Braskem SA 6-K 2007
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16
OR 15D-16 OF THE SECURITIES EXCHANGE ACT OF 1934
For the month of May, 2007
(Commission File No. 1-14862 )
(Exact Name as Specified in its Charter)
(Translation of registrant's name into English)
Rua Eteno, 1561, Polo Petroquimico de Camacari
Camacari, Bahia - CEP 42810-000 Brazil
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F ___X___ Form 40-F ______
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(1). _____
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(7). _____
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- _____.
(A translation of the original interim financial information in Portuguese, prepared in accordance with accounting principles derived from the Brazilian Corporation Law and rules of the Brazilian Securities Commission - CVM)
Independent Auditors Special Review Report
Our reviewed was conducted to enable us to issue a report on the special review of the quarterly financial information referred to in the first paragraph. The statements of cash flows for the quarter ended March 31, 2007, provides supplementary information to the quarterly financial information, which is not required according to accounting practices adopted in Brazil and is presented to enable additional analyses. This additional information was submitted to the same review procedures applied to the quarterly financial information and we are not aware o any significant changes that should be made for this information to be in accordance with accounting practices in Brazil and consistent with the rules issued by the Brazilian Securities Commission
April 26, 2007
KPMG Auditores Independentes
Anselmo Neves Macedo
March 31, 2007 and December 31, 2006
Three-month period ended March 31, 2006 and 2005
(In thousands of Reais, excepting the share unit value and the dividend by share, which are expressed in R$)
Notes to the interim financial information
Quarter ended March 31, 2007 and 2006 and year ended December 31, 2006
(In thousands of Reais)
(a) Braskem S.A. ("Braskem" or the "Company"), with headquarters at Camaçari - BA, and 14 production units located in the States of Alagoas, Bahia, São Paulo and Rio Grande do Sul, engages in the production of basic petrochemicals such as ethene, propene, benzene, and caprolactam, in addition to gasoline and LPG (cooking gas). The thermoplastic resin segment includes polyethylene, polypropilene, PVC and Polyethylene Teraphtalate ("PET"). The Company also engages in the import and export of chemicals, petrochemicals, fuels, as well as the production and supply of utilities such as steam, water, compressed air and electric power to the companies in the Camaçari Petrochemical Complex in Bahia, and the rendering of services to those companies. The Company also invests in other companies, either as a partner or shareholder.
(b) As a result of convertible debentures due to shareholder ODBPAR Investimentos S.A. (ODBPAR INV), in the amount of R$ 1,162,037 (Note 15) at March 31, 2007, the Company states negative net working capital of R$ 369,166 (December 31, 2006 - R$ 385,029).
(c) Corporate reorganization
Since its inception on August 16, 2002, the Company has undergone a major corporate restructuring process, disclosed to the market through material event notices. The main developments in 2006 can be summarized as follows:
. On April 4, 2006, as disclosed in a Relevant Event, Braskem acquired 66.04% of the common shares and 15.33% of the preferred shares in the capital of Politeno Indústria e Comércio S.A. (Politeno). With the acquisition, Braskem now holds 100% of the voting capital and 96.16% of the total capital of Politeno, a company located in the Northeast Petrochemical Complex, with an annual production capacity of 360 thousand tons of polyethylene. The initial amount paid by Braskem was R$ 237.500 thousand, equal to US$ 111,300 thousand.
The final amount to be paid by the Company for the shares acquired will be computed in November 2007, based on Politenos average performance over the 18 months subsequent to
the execution of the purchase and sale agreement, in accordance with the difference between the prices of polyethylene and ethylene in the Brazilian market, audited by an independent firm appointed by Braskem and the former shareholders. In order to record the commitment to pay for this acquisition, the Company projected the variables that will define the final price of the shares and, at December 31, 2006, recognized a provision to supplement the estimated price, stated in current liabilities, under Other provisions and accounts payable. The provision is subject to changes on account of the fluctuation of market prices and conditions up to the actual payment date. The sum of this provision and the initial payment gave rise to goodwill of R$ 106,612.
. The Extraordinary General Meeting held on May 31, 2006 approved the merger of Polialden Petroquímica S.A. (Polialden) into the Company, based on the book value of shareholders equity as of March 31, 2006, in the amount of R$ 289,941. The exchange ratio of Polialden shares for Braskem shares was determined based on the book value of shareholders equity of the companies, at market values, as of March 31, 2006, according to appraisal reports issued by independent experts.
In order to encourage shareholders to engage in the exchange, Polialden shares held by third parties were replaced with class A preferred shares in the Company at the ratio of 33.62 shares in Braskem for each 1,000 shares in Polialden, which corresponds to an increase of 6.76% on the replacement ratio derived from the Appraisal Reports of the Market Value of Shareholders Equity, as shown below:
The equity variations in Polialden determined during the period from the merger base date and the actual merger were taken to the statement of income of the Company, as equity in the earnings. The balance of goodwill as of the merger date, R$ 337,328, justified based on future profitability, was transferred to deferred assets.
Upon the merger of Polialden, the Company capital was increased by R$105,304, through the issue of 7,878,725 class A preferred shares, totaling R$ 3,508,272, comprising 123,492,142 common, 246,107,138 class A, and 803,066 class B preferred shares (Note 20(a)).
The Extraordinary Shareholders Meeting held on July 20, 2006 approved a proposal to absorb the net assets spun off from Companhia Alagoas Industrial - CINAL, a wholly-owned subsidiary.
Pursuant to the Valuation Report of CINALs Shareholders Equity issued by independent experts as of March 31, 2006, the book value of the spun-off assets assigned to Braskem is R$ 58,212. Equity variations between the transaction base date and the spin-off approval date were recognized by the Company as equity in the results. As a result of the spin-off, the capital of CINAL was reduced by R$ 58,212 and 57,657,265 preferred shares were cancelled.
. At a meeting held on September 29, 2006, the Board of Directors of the Company approved the formation of an entity in Holland, named Braskem Europe B.V. (Braskem Europa), organized as a limited liability company, having the Company as partner holding 100% of the capital.The Company and its subsidiaries, as participants in the corporate restructuring process, may be affected by economic and/or corporate aspects as a result of the outcome of this process.
(d) Administrative Council for Economic Defense - CADE
On July 19, 2006, CADE approved, by unanimous vote, the acquisition of Politeno by the Company (Note 1(c)), on the grounds that the relevant market for the petrochemical industry has international scope and therefore the transaction does not represent a threat to competition.
(e) Corporate governance
Braskem enrolled in Level 1 of the Differentiated Corporate Governance on the Bovespa, which mainly commits the Company to improvements in providing information to the market and in the dispersion of shareholdings. The Company intends to reach Level 2 of Bovespa's Corporate Governance in due time.
2 Presentation of Financial Statements
The individual and consolidated Quarterly Financial Information was prepared in accordance with the accounting practices adopted in Brazil and also in compliance with the rules and procedures determined by the Brazilian Securities Exchange Commission CVM, Brazilian Institute of Independent Auditors IBRACON, and Federal Accounting Council - CFC.
The explanatory notes refer only to the individual Quarterly Financial Information.
To provide the market with more information, the Company presents its Statement of Cash Flows as supplementary information to the Quarterly Financial Information.
3 Significant Accounting Practices
(a) Use of estimates
In the preparation of the financial statements, it is necessary to use estimates to record certain assets, liabilities and transactions. The financial statements of the Company and its subsidiaries include, therefore, various estimates regarding the selection of the useful lives of property, plant and equipment, deferred charges amortization periods, as well as provisions for contingencies, income tax and other similar amounts.
(b) Determination of net income
Net income is determined on the accrual basis of accounting.
Sales revenues are recognized when the risk and product title are transferred to customers. This transfer occurs when the product is delivered to customers or carriers, depending on the type of sales.
The provisions for income tax and Value-Added Tax on Sales and Services (ICMS) are recorded gross of the tax incentive portions, with the amounts related to tax exemption and reduction recorded in a capital reserve, while the ICMS amounts are taken to income.
