged nationalization of FPSO OSX-3, as RFB did not accept OGPar as guarantor for acquisition of FPSO OSX-3 under the Repetro system, as legally regulated. In September 2018, the Company was granted a favorable decision by the Federal Regional Appellate Court. 760,706 752,680
Plaintiff: RFB Nature: Payment of IRRF on offshore remittances as interest arising from an Export Prepayment Agreement (“PPE”) – see the details of this transaction in Note 15 – as the transaction allegedly lost its characteristics as a PPE transaction, as well as the non-eligibility of the transaction to RFB’s regulation that governs IRRF zero tax on offshore remittance as interest. Current situation: The Company received the tax deficiency notice on December 13, 2017, challenged the decision on January 18, 2018 and is awaiting judgment. 675,545 655,903
68
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Plaintiff: RFB Nature: Non-recognition of deductibility, in the calculation of IRPJ and CSSL, of interest expenses arising from a PPE Agreement – see the details of this transaction in Note 15 – as the transaction allegedly lost its characteristics as a PPE Transaction. Current situation: The Company received the tax deficiency notice on December 13, 2017, challenged the decision on January 18, 2018 and is awaiting judgment. The effect in case of loss would be only a reduction of the tax loss base. 593,677 593,677
Plaintiff: RFB Nature: Dispute referring to non-recognition, by RFB, of PIS and COFINS credits calculated by the Company on E&P expenses. Current situation: The issue involves lawsuits under different administrative and judicial phases, and remains as a possible loss, as the Company understands that there are favorable statements. 567,673 -
Plaintiff: RFB Nature: Tax deficiency notice requiring payment of IRRF supposedly due on payments to foreign suppliers. Current situation: The issue involves lawsuits under different administrative and judicial phases, and remains as a possible loss, as the Company understands that there are favorable statements. 68,680 -
Plaintiff: RFB Nature: Several Current situation: Several 2,332 -
2,753,461 2,106,118
Company and Consolidated Description of labor lawsuits 12/31/2018 12/31/2017 Plaintiff: Several Nature: Overtime, night-shift premium, emotional distress and others. Current situation: The issue involves lawsuits under different administrative and judicial phases, and remains as a possible loss, as the Company understands that there are favorable statements. 19,073 17,860
Company and Consolidated Description of civil lawsuits 12/31/2018 12/31/2017 Plaintiff: IBM Brasil - Indústria Máquinas e Serviços Limitada (“IBM”) Nature: Payment Current situation: On October 29, 2013, the Company terminated the service agreement with IBM. IBM alleged 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, said amounts were not subject to the court-supervised reorganization. Among other arguments, the Company claims that any service rendered was residual and related to the demobilization of the agreement, the reason why any amount due would be included in the court-supervised reorganization. 9,153 9,153 69
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Plaintiff: OGPar minority shareholder Nature: Collection Current situation: Ordinary lawsuit filed by minority shareholders with the purpose of claiming compensation for equity losses incurred, in respect of shares already disposed of and shares still in the portfolio, related to the Company. 2,771 2,771
11,924 11,924
20 Equity (net capital deficiency)
a. Capital stock The following table shows the changes in the Company’s capital stock in 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 (*) 92,907
Capital stock as at December 31, 2018 10,250,677
Capital stock on December 31, 2018 was represented by 2,700,398,881 (two billion, seven hundred million, three hundred and ninety-eight thousand, eight hundred and eighty-one) registered, book-entry common shares with no par value.
(*) Capital increase as a result of the merger of OGPar shares. For more information, see Note 11.
b. Treasury shares The amount of BRL 21,646 refers to the reciprocal interest of the wholly-owned subsidiary OGPar in Dommo Energia and is due to the incorporation of shares occurred on November 26, 2018, detailed in Note 11. In compliance with Paragraph 5 of Article 244 of Law 6,404/76, which establishes that the reciprocal interest, when occurring as a result of an incorporation, must be eliminated within a maximum period of one (1) year, the Company dedicated its efforts and settled all this reciprocal interest up to February 13, 2019, generating BRL 35,411 in cash. Until the date of publication of these financial statements, the balance of these treasury shares was fully settled, and converted into cash, thus eliminating the effect of a reduction in shareholders' equity at December 31, 2018. The movement of this reciprocal interest recorded as treasury shares in 2018 is shown below: R$
Fair value of shares on November 26, 2018 recorded as treasury shares (54,200)
Shares sold on the open market by OGPar to third parties between the date of the 16,215 incorporation of shares and December 31, 2018
Adjustment at fair value at December 31, 2018 16,339
Balance at December 31, 2018 (21,676)
70
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
c. Dividends
The Company’s Bylaws call for distribution of minimum mandatory dividends of 0.001% of net income 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 is to be imputed to minimum mandatory dividends, as per Article 9 of Law 9,249/1995.
d. Currency translation adjustment Due to currency conversion relating to investments in foreign subsidiaries, currency translation adjustments were recognized under comprehensive income (loss).
e. Capital reserves Refers to goodwill in the issue of new Company shares.
