PETROBRAS ANNOUNCES FISCAL YEAR OF 2010 RESULTS

Consolidated net income attributable to Petrobras reached U.S.$19,184 million for the year ended December 31, 2010 and U.S.$5,896 million in the fourth quarter of 2010.

HIGHLIGHTS

•           Production start-up of six new production systems and two natural gas treatment units.

•           In 2010, average domestic crude oil production exceeded 2 million barrels per day for the first time. In December 2010, domestic crude oil production reached a record of 2.122 million barrels per day.

•           Our proved reserves in Brazil and abroad, which are estimated by our management in accordance with U.S. Securities and Exchange Commission (SEC) rules, amounted to 12.7 billion barrels of oil equivalent for 2010, 5% higher compared to 2009, with a reserves-to-production ratio of 14.7 years.

•           The declaration of commerciality of discoveries made in the pre-salt layer of the Santos Basin, in the areas of Tupi and Iracema, in the Lula and Cernambi fields, respectively, and the production start-up of the first pilot system in the pre-salt layer of the Santos Basin only three years after its discovery, with a production capacity of 100 thousand barrels of oil per day.

•          Through the celebration of the assignment agreement in 2010, Petrobras obtained the right of production of 5 billion barrels of oil equivalent at pre-salt layers.

•           Expansion of our Petrobras Paulínia refinery (Replan) and start-up of production of new diesel hydro treatment and coke units in our Henrique Lage refinery (Revap).

•           The delivery of natural gas reached the peak during December 2010 of 86 million of cubic meters per day (540 thousand barrels of oil equivalent), and the thermoelectric production reached 6,500 MW per day (compared to an annual average in 2009 of 36 million of cubic meters per day and 525 MW), due to the consolidation of Gas and Power capital expenditures.

 •          Capital expenditures amounted to U.S.$45,078 million in 2010, compared to U.S.$35,134 million in 2009.

•           Proposed dividends amounted to U.S.$6,780 million in 2010.

Dear Shareholders and Investors,

Our results for the fourth quarter and full year of 2010 further underscores our capacity for overcoming challenges, as well as emphasizes the quality of our assets and investment projects. Consolidated net income attributable to Petrobras for the year ended December 31, 2010 totaled U.S.$19,184 million, 23.7% higher compared to 2009, while operational cash flow, measured by Adjusted EBITDA, reached U.S.$32,626 million.

Among the Company’s numerous achievements in 2010, we would like to draw particular attention to three main achievements: the operational start-up of the pre-salt pilot system in the Lula field (formerly, the Tupi pilot system) in the pre-salt layer of the Santos Basin, a landmark in the development of one of the world’s most promising exploratory frontiers; the raising of U.S.$70.5 billion through the biggest ever public share offering; and the signing of the assignment agreement, which gives the Company the right to produce up to 5 billion barrels of oil equivalent in specified pre-salt areas not yet under concession.

Annual oil production in Brazil reached record levels, with average annual output exceeding 2 million barrels per day, primarily due to the start-up of new wells, the increased operational efficiency of existing units and the revitalization of mature fields.

Our proved oil, condensate and natural gas reserves in Brazil and abroad, estimated according to SEC rules, reached 12.7 billion barrels of oil equivalent at December 31, 2010, an increase of  5.0% compared to 2009, mainly attributable to the addition of other pre-salt discoveries in the Santos and Campos Basins, new discoveries in other basins and projects implemented in mature fields in Brazil and abroad. We achieved a substantial reserve replacement ratio of 170% and a reserves-to-production ratio of 14.7 years, both of which strengthen our capacity for organic growth and reinforce prospects of excellent future results.

We invested U.S.$45,078 million in 2010 to consolidate our position as a world-class integrated energy company – we are currently the world’s third biggest energy firm, according to PFC Consulting. In order to increase our oil and natural gas production and reserves, we invested the greater part of the capital expenditures (49.3%) in the Exploration & Production segment. We continued with our domestic refining capacity expansion projects in the Refining, Transportation and Marketing segment in order to ensure profitable operations, particularly given growing demand for oil products in Brazil. In the Gas and Power segment, we concluded important pipeline integration projects, increasing the diversification and flexibility of natural gas sources. We also expanded our biodiesel and ethanol operations and our market share in the Distribution segment, maintaining our leadership in Brazil’s fuel market.

At Petrobras, we are fully aware that our achievements would not have been possible without the adoption of good corporate governance practices, as well as investments in technology and workforce training. Nowadays, we are renowned throughout the world for our pioneering approach and excellence in regard to oil exploration and production. In order to maintain our leadership position, we doubled our Research Center, one of the world’s largest, which will continue to play a fundamental role in developing new technologies for all of the Company’s operational segments, especially that of pre-salt oil production.

It is also important to underline our unceasing commitment to operational safety, as well as to the environment and sustainable development. In recognition of our commitment, we were included in the Dow Jones Sustainability Index, the most important index of its type in the world, for the fifth consecutive year.