In accordance with the requirements of CVM Deliberation 273 and Instruction 371, the deferred income tax is stated at probable realizable value, expected to occur as described in Note 17 (b).
Monetary and foreign exchange variations on assets and liabilities are classified in Financial income and Financial expenses, respectively.
The Company has recognized in financial results for the period the market value of derivative contracts relating to cash flows and liabilities indexed to foreign currency or international interest rates.
Earnings per share are calculated based on the number of outstanding shares at the end of the period.
(c) Current assets and long-term receivables
Cash and cash equivalents comprise primarily cash deposits and marketable securities or investments with immediate liquidity or maturing within 90 days (Note 4).
Marketable securities are valued at the lower of cost or market, including accrued income earned to the balance sheet date. Derivative instruments are valued at their adjusted fair values, based on market quotations for similar instruments against future exchange and interest rates.
The allowance for doubtful accounts is set up at an amount considered sufficient to cover estimated losses on the realization of the receivables, taking into account the Company's loss experience. For a better calculation of the doubtful accounts the Company analyzes, on a monthly basis, the amounts and characteristics of trade accounts receivable.
Inventories are stated at average purchase or production cost, which is lower than replacement cost or realization value. Imports in transit are stated at the accumulated cost of each import. Inventories of consumable materials (Warehouse) are classified in current assets or long-term receivables, considering their history of consumption.
Deferred income tax is recognized upon favorable scenarios for its realization. Periodically, the amounts recorded are revalued in accordance with CVM Deliberation 273/98 and CVM Instruction 371/02.
Judicial deposits are stated net of the related contingent liabilities, pursuant to CVM Deliberation 489/05.
Other assets are shown at realizable values, including, where applicable, accrued income and monetary variations, or at cost in the case of prepaid expenses.
(d) Permanent assets
These assets are stated at cost plus restatements for inflation through December 31, 1995 considering the following:
. investments in subsidiaries, jointly-controlled entities and associated companies are accounted for on the equity method, plus unamortized goodwill/negative goodwill. Goodwill is calculated as the difference between the amount paid and the book value of net assets acquired. Goodwill is based on the expected future profitability of the investees and appreciation of the assets, and is amortized over a period of up to 10 years. Goodwill in merged companies is transferred to property, plant and equipment and deferred charges, when based on asset appreciation and future profitability of the investees, respectively. Other investments are carried at the cost of acquisition.
. interests in foreign subsidiaries are accounted for on the equity method and foreign exchange variances on assets is recorded in a separate account under operating profits. Balance sheet and income statement accounts are converted into Brazilian currency at the exchange rates ruling as of the closing date of the Quarterly Financial Information, according to CVM Deliberation 28/86.
. property, plant and equipment is shown at acquisition or construction cost and, as from 1997, includes capitalized interest incurred during the construction period. Capitalized interest is added to assets and depreciated as from the date they become operational.
. depreciation of property, plant and equipment is recorded on the straight-line basis at the rates mentioned in Note 12.
. amortization of deferred charges is recorded over a period of up to ten years, as from the time benefits begin to accrue.
. as from January 2006, in accordance with IBRACON Technical Interpretation 01/2006, the Company records all programmed maintenance shutdown expenses in property, plant and equipment, as Machinery, equipment and facilities. Such stoppages occur at scheduled periods at intervals from two to six years and the related expenses are amortized until the beginning of the next maintenance shutdown (Note 12).
(e) Current and long-term liabilities
These are stated at known or estimated amounts, including accrued charges and monetary and exchange adjustments, as applicable.
The provision for loss in subsidiaries is recorded based on the net unsecured liabilities (excess of liabilities over assets) of these companies, and is recorded as a long-term liability against the equity results.
Defined benefit pension plans are accounted for based on the calculations made by independent actuaries, which in turn are based on assumptions provided by the Company.
A provision is recognized in the balance sheet when the Company has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are recorded considering the best estimates of the risk specific to the liability.
(f) Deferred income
Deferred income includes negative goodwill of merged or consolidated companies, supported by the expected future profitability.
(g) Consolidated financial statements
The consolidated Quarterly Financial Information was prepared in accordance with the consolidation principles set forth in the Brazilian corporate law and supplementary provisions of CVM and include the financial statements of the Company and its subsidiaries and jointly-controlled entities, and Special Purpose Entities (Entidades de Propósito Específico - EPEs) in which the Company has direct or indirect share control, as shown below:
(i) Including the interest of the subsidiary Braskem Distribuidora, Braskems interest is equal to 100.00% .
In the consolidated Quarterly Information, the intercompany investments and the equity pick-up, as well as the intercompany assets, liabilities, income, expenses and unrealized gains arising from transactions between consolidated companies, were eliminated.
Minority interest in the equity and in the results of subsidiaries has been segregated in the consolidated balance sheet and statement of operations for the consolidated years, respectively. Minority interest corresponds to the respective participations in the capital of CPP, Politeno and Tegal.
Goodwill not eliminated on consolidation is reclassified to a specific account in permanent assets which gave rise to it, in accordance with CVM Instruction 247/96. Negative goodwill is reclassified to Deferred income".
Pursuant to paragraph 1, article 23 of CVM Normative Instruction CVM 247/96 and authorization by CVM Letter SNC 004/2007, the Company has not consolidated on a pro rata basis the financial statements of the jointly-controlled entity Companhia de Desenvolvimento Rio Verde - CODEVERDE. This subsidiary is at pre-operating stage. Its information does not show significant changes and does not lead to distortions in the Company consolidated Quarterly Information.
CODEVERDE balance sheet (not reviewed) is summarized as follows:
(*) The financial statements as of March 2007 are not available.
For a better presentation of the consolidated Quarterly Information, the cross-holding between the Company and the subsidiaries Braskem Participações and Politeno was reclassified as Treasury share. Total shares hold by the subsidiaries, as well as their shareholding in the Companys total capital are stated below:
The reconciliation between the parent company and consolidated shareholders equity and the net income for the period is as follows:
4 Cash and Cash Equivalents
The domestic investments are mainly represented by quotas of a Braskem exclusive fund, which, in turn, holds quotas of domestic investment funds, such as fixed income investment funds, multiportfolio funds, investment fund quotas in credit rights, and other fixed-income securities. Foreign investments mainly comprise highly liquid government securities.
The Company maintains cash and cash equivalents sufficient to cover: (i) its working capital needs; (ii) investments anticipated in the business plan; and (iii) adverse conditions that may reduce the available funds.
Such funds are allocated in order to: (i) have a return compatible with the maximum volatility determined by the investment and risk policy; (ii) obtain a high spread of the consolidated portfolio; (iii) avoid the credit risk arising from the concentration in a few securities; and (iv) follow the market interest rate changes both in Brazil and abroad.
5 Marketable Securities
Braskem is the only quotaholder of the investment fund recorded in current assets. The portfolio comprises time deposits at Credit Suisse First Boston Bank (CSFB).
6 Trade Accounts Receivable
The Company adopts an additional policy for realizing domestic trade accounts, by selling its receivables to investment funds with credit rights (Fundo Chemical, until December 2006, and Chemical II - Note 3 (g)).
In December 2006, the Company carried out a trade bill discount transaction with a financial institution, undertaking to reimburse it in the event of delinquency of the customers.
Changes in the allowance for doubtful accounts are as follows:
(*)Based on its turnover, part of the maintenance materials inventory was reclassified to long-term.
Advances to suppliers and expenditures for imports in transit mainly relate to the acquisition of petrochemical naphtha, which is the main raw material of the Company.
8 Related Parties
(i) Amounts stated under Related parties, in long-term receivables, refer to advances for future capital increase.