21 Net sales revenue Company Consolidated
12/31/2018 12/31/2017 12/31/2018 12/31/2017
Oil
Gross sales revenue 523,336 426,481 538,273 426,481 (-) Taxes on sales - - - - Net sales revenue 523,336 426,481 538,273 426,481
Volume sold in thousands of barrels (i) 2,352,1 2,757,2 (i) Information not reviewed by the independent auditors
In 2018, the upturn in average oil price to R$228,800 per barrel, compared to R$154,700 per barrel in 2017, resulted in an increase in net revenues.
22 Cost of goods sold
Company Consolidated
12/31/2018 12/31/2017 12/31/2018 12/31/2017
Leasing (i) 62,114 295,629 41,918 276,110
O&M 82,056 78,751 82,056 78,751
Logistics 101,592 99,972 101,592 99,972
Other expenditures 15,920 15,845 15,920 15,845
261,682 490,197 241,486 470,678
Royalties 52,057 40,761 52,057 40,761
Depreciation/Amortization 8,048 - 8,048 -
321,787 530,958 301,591 511,439
71
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Leasing: in the Consolidated, this refers to the lease costs of FPSO OSX-3. In the Company, such costs include the lease of subsea equipment between Dommo Energia and OGX Netherlands, the effect of which is eliminated at the Consolidated level. O&M: refers to the costs for operations and maintenance of FPSO OSX-3 and the submerged centrifugal pumps (BCS). Logistics: refers to the costs incurred with support vessels, helicopters and fuel for the support vessels and the FPSO units. Other expenditures: include, among others, the allocation of G&A expenses and the cost of chemical products.
(i) As part of the agreement signed on July 24, 2017 with certain creditors, including OSX-3 Leasing B.V. and Nordic Trustee ASA (the “Creditor Agreement” or “Omnibus Deed”), all unpaid liabilities related to the platform charter were settled upon conversion of the credits into Dommo Energia equity instruments. In addition, the charter costs initially provided for in the agreement have been reduced and the leasing costs of FPSO OSX-3, currently being used for production in the Tubarão Martelo field, have been limited to one third of the monthly revenue exceeding US$ 8.000, after payment of royalties.
23 General and administrative expenses
Company Consolidated
12/31/2018 12/31/2017 12/31/2018 12/31/2017
Personnel expenses 10,732 6,710 10,805 6,839 Management compensation (Note 27) 9,835 9,026 9,835 9,026 Guaranteed minimum payment - stock options (519) 126 (519) 126 Depreciation and amortization 665 641 665 641 Office expenses 4,164 6,285 4,239 6,501 Outsourced services (i) 20,148 42,184 21,632 43,609 Others 5,040 2,607 5,089 2,629
50,065 67,579 51,746 69,371
(ii) Due to the conclusion of the court-supervised reorganization, the Company significantly reduced legal counsel expenses.
72
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
24 Financial results
Company Consolidated
Ref. 12/31/2018 12/31/2017 12/31/2018 12/31/2017 Financial expenses Interest/charges and premiums on financing (a) - 286,167 - 286,167 Interest on provision for ARO (16,049) (13,215) (16,049) (13,215) Sundry interest (420) (751) (1,724) (3,424) Fair value of financial instruments (b) (9,917) (21,421) (9,917) (21,421) Loss on conversion of debt into equity instrument (c) - (1,590,937) - (1,590,937) Other financial liabilities (1,662) (7,533) (3,487) (10,260)
(28,048) (1,347,690) (31,177) (1,353,090) Financial revenue Interest 9,207 6,786 5,964 4,721 Fair value of financial instruments (b) 15,371 62,080 20,179 62,080 Earnings from financial investments 1,223 782 1,558 1,268 Other financial liabilities 2 20,878 67 20,926
25,803 90,526 27,768 88,995
Net exchange variation 620,614 140,467 (16,936) 84,802
Net financial results 618,369 (1,116,697) (20,345) (1,179,293)
(a) In 2018, the Company did not have loans and financing liabilities with third parties. (b) Effect of the adjustment to present value of the shares the Company holds in the subsidiary Eneva S.A. (c) Loss on conversion of debt into equity instrument that occurred in 3Q17.