(ii) Debentures issued by Braskem (Note 15)
Trade accounts receivable and Suppliers include the balances resulting from transactions with related parties, arising mainly from the following sales and purchases of goods and services:
Sales of Braskem:
Purchases of Braskem:
These transactions are carried out at normal market prices and conditions, considering (i) for purchase and sale of ethylene, international market prices, and (ii) for purchases of naphtha from Petrobras, the European market prices. Until March 31, 2007, the Company also imported naphtha at a volume equal to 27% of its consumption.
The related parties balance includes current account balances with group companies, remunerated at 100% of CDI. The current accounts are used by the Company and its direct and indirect subsidiaries to centralize available cash in a central pool for settlement of their obligations. The Company and its direct and indirect subsidiaries current-account holders in this pool.
9 Taxes Recoverable
In the 1st quarter of 2005, the Company used up its IPI credits from acquisition of raw materials taxed at a zero rate, when related to transactions involving the establishments of absorbed company OPP Química S.A. (OPP Química), located in the State of Rio Grande do Sul. This excise tax credit derived from a lawsuit filed by OPP Química in July 2000 for full adoption of the non-cumulative tax principle to said establishments.
On December 19, 2002, the Federal Supreme Court (STF) based on its full-bench precedents on this matter entertained an extraordinary appeal lodged by the National Treasury and affirmed the erstwhile decision rendered by the Regional Federal Court (TRF), 4th Circuit, thus recognizing OPP Químicas entitlement to the IPI tax credit on said acquisitions, covering the ten-year period prior to the filing date and accruing the SELIC benchmark rate until the date of actual use of such credits.
The STF determination was challenged by the National Treasury via special appeal known as agravo regimental, which is pending judgment by the 2nd Panel of STF. In this special appeal, the National Treasury is no longer challenging the companys entitlement to the IPI tax credit from acquisition of raw materials taxed at a zero rate, but rather alleging some inaccuracies in the court determination as to non-taxed inputs and raw materials, the restatement of tax credits, and the respective calculation rate. According to the opinion of the Companys legal advisors, all these aspects have already been settled in the STF and TRF court decisions favorably to OPP Química, or even in the STF full-bench precedents. For this reason, the special appeal referred to above poses no risk of changes in the Companys entitlement to the tax credit, even though the STF itself is revisiting this matter in a similar lawsuit involving another taxpayer (this judgment is currently on hold).
In December 2002, OPP Química booked the related tax credit of R$ 1,030,125, which was offset by the Company with IPI itself and other federal tax debts.
On September 28, 2006, the Company was given four infraction notices (autos de infração) for use of those IPI tax credits at the Rio Grande do Sul establishments of absorbed company OPP Química. The Company presented administrative defenses against such infraction notices.
Two of these infraction notices were issued solely to avoid forfeiture of the tax authorities right to dispute the use of tax credits until ten years before the filing of a lawsuit by the Company (R$ 308,629). However, the Companys use of tax credits is protected by the STF final and conclusive determination, which voids the content of said notices.
The other two infraction notices (R$ 791,371) allege that there is no favorable court decision supporting the Companys use of tax credits deriving from future acquisition of raw materials. However, those court rulings did warrant the Companys ongoing entitlement to offset its tax credits. In the opinion of its legal advisors, the Company stands good chances of prevailing against these four infraction notices.
Similar lawsuits have also been filed by the Company's branches located in the States of São Paulo, Bahia and Alagoas (Note 16(ii)).
The Company has accrued ICMS tax credits, basically on account of its high level of exports (exempt from ICMS taxation) and outgoing products (subject to deferred state taxation).
The Companys Management is giving priority to a number of actions aimed at optimal use of such credits and, currently, no losses are expected from realization of those credits.
The Managements actions comprise, among others:
. Obtaining from the Rio Grande do Sul state authorities an authorization for transfer of these credits to third parties, backed by Agreement TSC 036 of 2006 (published in the Official Gazette on October 19, 2006).
. Obtaining from the Bahia state authorities a greater reduction in the tax base of ICMS levied on imported petrochemical naphtha (from 40% to 60%), as per article 347, paragraphs 9 and 10 of the Bahia State ICMS Regulations (Decree 9681 of 2005).
. Increasing the ICMS tax base in connection with the sale of fuels to refiner (from 40% to 100%), as per article 347 of the Bahia State ICMS Regulations.
. Replacing the exports of co-products by domestic market transactions with identified clients.
. Starting feedstock imports under specific customs prerogatives, thus ensuring a lower generation of ICMS credits.
Based on the Companys Management projection over the term for realization of those credits, which came to R$ 668,511 on March 31, 2007 (December 31, 2006 R$ 693,548), the amount of R$ 538,012 (December 31, 2006 R$ 539,033) was posted as noncurrent assets.
10 Judicial Deposits and Compulsory Loan Long-term Receivables
(a) Information on investments
(i) Number of shares or quotas expressed in units.
Information on investments (continued)
Quotation of related parties listed on the São Paulo Stock Exchange:
(b) Investment activity in subsidiaries, jointly-controlled entities and associated companies
(i) Additions through merger arise mainly from the corporate restructuring described in Note 1(c).
Goodwill (negative goodwill) underlying the investments
(i) Goodwill based on the appreciation of property, plant and equipment, and amortized up to 2015.
In the consolidated Quarterly Information, goodwill is stated in property, plant and equipment or deferred charges, while negative goodwill is stated in deferred income, in accordance with CVM Instruction 247/96.
(c) Information on the main investees with operating activities
COPESUL is engaged in the manufacture, sale, import and export of chemical, petrochemical and fuel products and the production and supply of utilities, as well as providing various services used by the companies in the Triunfo Petrochemical Complex in the State of Rio Grande do Sul and management of logistic services related to its waterway and terrestrial terminals.
Polialden, merged into the Company on May 31, 2006 (Note 1(c)), was engaged in the manufacture, processing, sale, import and export and any other activities related to the production or sale of high-density polyethylene and other chemical and petrochemical products. The main raw material for all of its products was ethylene, which was supplied by Braskem. Polialden operated an industrial plant in Camaçari Bahia.
Politeno, merged on April 2, 2007 (Note 29), was engaged in the manufacture, processing, direct or indirect sale, consignment, export, import and transportation of polyethylene and by-products, as well as the participation in other companies. The main raw material for all of its products was ethylene, which was supplied by Braskem. Politeno operated an industrial plant in Camaçari - Bahia.
The activities of CETREL are to supervise, coordinate, operate and monitor environmental protection systems; carry out research in the environmental control area and in the recycling of waste and other materials recoverable from industrial and urban emissions; monitor the levels of environmental pollution of air quality, water resources and other vital elements; perform environmental diagnostics; prepare and implement projects of environmental engineering solutions; develop and install environmental management systems and those relating to quality, laboratory analyses, training, environmental education and also specification, monitoring and intermediation in the acquisition of materials of environmental protection systems.
Until July 2006, CINAL was engaged in the implementation of the Basic Industrial Nucleus of the Alagoas Chlorine chemical Complex and the production and sale of goods and several services, such as steam, industrial water, industrial waste treatment and incineration of organ chlorine waste for the companies located in the mentioned Industrial Nucleus. In July 2006, the assets associated with the production of steam, industrial water and other industrial inputs were spun-off and merged into the Company (Note 1(c)).
On September 16, 2005, Braskem and Petroquisa formed Petroquímica Paulínia, which will be responsible for the implementation and operation of a new polypropylene unit to be built at Paulínia São Paulo, using as raw material polymer-grade propylene supplied by Petrobras. Operations are scheduled to start by early 2008, using last-generation Braskem technology. Startup of this venture is scheduled for the first quarter of 2008.
12 Property, Plant and Equipment and Intangible Assets
Projects in progress relates mainly to projects for expansion of the industrial units capacities, operating improvements to increase the useful lives of machinery and equipment, excellence projects in maintenance and production, as well as programs in the areas of health, technology and security.
At March 31, 2007, property, plant and equipment includes the appreciation, in the form of goodwill arising from the merger of subsidiaries, in conformity with CVM Instruction 319/99, in the net amount of R$ 798,924 (December 31, 2006 - R$ 819,754).
As from January 2006, in accordance with IBRACON Technical Interpretation 01/2006, the Company records all programmed maintenance shutdown expenses in property, plant and equipment, as Machinery, equipment and facilities. Such expenses, which arise from the partial or full production stoppage, occur at scheduled periods at intervals from two to six years and are amortized in production cost until the beginning of the next maintenance shutdown.
Also because of the adoption of Technical Interpretation 01/2006, in the first quarter of 2006, the Company recorded additional depreciation of machinery and equipment in the amount of R$ 164,890. As this is a change in accounting criterion and depreciation in relation to years prior to 2006, this amount was recorded in Shareholders equity, in the Accumulated deficit line, as required by Technical Interpretation 01/2006 and article 186 of the Brazilian corporate law.
13 Deferred Charges
(i) Goodwill on merger is based on future profitability and is being amortized in up to 10 years, according to appraisal reports issued by independent experts. The recording of this goodwill in deferred charges is in conformity with CVM Instruction 319/99.
14 Loans and Financing
(i) UMBNDES = BNDES monetary unit.
In April 2006, the Company completed the issue of US$ 200,000 thousand perpetual bonds. The bonds are redeemable at the option of the Company in 360 months, and quarterly as from 2011. Funds raised were used for working capital purposes and acquisition of Politeno shares.
In September 2006, the Company approved the issue of US$ 275.000 thousand Bonds, with a 8% coupon and maturity in ten years. Funds raised were used mainly for the partial repurchase of Medium-Term Notes (MTN) of the 3rd tranche (Note 14(c)).
Composition of transactions:
(b) Export prepayments
Composition of transactions:
(c) Medium-Term Notes ("MTN") program
Composition of transactions:
To restructure its debt, in September 2006, the Company repurchased part of the notes of the 3rd tranche, in the amount of US$ 184,600 thousand, corresponding to 67% of the original issue. In addition to the principal, note holders were paid the amount relating to due and not yet due interest, brought to present value.
(d) FINAME, BNDES and BNB
These loans relate to various transactions aiming at increasing production capacity, as well as environmental programs, operating control centers, laboratory and waste treatment stations. Principal and charges are payable monthly up to June 2016.
In June 2005, a BNDES credit line was approved, in the amount of R$ 384,600, of which R$ 295,335 was released up to March 31, 2007.
In November 2006, a further BNDES credit line was approved in the amount of R$ 48,449, of which R$ 23,014 was released up to March 31, 2007.
(e) Project financing
In March and September 2005, the Company obtained loans in Japanese currency from Nippon Export and Investment Insurance ("NEXI"), in the amount of YEN 5,256,500 thousand -R$ 136,496, and YEN 6,628,200 thousand - R$ 141,529. The principal is payable in 11 installments as from March 2007, with final maturity in June 2012.
As part of its risk management policy (Note 22), the Company entered into a swap contract in the total amount of these loans, which, in effect, change the annual interest rate to 101.59% of CDI for the tranche drawn down in March, and 104.29% and 103.98% of CDI for the tranches drawn down in September 2005. The swap contract was signed with a leading foreign bank and its maturity, currencies, rates and amounts are perfectly matched to the financing contracts. The effect of this swap contract is recorded in financial results, under monetary variation of financing (Note 23).
(f) Repayment schedule and guarantees
Long-term loans mature as follows:
For financing and debentures, the Company has given security as stated below:
At March 31, 2007, the company is the direct financing guarantor of the jointly-controlled entity Petroflex for R$ 8,296 (December 31, 2006 - R$ 12,742) corresponding to 40% of Petroflex debt with BNDES.
In December 2006, the Company, together with Petrobras Química S.A. Petroquisa, entered into a supporting agreement with BNDES, under which Braskem and Petroquisa undertake to provide, in proportion to their respective interests in the capital of Petroquímica Paulínia, the required funds to meet any insufficiencies arising from delinquency on the part of this company. Accordingly, the Company may be required to make disbursements to Petroquímica Paulista of up to R$ 339,720, as capital contribution or loan.
These amounts correspond to the maximum amount of potential future repayments (not discounted) that the Company may be required to make.
(h) Capitalized interest
As described in Note 3(d), the Company adopts the accounting practice of capitalizing interest on financing during the period of asset construction. The Company policy is to apply the weighted average financial charge rate on the debt to the balance of projects in progress. This amount is limited to the amount of charges incurred in the period.
During the first quarter of 2007, the average rate used was 7% p.a. and the amounts capitalized during the periods are stated below:
At a meeting held on August 2, 2006, the Board of Directors approved the 14th issue of 50,000 simple, unsecured debentures, not convertible into shares, in a single series, for a total of R$ 500,000. The debentures were subscribed and paid up on September 1, 2006.
At a meeting held on November 29, 2006, the Board of Directors approved the cancellation of 1,500 debentures of the 12th issue, to mature in June 2009.
Composition of transactions:
(i) Privates issue of debentures convertible into class A preferred shares. At present, these securities are held by ODBPARINV (Note 8).
The debenture activity in the period/ year is summarized as follows:
16 Taxes and Contributions Payable Long-term Liabilities
The Company has challenged in court certain changes in the tax law. The related restated amounts have been provided for. The Company did not record contingent assets.
(i) IPI Tax Credit on Exports (Crédito- Prêmio)
The Company by itself and through absorbed companies challenges the term of effectiveness of the IPI tax credit (crédito-prêmio) introduced by Decree-law 491 of 1969 as an incentive to manufactured product exports. Lower courts have granted most lawsuits to that end, but such favorable decisions may still be appealed.
According to its legal advisors, the Company stands good chances of success in these suits. The Superior Court of Justice (STJ) is currently entertaining an identical lawsuit lodged by another taxpayer (judgment is currently on hold). Most of the STJ justices who have cast their votes to date recognized that such tax benefit continued after 1983.
(ii) IPI Zero rate
Absorbed companies OPP Química, Trikem and Polialden have filed lawsuits claiming IPI tax credits from the acquisition of raw materials and inputs that are exempt, non-taxed or taxed at a zero rate. Lower courts have granted most lawsuits to that end, but such favorable decisions may still be appealed. The Companys legal advisors are of the opinion that these cases are likely to prevail; the STF itself is revisiting this matter as well.
In a decision rendered in February 2007 on a case unrelated to the Company, the STF found against the right to offset zero-rate IPI credits by a tight majority (6 to 5). This judgment is currently on hold, as the STF justices are yet to deliberate on the effects of such decision. In light of this shift in its stance, the STF should now determine when such new precedent will take effect (that is, whether it will have future or retrospective effects).
(iii) PIS/COFINS - Law 9718 of 1998
The Company by itself and through absorbed companies has brought a number of lawsuits to challenge the constitutionality of the changes in the PIS and COFINS tax bases deriving from Law 9718 of 1998.
In February 2006, court decisions favorable to the Companys cases initiated in March 1999 became final and conclusive.
As the STF Full Bench had definitively ruled, in November 2005, that the increase in PIS and COFINS tax rates under said law was unconstitutional, the Company also in reliance on the opinion of its legal advisors believes that it shall prevail in the other cases as well. The positive impact on the Companys results will come to approximately R$ 106,941, considering the amounts provisioned for at March 31, 2007.
Some of these lawsuits also challenged the escalation of COFINS tax rates from 2% to 3%. In the opinion of its legal advisors, the Company stands remote chances in this specific regard. This fact, coupled with the recent unfavorable determination from the STF, led the Company to file for voluntary dismissal of this claim in most suits and settle the debt in cash on December 15, 2006.