25 Other operating income (expenses)
Company Consolidated
Description Ref. 12/31/2018 12/31/2017 12/31/2018 12/31/2017
Reversal of provision for inventory losses (a) 317 50,332 317 50,332 PIS/COFINS offsetable (b) 26,436 16,878 26,436 16,878 Deferred PIS/COFINS (c) (101,695) (9,537) (101,695) (9,537) Provision for losses on taxes recoverable (1,216) (1,107) (8,398) (7,381) Net loss on sale of inventories of E&P supplies (d) - (31,871) - (31,871) Provision for loss of reimbursable costs – ARO in the TBAZ field (16,791) (16,593) (1,102) (2,488) OSX offsets 221 (4,882) 221 (4,882) Provision for labor proceedings (676) - (676) -
Costs of OGX Netherlands - - (15,982) (13,960)
Provision for loss of credit (3,756) - (3,756) - Others (3,757) (26,782) (1,962) (25,304)
(100,917) (23,562) (106,597) (28,213)
a) Provision for inventory losses: created to maintain inventories at their expected realizable amounts. b) PIS/COFINS credits calculated in the year c) Expenses current form deferred PIS/COFINS on exchange rate variation. See Note 14. d) In 2018, no inventories of E&P supplies were sold. 73
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
26 Impairment
Company Consolidated
12/31/2018 12/31/2017 12/31/2018 12/31/2017
Fixed assets (Note 12) Partial impairment reversal - Tubarão Martelo 251,906 - 251,906 - BS-4 impairment (193,828) (321,266) (193,828) (321,266) Impairment adjustment related to ARO and other assets 13,109 6,837 13,109 6,837 Depreciation of OGX Netherlands equipment - - 16,945 14,467 71,187 (314,429) 88,132 (299,962)
Intangible assets (Note 13) BS-4 impairment (239,422) (329,853) (239,422) (329,853) Impairment Tubarão Martelo (251,287) - (251,287) - (490,709) (329,853) (490,709) (329,853)
Translation adjustments (i) - - (962) (477)
Effect on profit (loss) (419,522) (644,282) (403,539) (630,292)
(i) Currency translation adjustment affecting impairment of offshore companies.
27 Management compensation
The compensation paid to the Company’s Management is as follows:
Company and Consolidated
12/31/2018 12/31/2017
Board of Directors (charges and fees) 2,963 529 Audit Committee (charges and fees) 518 454 Management (compensation, salaries, benefits and charges) 5,662 4,733 Performance-based compensation 320 3,033
Total management compensation 9,463 8,749
Fiscal Council (charges and fees) 372 277
Total management compensation + Fiscal Council (Note 23) 9,835 9,026
28 Commitments assumed
Minimum Exploratory Program (“PEM”) In the third quarter of 2016, the Company received correspondence from ExxonMobil, partner and operator of Block POT-M-762, informing that it had received an Official Letter from the ANP on July 4, 2016, requesting that both parties, Dommo Energia and ExxonMobil, pay R$107,487, 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
74
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
amount (R$53,743), due to the obligations assumed in the Joint Operation Agreement. In this regard, Dommo Energia’s legal counsel 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 that occurred in the first half of 2013, i.e. before the filing for court-supervised reorganization. On March 2, 2018, the judgment 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, which determined the late filing of the claim, totaling R$53,743, in the general list of creditors. The Company is still waiting for the result of the Special Appeal filed by ExxonMobil with the Supreme Court of Justice. As a result, even considering a favorable decision to the Company by the Rio de Janeiro Court of Appeals, the Company maintained the provision recorded for this liability. See Note 17.
29 Financial instruments and risk management
The Company engages in 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 consists of permanently monitoring the contractual terms versus 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 in interpreting market data in order 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 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 variation in the price of oil is subject to the limits of physical exposure and volatility set forth in the Risk Management Policy and in the financial investments norms and hedges. 75
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
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 management of oil sale prices. The guidelines for hedging the price of this commodity call for the possibility to use derivative instruments to set the sale price in order to assure enhanced stability and predictability for the Company’s flow of revenues. The volatility of Brent prices is one of the Company’s assumptions to carry out an impairment test. 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 sale 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 hedge operations could involve oil futures, swaps, collars and options. The operations may be carried out on the following exchanges: the NYMEX - New York Mercantile Exchange and the ICE - Intercontinental Exchange, as well as in the over-the- counter market. Sensitivity analysis - stress testing As at December 31, 2018, the Company was not presenting any sensitivity analysis for oil derivatives, since there were no outstanding positions on said reference date. 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.