(iv) Special Installment Program - PAES - Law 10684/03
In August 2003, absorbed company Trikem opted to file for voluntary dismissal of its lawsuit against the COFINS rate increase from 2% to 3% under Law 9718 of 1998, thus qualifying for the more favorable payment conditions under the PAES program instituted by Federal Law 10684 of 2003. The amount due is being paid in 120 monthly installments. The outstanding debt is R$ 41,513 as of March 31, 2007, being R$ 6,555 in current liabilities and R$ 34,958 in noncurrent liabilities (December 31, 2006 R$ 43,151, being R$ 6,555 in current liabilities and R$ 36,596 in noncurrent liabilities).
Even though the Company had met all legal requirements and payments were being made as and when due, the National Treasury Attorneys Office (PFN) disqualified the Company for PAES on two different occasions, and the Company obtained a court relief reinstating it to PAES in these two events. In reliance on the opinion of its legal advisors, Management believes that the Companys eligibility for these installment payments will be upheld as originally requested.
17 Income and Social Contribution Taxes on Net Income
(a) Current income tax
Out of the income tax expense, R$ 10,711 (1st quarter of 2006 - R$ 7,377) is entitled to income tax exemption/abatement benefits.
(b) Deferred income tax
(i) Composition of deferred income tax
In accordance with the provisions of CVM Deliberation 273/98, which approved the Institute of Independent Auditors of Brazil (IBRACON) standards on the accounting of income tax, supplemented by CVM Instruction 371/02, the Company has the following accounting balances of deferred income tax:
Deferred income tax assets arising from tax losses and timing differences are recorded taking into account analyses of future tax profits, supported by studies prepared based on internal and external assumptions and current macroeconomic and business scenarios approved by the Company's management.
(ii) Estimated timing of the realization of deferred income tax assets
Deferred income tax assets recorded are limited to the amounts whose offsetting is supported by projections of taxable income, brought to present value, earned by the Company in up to 10 years, also taking into account the limit for offsetting tax losses of 30% of the net income for the year before income tax and tax exemption and reduction benefits.
Considering the price, foreign exchange, interest rate, market growth assumptions and other relevant variables, the Company prepared its business plan for the base date of December 31, 2006, anticipating the generation of future taxable income. The studies show that the income tax credit from tax losses, in the amount of R$ 154,523, will be fully utilized between 2009 and 2012.
The realization of deferred income tax on tax losses is anticipated as follows:
Deferred income tax credits on timing differences, mainly comprised of goodwill in the amount of R$ 92,251 and provisions in the amount of R$ 126,648, are justified by their full utilization due to the accounting realization of goodwill and provisions.
The realization of income tax credits on goodwill is anticipated as follows:
The accounting for deferred income tax assets does not consider the portion of amortized goodwill on investments in merged companies, the realization term of which exceeds 10 years (R$ 13,079).
Concerning temporarily non-deductible expenses, deferred income tax was calculated on tax expenses which are currently being challenged in court and other operating expenses, as is the case of the provision for doubtful accounts.
As the taxable income basis is determined not only by the potential future profits, but also the existence of non-taxable revenues, non-deductible expenses, fiscal incentives and other
variables, there is no immediate correlation between the Company's net income and the income tax results. Accordingly, the expectation of using fiscal credits should not be construed as an indication of the Company's future results.
(c) Social Contribution on Net Income (CSL)
In view of the discussions over the constitutionality of Law 7689 of 1988, the Company and its absorbed companies OPP Química, Trikem and Polialden filed civil lawsuits against payment of CSL. The resulting court decision favorable to these companies became final and conclusive.
However, the Federal Government filed a suit on the judgment (ação rescisória) challenging the decisions on the lawsuits filed by the Company, Trikem and Polialden, on the argument that after the final decision favorable to those companies the Full Bench of STF declared the constitutionality of this tax except for 1988. As the Federal Government did not file a suit on the judgment in the case of OPP Química, the first final and conclusive decision remained in force.
The suit on the judgment is pending the STJ and STF review of a number of appeals concerning this specific matter. Even though the suit on the judgment and tax payments are still on hold, the Federal Revenue Office has issued tax infraction notices against the Company and its absorbed companies, and administrative defenses have been filed against such notices.
Based on the opinion of its legal advisors, Management believes that the following is likely to occur: (i) the courts will eventually release the Company from paying this tax; and (ii) even if the suit on the judgment is held invalid, the effects of said judgment cannot retroact to the year of enactment of the law, the reason why the Company has created no provisions for this tax.
If retrospective collection is required by court order (contrary to the opinion of its legal advisors), the Company believes that the possibility of being imposed a fine is remote. Accordingly, the amount payable, restated based on Brazils SELIC benchmark rate, would be approximately R$ 754,000 (December 31, 2006 - R$ 743,000), net of fine.
18 Tax Incentives
(a) Corporate income tax
Until calendar year 2011, the Company is entitled to reduce by 75% the income tax on the profit arising from the sale of basic petrochemical products and utilities. The two polyethylene plants at Camaçari have the same right up to base years 2011 and 2012. The PVC plant at Camaçari will also have this right until base year 2013. The PVC plants in Alagoas and the PET plant at Camaçari are exempt from corporate income tax calculated on the results of their industrial operations until 2008.
Productions of caustic soda, chloride, ethylene dichloride and caprolactam enjoy the benefit of the 75% decrease in the income tax rate up to 2012.
At the end of each fiscal year, in the case of taxable profit resulting from the benefited operations, the income tax amount is recorded as expense for the year and credited to a capital reserve account, which can only be used to increase the capital or absorb losses.
Incentives determined for the quarter ended March 31, 2007 amounted to R$ 10,711.
(b) Value-added tax - ICMS
The Company has ICMS tax incentives granted by the States of Rio Grande do Sul and Alagoas, through the Company Operation Fund - FUNDOPEM and State of Alagoas Integrated Development Program - PRODESIN, respectively. Such incentives are designed to foster the installation and expansion of industrial facilities in those States. The incentive determined for the quarter ended March 31, 2007 was R$ 1,160.
19 Long-term Incentives
In 2006, Braskem developed a Long-term Incentive Plan, under which the employees involved in strategic program (Alfa unit) can acquire Investment Units.
The unit value of each Alfa Investment Units corresponds to the average closing price of quotations of Braskem class A preferred shares on the São Paulo Stock Exchange between October of prior year and March of the current year.
As an incentive to purchase Alfa Investment Units by those employees entitled to the program, Braskem granted 1 Investment Unit for each Investment Unit already purchased (Beta Unit). Beta Units are redeemable as from the fifth year at the ratio of 20% in the first year and 10% in subsequent years. Beta Units not redeemed within the stipulated terms are converted into Alfa Units. The value of these units was determined based on the projected the value of the Company class A preferred share.
Alfa Units will have a return equivalent to the amount of dividends and/or interest on capital paid to the holders of Braskem class A preferred shares.
The composition and cost of Investment Units at March 31, 2007 are as follows:
20 Shareholders Equity
At March 31, 2007, the Companys subscribed and paid-up capital is R$ 3,508,272, divided into 123,492,142 common, 246,107,138 class A preferred, and 803,066 class B preferred shares, with no par value. At the same date, the Companys authorized capital comprises 488,000,000 shares, of which 175,680,000 are common, 307,440,000 are class A preferred, and 4,880,000 are class B preferred shares.
The Extraordinary General Meeting held on May 31, 2006 approved the Companys capital increase by R$ 105,304 as a result of the merger of subsidiary Polialden (Note 1(c)), through the issue of 7,878,725 class A preferred shares. On that same date, the conversion of 2,632,043 class A preferred shares into common shares, at the ratio of 1:1, was also approved.
(b) Rights attaching to shares
Preferred shares carry no voting rights, but qualify for a non-cumulative priority dividend at 6% per annum on their unit value, if profits are available for distribution. Only Class A preferred shares are on a par with common shares for entitlement to remaining profits; dividends are earmarked to common shares only after the priority dividend has been paid to preferred shares. Further, only Class A preferred shares rank equally with common shares in the distribution of shares resulting from capitalization of other reserves. Class B preferred shares are not convertible into common shares. However, after expiration of the non-convertibility period prescribed in special legislation, these shares may be converted into Class A preferred shares at any time, at a ratio of two Class B preferred shares to each Class A preferred share.
If the Company is wound up, Class A and B preferred shares are accorded priority treatment in repayment of capital.
Shareholders are entitled to a compulsory dividend at 25% of the net profits at year end, adjusted as per the Brazilian Corporation Law.
According to the Memorandums of Understanding for Execution of Shareholders Agreement, the Company is required to distribute dividends not lower than 50% of the yearend net profits, to the extent that the reserves necessary for its effective operation in the ordinary course of business are maintained at a sufficient level.
As agreed at the time of issuance of Medium-Term Notes (Note 14(c)), the payment of dividends or interest on equity is capped at twofold the minimum dividends accorded to preferred shares under the Companys bylaws. Further, pursuant to the 12th debentures indenture (Note 15), the payment of dividends or interest on equity capped either at 50% of the net profits at yearend, or at 6% of the nominal value of the Companys Class A and B preferred shares, whichever is higher.
(c) Treasury share
The Board of Directors meeting held on May 3, 2006 approved a Share Buyback Program. This program was closed on October 23, 2006 and was intended to acquire common and class A preferred shares to be held in treasury and subsequently sold and/or cancelled, with no reduction in capital. Under the program, the Company acquired 13,131,054 class A preferred shares at the average cost of R$ 13.88. The low and high quotations during this period were R$ 9.97 and R$ 15.89 per share, respectively.
In July 2006, the Company also acquired 765,079 class A preferred shares from dissenting Polialden shareholders.
At March 31, 2007, shares held in treasury comprised 14,363,480 class A preferred shares for a total value of R$ 194,555. The total value of these shares, based on the average quotation of Bovespas last session on March 31, 2007, is R$ 218,038.
(d) Appropriation of net income
The Extraordinary Shareholders Meeting held on March 28, 2007 approved the appropriation of net income for 2006, amounting to R$ 77,753, as follows: (i) R$ 36,933 for payment of dividends to class A and B preferred shares, at the ratio of R$ 0.159017 per share; (ii) R$ 3,888 to the legal reserve; and (iii) R$ 36,933 to the profit retention reserve for expansion. Payment of dividends started April 9, 2007.
(e) Statement of changes in shareholders equity
(a) Collective Bargaining Agreement Section 4
The Petrochemical, Plastics, Chemicals and Related Industry Workers Union in the State of Bahia (SINDIQU¥MICA) and the Employers Association of the Petrochemical and Synthetic Resins Industries in the State of Bahia (SINPEQ) are disputing in court the validity of a wage and salary indexation clause contained in the collective bargaining agreement (convenção coletiva de trabalho), given the matter of public policy involved, namely, the adoption of an economic stabilization plan in 1990 that put a limit on wage adjustments. The Company ran plants in the region in 1990, and is a member of SINPEQ.
The employees labor union seeks retrospective adjustment of wages and salaries. In December 2002, the STF affirmed an erstwhile decision from the Superior Labor Court (TST), determining that an economic policy legislation should prevail over collective bargaining agreements and, as such, no adjustment was due. SINDIQU¥MICA appealed this decision by means of a motion for clarification, which was rejected by unanimous opinion on May 31, 2005.
On October 24, 2005, SINDIQU¥MICA filed a plea known as embargos de divergência, which was recognized by the higher courts. This plea was forwarded to the General Prosecutor Office of the Republic, which rendered an opinion fully favorable to SINPEQ in November 2006. The appeal is pending inclusion in the trial docket of the STF full bench.
(b) Preferred shares with incentives
Some holders of Class B preferred shares issued by the Company under a tax incentive program claim that they are entitled to profit distribution on a par with the holders of common and Class A preferred shares.
Polialden faced an identical issue before CVM; on August 10, 2000, the CVM Board sided with the Polialdens stance that the dividends payable to preferred shares should range from 6% to 8% of the par value of such shares, or the equivalent to 25% of net profits at yearend, whichever is higher, as the company has done over the last 10 years. Such shares are not entitled to remaining profits, as the bylaws have clearly set the maximum dividends attaching to such shares.
Most court decisions already rendered in this regard have been favorable to the Company and its absorbed company Polialden. For this reason, most of the judicial bonds posted by Polialden as security for preliminary injunctions entered favorably to some shareholders (in an amount corresponding to the shortfall asserted by those shareholders in connection with the dividends approved at the Annual General Meetings of 2002 and 2004) have already been released to the Company; there is only one judicial bond securing the 2004 dividends asserted by one single shareholder, at the historical value of R$ 804.
The Companys legal advisors believe that the chances of success in these cases are likely, having also relied on opinions from renowned jurists and on recent court and CVM rulings on this specific issue; for this reason, the Company has abided by the rules set out in its bylaws as to payment of dividends to preferred shares under incentive, limiting payments at 6% of their par value and capped at 25% of the compulsory dividends set forth in the Companys bylaws.
(c) Offsetting of tax credits
From May through October 2000, absorbed companies OPP Química and Trikem offset their own federal tax debts with IPI tax credits (créditos-prêmio) assigned by an export trading company (Assignor). These offsetting procedures were recognized by the São Paulo tax officials (DERAT/SP) through offset supporting certificates (DCCs) issued in response to an injunctive relief entered in a motion for writ of mandamus (MS SP). Assignor also filed a motion for writ of mandamus against the Rio de Janeiro tax officials (DERAT/RJ) (MS RJ) for recovery of IPI tax credits and their use for offsetting with third-party tax debts, among others. The MS SP was dismissed without prejudice, confirming the Rio de Janeiro administrative and jurisdictional authority to rule on Assignors tax credits.
In June 2005, DERAT/SP issued ordinances (portarias) canceling the DCCs. Based on said ordinances, the Federal Revenue Office unit in Camaçari/BA sent collection letters to the Company. Notices of dispute were presented by the Company, but the administrative authorities declined to process them. As a result, past-due federal tax liabilities (dívida ativa) at R$ 276,620 were posted in December 2005 concerning the Companys tax debts originating from purportedly undue offsetting procedures.
Both Assignor and the Company commenced a number of judicial and administrative proceedings to defend the lawfulness and validity of those offsetting procedures, and the legal counsels to both companies labeled the chances of success in those cases as probable, mostly in light of the indisputable certainty and validity of those credits as confirmed in a specific audit conducted by DERAT/RJ.
On October 3, 2005, the Federal Supreme Court (STF) held the MS RJ favorably to Assignor in a final and conclusive manner, confirming Assignors definite right to use the IPI tax credits from all its exports and their availability for offsetting with third-party debts. As a result, the legal advisors to Assignor and to the Company believe that the offsetting procedures carried out by the absorbed companies and duly recognized by DERAT/SP are confirmed, and for this reason they also hold that the tax liabilities being imputed to the Company are not due. Despite the final and
conclusive decision in MS RJ, the legal advisors to Assignor and to the Company, in addition to a jurist when inquired of his opinion on this specific issue, feel that the tax liabilities purportedly related to offsetting procedures carried out by the absorbed companies have become time-barred and, as such, can no longer be claimed by the tax authorities.
In January 2006, the Company was ordered to post bond in aid of execution of the tax claim referred to above; this bond was tendered in the form of an insurance policy.
The Companys legal advisors have labeled the chances of success in all claims listed above as probable; nevertheless, if the Company is eventually defeated in all those cases, it will be entitled to full recourse against Assignor concerning all amounts paid to the National Treasury, as per the assignment agreement executed in 2000.
(d) National Social Security Institute - INSS
The Company is a party to several social security disputes in the administrative and judicial spheres, totaling approximately R$ 246,379 (updated by the SELIC rate) as of March 31, 2007. Out of these sums, the Company has made judicial deposits at R$15,100.
In reliance on the legal advisors opinion that the Company stands good chances of success in these cases, Management believes that no sum is payable in connection with these notices and, as such, no amount was provisioned for.