76
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Net exchange exposure
Consolidated
12/31/2018
Assets (i) 10,837,857 Liabilities (ii) (10,954,752)
Net foreign currency assets (116,895)
(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 Dommo Austria [see Note 15 item (i)], the investment in the subsidiary Dommo Austria (see Note 15), and the provision for 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 December 31, 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 at December 31, 2018. Positive amounts represent revenues and negative amounts, expenses.
Notional amount Scenario I Scenario II (US$) (R$) (R$) Net foreign currency assets (30,168) (*) (29,224) (58,447)
(*) Corresponding to the amount of R$(116,895) presented in the section above entitled “Net exchange exposure” in Note 29b.2, translated into US$ at the closing rate for December 31, 2018 of R$3.8748.
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 its counterparts, and also permanently tracking outstanding positions. To appraise the financial institutions with which it conducts operations, the Company uses the Risk Bank Index from the consulting firm Lopes Filho e Associados, and the rating of the risk rating agency Standard & Poor’s. In order to appraise its commercial counterparts, the Company has a regulation establishing a set of criteria and guidelines 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. 77
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Maximum exposure to credit risk The Company’s maximum exposure to credit risk corresponds to the total set out below:
Company Consolidated
Credit risk 12/31/2018 12/31/2017 12/31/2018 12/31/2017
Cash and cash equivalents 51,922 36,008 157,311 42,537 Escrow deposits 3,245 133,181 3,245 133,181 Trade accounts receivable - 16,523 - 16,523 Other credits (except prepaid expenses) 12,669 9.494 14,247 9,313 Marketable securities - 68,923 79,078 68,923
67,836 264,129 253,881 270,477
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 implies keeping on hand sufficient cash and marketable securities and having the capacity to settle short-term market positions. The following chart shows the aging list of the Company’s financial liabilities.
12/31/2018 – Consolidated Overdue Overdue Overdue Total Overdue from six from one for more Overdue up to six months to to two than two months one year years years
Trade accounts payable 11,915 23,979 - - - 35,894 Other accounts payable – BS-4 Consortium (i) 94,052 - - - - 94,052
Other accounts payable - 27,220 - - - 27,220 Accounts payable to related parties (ii) - 14,030 58,122 - - 72,152
Total 105,967 65,229 58,122 - - 229,318
(i) Refers to cash calls due by the Company to the BS-4 Consortium. (ii) Amounts referring to the chartering of FPSO OSX 3.
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 FVTPL. The profit for the year would fluctuate depending on the gains or losses over the price of the shares measured at FVTPL.
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 in an active market. The hierarchy of fair value for financial instruments is structured as follows:
78
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Prices Pricing model based on Pricing model observable in prices observable in without use of active market active market observable prices (Level I) (Level II) (Level III)
Financial investments - 15,078 - Marketable securities 79,078 - - Balances as at December 31, 2018 79,078 15,078 - Prices Pricing model based on Pricing model observable in prices observable in 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 at December 31, 2017 68,923 6,469 -
There was no reclassification between the fair value hierarchy categories of marketable securities and financial investments as at December 31, 2018 and 2017.
30 Insurance Coverage (unaudited) The Company continuously takes out a Petroleum Risk insurance policy, effective as from the beginning of its exploratory campaign, which includes the following coverage: Third Party Civil Liability for material damages and/or personal injury; Well Control Insurance, which covers accidents such as kicks and blowouts, well eruption due to uncontrolled pressure, which may lead to well abandonment, in addition to expenses, such as re-drilling wells or cleaning and decontamination. On March 1, 2018, the Petroleum Risk insurance policy 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 until October 07, 2019.
Tokio Marine renewed the D&O civil liability policy for another 12 months, valid until August 2, 2019.
As at December 31, 2018, the main assets or interests covered by insurance policies and the respective amounts thereof are as follows:
79
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Insured Type of insurance amounts
Exploratory campaign US$’000
Offshore blowout risks in the Campos Basin 57,500 Protection and Indemnity OSX-3 (P&I) 500,000
Other insurance R$’ 000
Operating risks to property 9,060 General civil liability 20,000 Civil liability of administrators – D&O 60,000
31 Segment reporting
Oil and gas exploration and production is the only segment where the Company operates.