(e) Other court disputes involving the Company and its subsidiaries
The Company is defendant in civil lawsuits filed by the controlling person of a former caustic soda distributor and by a carrier that rendered services to the latter, totaling R$ 26,414 as of March 31, 2007 (December 31, 2006 R$ 25,826). Said plaintiffs seek redress of damages caused by the Companys alleged non-fulfillment of the distributor agreement. In reliance on the opinion of legal advisors sponsoring the Company in these lawsuits, Management believes that the cases are likely to be rejected, and for this reason the respective sums have not been provisioned for.
In the second quarter of 2005, the Chemical and Petrochemical Industry Workers Unions in Triunfo (RS) and Camaçari (BA) filed several lawsuits for recovery of unpaid overtime. The Company has presented its answers accordingly, and in reliance on the legal advisors opinion the Companys Management does not expect to be defeated.
The Company acts as respondent in arbitration commenced by a shipping company and underway in the City of Rio de Janeiro. Recently, the arbitrators asked for a technical expert opinion on the subject matter and extent of the dispute, which was estimated at R$29,000. However, in reliance on the opinion of legal advisors sponsoring the Companys interests in this arbitration, Management believes that the Company is likely to prevail, and for this reason no amounts were provisioned for in this regard.
As of March 31, 2007, the Company figured as defendant in circa 1,080 labor claims (including those mentioned above), totaling approximately R$ 202,300 (2006 R$260,200). According to
the opinion of legal advisors, most claims are likely to be found for the Company. For the cases entailing a probable defeat, the Company has provisioned for R$ 13,328.
22 Financial Instruments
(a) Risk management
Since the Company operates in the domestic and international markets, obtaining funds for its operations and investments, it is exposed to market risks mainly arising from changes in the foreign exchange and interest rates.
The Companys policy to manage risks has been approved and reviewed by management. These rules prohibit speculative trading and short sales, and provide for the diversification of instruments and counterparties. Counterparties limits and creditworthiness are reassessed on a regular basis and set up in accordance with rules approved by management. Gains and losses on hedge transactions are taken to income on a monthly basis.
To cover the exposure to market risk, the Company utilizes various types of currency hedges, some involving the use of cash and others not. The most common types which use cash, as adopted by the Company, are financial applications abroad (Certificates of deposit, securities in U.S. dollars, foreign mutual funds, time deposits and overnight deposits) and put and call options. The types of currency hedge which do not involve the use of cash are swaps of foreign currency for CDI and forwards".
To hedge its exposure to exchange and interest risks arising from loan and financing agreements, the Company adopted the following methodology: hedging of the principal and interest falling due in the next 12 months in, at least (i) 60% of the debt linked to exports (trade finance), except for Advances on Exchange Contracts (ACCs) of up to six months and Advances on Export Contracts (ACEs); and (ii) 75% of the debt not linked to exports (non-trade finance).
(b) Exposure to foreign exchange risks
The Company has long-term loans and financing to finance its operations, including cash flows and project financing. Part of the long-term loans is linked to the U.S. dollar (Note 14).
(c) Exposure to interest rate risks
The Company is exposed to interest rate risks on its debt. The debt in foreign currency, bearing floating interest rates, is mainly subject to LIBOR variation, while the domestic debt, bearing floating interest rates, is mainly subject to fluctuations in the Long-term Interest Rate (TJLP) and the Interbank Deposit Certificate (CDI) rate.
(d) Exposure to commodities risks
The Company is exposed to fluctuations in the price of several petrochemical commodities, especially its main raw material, naphtha. Since the Company seeks to transfer to its own selling prices the effect of price changes in its raw material, arising from changes in the naphtha international quotation, part of its sales may be carried out under fixed-price contracts or contracts stating maximum and/or minimum fluctuation ranges. Such contracts are commercial agreements or derivative contracts relating to future sales.
(e) Exposure to credit risk
The operations that subject the Company to concentration of credit risk are mainly bank accounts, financial investments and other accounts receivable, exposing Braskem to the risk of the financial institution involved. In order to manage the credit risk, the Company keeps its bank accounts and financial investments with large financial institutions.
In relation to customer credit risk, the Company protects itself by performing detailed analyses before granting credit and by obtaining real and personal guarantees, when necessary.
(f) Derivative instrument transactions
As of March 31, 2007 and December 31, 2006, the Company had the following derivative contracts:
(i) The market value represents the amount receivable (payable) in R$ thousand, should the transactions be settled on March 31, 2007 and December 31, 2006.
To determine the estimated market value of financial instruments, the Company uses transaction quotations or public information available in the financial market, as well as valuation methodologies generally accepted and utilized by counterparties. These estimates do not necessarily guarantee that such operations could be realized in the market at the indicated amounts. The use of different market information and/or valuation methodologies could have a significant effect on the estimated market value.
23 Financial Income (Expenses)
24 Other Operating Income and Expenses
The recovery of taxes in the first quarter of 2006 mainly arises to favorable final decisions on PIS and COFINS lawsuits Law 9718 of 1998 (Note 16(iii)).
25 Insurance Coverage
The Company has a broadly-based risk management program designed to provide cover and protection for all assets, as well as possible losses caused by production stoppages, through an "all risks" insurance policy. This policy establishes the amount for maximum probable damage, considered sufficient to cover possible losses, taking into account the nature of the Companys activities and the advice of insurance consultants. At March 31, 2007, insurance coverage for inventories, property, plant and equipment, and loss of profits of the Company is R$ 16,543,519 per claim, while the total of all insured assets is R$ 11,613,424. As the risk assumptions adopted, given their nature, are not within the scope of an audit of financial statements, they have been not reviewed by the Company independent auditors.
26 Shares Traded Abroad - NYSE and LATIBEX
(a) American Depositary Receipts ("ADRs") program
The Companys ADSs are traded on the NYSE with the following characteristics:
. Type of shares: Class A preference
The Company's Class A preference shares are traded on LATIBEX, the market for Latin American Companies quoted in Euros at the Madrid Stock Exchange. The shares are traded under the symbol "XBRK" and the Brazilian Custodian Bank is Banco Itaú S.A. LATIBEX has adjusted and altered the process for quotation and trading to comply with the new standards adopted by Bovespa. Accordingly, as from May 16, 2005, the shares are traded in units.
27 Private Pension Plans
The actuarial obligations relating to the pension and retirement plans are accrued in conformity with the procedures established by CVM Deliberation 371/2000.
The formation of Braskem (Note 1 (c)) involved the integration of six sponsoring companies and three different pension plans managed by Fundação PETROBRAS de Seguridade Social - PETROS ("PETROS"), PREVINOR - Associação de Previdência Privada ("PREVINOR") and ODEPREV - Odebrecht Previdência ("ODEPREV"). In addition to sponsoring different private pension plans, the Company has approximately 800 employees who do not participate in company-sponsored pension plans, as no new benefits were granted to employees since the inception of the Company.
Management ceased to include new participants in the three plans in order to devise a single, legitimate solution for all participants, with a view to protecting the plan participants financial assets.
Experts engaged by the Company recommended that ODEPREV be the only supplementary pension plan entity sponsored by the Company. Furthermore, employees who do not participate in the PETROS and PREVINOR plans were offered the opportunity of joining the ODEPREV plan, retroactively to August 16, 2002.
In June 2005, the Company communicated to PETROS and PREVINOR its intended withdrawal as a sponsor effective June 30, 2005. With regard to PETROS, the calculation of mathematical reserves of participants was completed in November 2006 and submitted in that month to the Supplementary Pension Plan Secretary, a Social Security Ministry department in charge of regulating and inspecting private pension plans. The Company has a provision of R$ 40,493 (December 31, 2006 R$ 58,554), which is considered sufficient to face any disbursements at the time the commitments of this plan are settled.
As to PREVINOR, the reserve computations have been completed and the entity has a surplus, so that no contributions by the Company are required. The sponsorship withdrawal was approved by the Supplementary Pension Plan Secretary and the commitments to the plan participants will be settled in the first half of 2007.
Benefits to retired employees and pensioners will continue to be paid on a regular basis up to completion of the process.
The Company has a defined-contribution plan for its employees. The plan is managed by ODEPREV - Odebrecht Previdência which was set up by Odebrecht S.A. as a closed private pension entity. ODEPREV offers its participants, employees of the sponsoring companies, the Optional Plan, a defined-contribution plan, under which monthly and sporadic participant contributions and annual and monthly sponsor contributions are accumulated and managed in individual retirement savings accounts.
The Board of Trustees of ODEPREV defines each year, in advance, in the funding plan, the parameters for contributions to be made by the participants and the sponsoring companies. With regard to the payment of benefits under the Optional Plan, the obligation of ODEPREV is limited to the total value of the quotas held by its participants and, to comply with the regulations for a defined-contribution plan, it will not be able to require any obligation or responsibility on the part of the sponsoring company to assure minimum levels of benefits to the participants who retire.
In the quarter ended March 31, 2007, the active participants in ODEPREV totaled 2,512 (2006 2,137), and the Companys and employees contributions in 2007 amounted to R$ 1,237 (2006 R$ 2,018) and R$ 3,152 (2006 R$ 2,801), respectively.
28 Raw Material Purchase Commitments
The Company has contracts for consumption of electric energy for its industrial plants located in the States of Alagoas, Bahia and Rio Grande do Sul. The minimum commitment for consumption under these four-year contracts amounts to R$ 247,522.
The Company acquires from Copesul ethylene and propylene for its units at the Southern Petrochemical Complex, under a contract in force until 2014. The minimum annual purchase commitment corresponds to 268,200 metric tons of ethylene and 262,200 metric tons of propylene. Considering the prices ruling at March 31, 2007, this commitment corresponds to R$ 1,204,927 (not reviewed). If the Company does not acquire the minimum volume, it must pay 40% of the current price of the amount not purchased. Based on 40% of prices charged as of March 31, 2007, the amount would be equal to R$ 481,970 (not reviewed).
Braskem purchases naphtha under contracts establishing a minimum annual purchase volume equal to R$ 4,234,195 (not reviewed), based on market prices as of March 31, 2007.
29 Subsequent Events
(a) Merger of Politeno
The Extraordinary Shareholders Meeting held on April 2, 2007 approved the merger of Politeno, based on this companys shareholders equity as of December 31, 2007, in the amount of R$ 498,983. The exchange ratio of Politeno shares for Braskem shares was determined based on shareholders equity of the companies at book value, in accordance with appraisal reports prepared by a specialized firm as of December 31, 2006. To maintain the current capital structure in Braskem, comprising 1/3 common and 2/3 preferred shares, the conversion of 486,530 class A preferred shares in common shares was also approved. The Company capital was increased by R$ 19,157, through the issue of 1,533,670 class A preferred shares, to R$ 3,527,429, divided into 123,978,672 common, 247,154,278 class A preferred, and 803,066 class A preferred shares.
(b) Acquisition of the Ipiranga Group
On April 18, 2007, Ultrapar (for itself), with the Company and Petrobras as intervening parties (under commission), acquired for R$ 2.1 billion the equivalent to 61.6% common and 13.8% preferred shares issued by Refinaria de Petróleo Ipiranga S.A. (RPI), 65.5% of common and 12.6% preferred shares issued by Distribuidora de Produtos de Petróleo Ipiranga S.A. (DPPI), and 3.6% of common and 0.4% of preferred shares issued by Companhia Brasileira de Petróleo Ipiranga (CBPI), then held by the controlling shareholders of the Ipiranga Group.
Under the agreement among Ultrapar, Braskem and Petrobras, Ultrapar now holds the control over the fuel distribution businesses located in the South and Southeast regions (Southern Distribution Assets), Petrobras has the control over fuel distribution businesses located in the North, Northeast and Center-West Regions (Northern Distribution Assets), and Braskem has the control over petrochemical assets, comprising Ipiranga Química S.A., Ipiranga Petroquímica S.A. (IPQ) and the interest of the latter in Copesul. Oil refining operation assets held by RPI will be shared on equal terms by Petrobras, Ultrapar and Braskem.
As agreed upon with Braskem and Petrobras, Ultrapar is responsible for carrying out a corporate restructuring of the companies acquired, in order to segregate the Assets ascribed to each of the acquiring companies. This process will comprise the following phases:
On April 18, 2007, Braskem and Copesul published a relevant event notice announcing that Braskem, through its subsidiary EDSP58 Participações S.A., together with Unibanco União de Bancos Brasileiros S.A., in the capacity of intermediary institution, had filed a request to carry out a public tender offer to delist (OPA) Copesul. Such public tender offer complies with art 4, paragraph 4 of Law 6404/76 and CVM Instruction 361/02.
On April 25, 2007, the Company and CADE (the Brazilian antitrust authority) executed an agreement to preserve the reversibility of the transaction (Acordo de Preservação da Reversibilidade da Operação APRO), under which Braskem undertakes to maintain the competitive status of the polyethylene and polypropylene markets prevalent before April 18, and, until the transaction is judged, to refrain from taking the following actions with respect to the Ipiranga Group petrochemical assets:
CADE expressed no restrictions with respect to Copesul, considering that the Company and Petrobras will maintain their status of controlling and minority shareholders, respectively, as it was before April 18, thus in conformity with the Shareholders Agreement in force.
The agreement may be reviewed at any time by CADE or at the request of the petitioners if these, at the discretion of CADEs full panel, prove that the conditions which led to the above mentioned agreement no longer exist.
In April 2007, Braskem completed negotiations to obtain up to US$ 1.2 billion under a bridge loan to finance the acquisition of the Ipiranga Group petrochemical assets and the future delisting of Copesul. In that month, the amount of US$ 309 million was drawn down and used to pay the shares acquired on April 18, 2007. This two-year term credit line bears interest of 0.35% above LIBOR in the first, and 0.55% in the second year.
Braskem expects to refinance the bridge loan in due time, always with a focus on reducing the Company capital cost, as well as maintaining a debt profile compatible with its cash flows.
(d) Propylene supply agreement
In April 2007, Braskem entered into an agreement with Refinaria Alberto Pasqualini (Refap), located in Canoas Rio Grande do Sul, for the initial supply of 70 thousand tons of propylene per year. This amount can rise to exceed 100 thousand tons per year with the anticipated increases in the refinery production.
Under the Refap contract, 5.8 thousand tons of propylene will be supplied per month. This volume will supplement the supply from the current company units at the Southern Petrochemical Complex and ensure the supply of raw material for future expansions.
(e) Agreement for the formation of joint ventures
On April 16, 2007, Braskem and Pequiven, the main petrochemical company in Venezuela, entered into an agreement to form two joint ventures intended to develop and implement in that country the most modern and competitive integrated petrochemical project in the Americas, named Jose Complex. Under one of the projects, an ethylene cracker from natural gas will be built, with a capacity of 1.3 million tons/year of ethylene, integrated with the production of 1.1 million tons/year of polyethylene and other petrochemicals.
Investments to implement the ethylene unit and the polyethylene units are estimated at approximately US$ 2.5 billion. Braskem and Pequiven are currently considering investments in PVC and soda units.
To finance these two projects, the model contemplates contributions of approximately 30% by Braskem and Pequiven, on equal shares, while the remaining 70% would be funded by a project finance arrangement guaranteed only by the project assets, obtained from multilateral export credit agencies, development banks and private banks.
Statement of cash flows for the periods ended March 31, 2007 and 2006
Cash flows (continued)
This statement was prepared in accordance with the criteria set forth in Accounting Standards and Procedures - NPC 20 - Statement of Cash Flows, issued by the Brazilian Institute of Independent Auditors - IBRACON.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 15, 2007
This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates offuture economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will a ctually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.