32 Earnings (loss) per share Consolidated
Basic and diluted loss per share 12/31/2018 12/31/2017
Basic and diluted numerator: Loss attributable to shareholders (670,977) (1,975,992)
Basic and diluted denominator: Weighted average number of shares (i) 2,666,220,914 378,580,923 Loss per Share (0.25166) (5.21947)
(i) Due to the conversion of the Company’s financial debt into equity instruments in 2017, in an amount exceeding R$ 2,000,000, the Company issued 2,532,171,819 new common shares. On November 26, 2018, the Company increased its capital again as a result of the merger of OGPar shares, the details of which are described in Note 11.
33 Events after the reporting period
Atlanta Field BV (“AFBV”) On January 9, 2019, QGEP Netherlands Holding B.V. and Barra 1 S.à.r.1 issued a joint notice requesting the transfer of 100% of the interest of OGX Netherlands Holding B.V. in AFBV in proportion to their interest.
On January 10, 2019, Barra 1 S.à.r.1 started an arbitration process against OGX Netherlands Holding BV charging the amount of USD 6,219 referring to open cash calls. On January 16, 2019, QGEP Netherlands Holding B.V. issued a notice stating that Dommo has open cash calls totaling USD 5,375. At December 31, 2018, the amount provided for in addition to the interests of Barra 1 S.à.r.1 and QGEP Netherlands Holding B.V. was of BRL 46,404 (BRL 38,354 at December 31, 2017), as disclosed in Note 18.
Dommo Energia, together with its external legal counsel, is evaluating these notices and possible administrative and judicial lawsuits to be filed. Considering the assessment of an 80
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
unfavorable outcome as possible by the legal counsel and linked to the findings of the arbitration related to BS-4, the Company recorded an impairment loss related to its interest in AFBV totaling BRL 223,273 (Note 11).
We highlight that this change in the accounting record essentially complies with determinations of CPC 01 and CPC 25, and does not represent the Company's and its legal counsel's understanding of the notification and does not prejudice any legal strategy to eventually be implemented.
Capital decrease On January 14, 2019, an extraordinary shareholders’ meeting was held, with shareholders representing 67.1864% of the voting capital, after deducting the treasury shares, according to the signatures in the Shareholders’ Attendance Book, and the Meeting unanimously approved, without reservations, the following resolutions:
(i) The incorporation of the balances of the capital reserve into the Company’s share capital.
With the incorporation of the balances of the capital reserve into the share capital of the Company, totaling BRL 1,884,317, the share capital will increase from BRL 10,250,677 to BRL 12,134,994, without the issuance of new shares, with the same percentage of interest of the shareholders in the Company’s capital.
(ii) The decrease of the Company’s share capital by absorbing the accumulated losses, pursuant to Article 173 of Law 6,404/76. With a capital decrease totaling BRL 11,722,602, the capital went from BRL 12,134,994 to BRL 412,392, without the cancelation of shares, maintaining the same percentage of interest of the shareholders in the capital of the Company.
There was also the abstention from shareholders holding five hundred twenty-two million, nine hundred and eighty-nine thousand, nine hundred and thirty-two (522,989,932) voting shares, corresponding to 28.8340% of the shares with voting rights at the Meeting.
Eneva S.A. secondary public offering
On March 27, 2019, the Company announced to its shareholders and market in general that is taking part in Eneva S.A. secondary public offering (“Offering”) announced on the same date, as a selling shareholder, with the totality of the shares held, as approved by the Company’s Board of Director.
81
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.
Dommo Energia S.A. Financial Statements on December 31, 2018
Board of Directors Board of Executive Officers
Roderick Fraser Paulo Souza Queiroz Figueiredo
Chairman of the Board of Directors CEO
Eduardo Yuji Tsuji Conrado Lamastra Pacheco Chief Financial and Investor Relations Officer
Marko Jovovic
Fiscal Council
João de Saint Brisson Paes de Carvalho
Cícero Gonçalves Dungas Controller and Accountant in charge
Luciano Magalhães Janoni Daniel Arippol CRC-RJ 115869/O-9
82
Free translation from the Portuguese official Financial Statements. In case of contradiction between the Portuguese and English versions the Portuguese version prevails.