In 2010, we once again demonstrated our competence and ability to produce excellent results, and we are confident that our achievements will guarantee us an outstanding position in the energy industry, ensuring excellent prospects of returns for our shareholders and investors in the coming decades.

Net Income and Consolidated Financial and Economic Indicators

(1)    Impacted by the increase in the value of Real against U.S. dollar during 2010.
(2)    Gross margin equals net operating revenues less cost of sales divided by net operating revenues.

(3)    Operating margin equals operating income divided by net operating revenues.

(4)    Net margin equals net income divided by net operating revenues.

(5)     Debt to equity ratio equals total liabilities divided by the sum of total liabilities and total shareholders’ equity.

(6)     Crude oil and NGL average sales price in Brazil includes intra-company transfers and sales to third parties.
(7)     Capitalized expenses differ from our total consolidated investments, disclosed for local purposes, primarily due to geological and geophysics and scheduled stoppages expenditures.

Reconciliation between Adjusted EBITDA and Net Income

(1) Adjusted EBITDA margin equals adjusted EBITDA divided by net operating revenues.

Our adjusted EBITDA and our adjusted EBITDA margin are not U.S. GAAP measures and it is possible that they may not be comparable with indicators with the same name reported by other companies. Adjusted EBITDA should not be considered as a substitute for operational profit or as a better measure of liquidity than operational cash flow, both of which are calculated in accordance with U.S. GAAP. We provide our adjusted EBITDA and adjusted EBITDA margin to give additional information about our capacity to pay debt, carry out investments and cover working capital needs. 

The comparison between our results of operations for 2010 and for 2009 has been affected by the 13.5% increase in the value of the Real against the U.S. dollar for 2010 compared to 2009.

Net Income

Net operating revenues increased 30.7% to U.S.$120,052 million for 2010 compared to U.S.$91,869 million for 2009, primarily due to a 2.3% increase of total domestic and international oil and natural gas production in 2010 compared to 2009; higher domestic demand of oil products and natural gas, led by the recovery of the Brazilian economy; and higher average sales prices of oil and natural gas in the international market, which increased oil products import costs and production taxes.

The increase of operating expenses was due to higher sales expenses, primarily due to higher domestic sales volumes, higher international freight costs, depreciation expenses, higher personnel expenses and third-party services, including rental and leasing expenses.

Lower foreign exchange losses on net monetary assets denominated in U.S. dollars. When compared to Real, U.S. dollar depreciates 4.3% in 2010 and 25.5% in 2009.

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We earn income from:

Our expenses include:

Fluctuations in our financial condition and results of operations are driven by a combination of factors, including:

Virtually all of our revenues and expenses for our Brazilian activities are denominated and payable in Reais.  When the Real strengthens relative to the U.S. dollar, as it did in 2010 (an appreciation of 13.5%) the effect is to generally increase both revenues and expenses when expressed in U.S. dollars. However, the appreciation of the Real against the U.S. dollar affects the line items discussed below in different ways.  The following comparison between our results of operations in 2010 and in 2009 was impacted by the increase in the value of the Real against the U.S. dollar during that period. 

RESULTS OF OPERATIONS FOR 2010 COMPARED TO 2009

The comparison between our results of operations has been affected by the 13.5% increase in the value of the Real against the U.S. dollar for 2010 compared to 2009.

Revenues

Consolidated sales of products and services increased 30.2% to U.S.$150,852 million for 2010 compared to U.S.$115,892 million for 2009.  This increase was primarily attributable to a 2.3% increase of total domestic and international oil and natural gas production; higher average sales prices of oil and natural gas in the international market (higher oil and oil product export prices linked to higher international prices) and crude oil in the domestic market; and a 12.9% increase in sales volumes in the domestic market (due mainly to a 10.7% increase in oil products demand and a 32.9% increase in natural gas demand). For more information on the domestic increase of sales volumes, see the discussion of sales volumes on page 18.

Included in sales of products and services are the following amounts that we collected on behalf of federal or state governments:

Net operating revenues increased 30.7% to U.S.$120,052 million for 2010 compared to U.S.$91,869 million for 2009 due to the increases mentioned above.

Cost of Sales (Excluding Depreciation, Depletion and Amortization)

Cost of sales for 2010 increased 43.5% to U.S.$70,694 million compared to U.S.$49,251 million for 2009. This increase was principally a result of:

Depreciation, Depletion and Amortization

We calculate depreciation, depletion and amortization of most of our exploration and production assets using the units of production method. Depreciation, depletion and amortization expenses increased 18.4% to U.S.$8,507 million for 2010 compared to U.S.$7,188 million for 2009, due to higher capital expenditures and increased oil and gas production.

Exploration, Including Exploratory Dry Holes

Exploration costs, including costs for exploratory dry holes, increased 16.4% to U.S.$1,981 million for 2010 compared to U.S.$1,702 million for 2009. Excluding the impact of the appreciation of the Real, exploration, including exploratory dry holes remained relatively constant during 2010 compared to 2009.

Impairment

In 2010, we recorded an impairment charge of U.S.$402 million compared to U.S.$319 million for 2009. The impairment charge in 2010 was primarily related to impairment at producing properties in Brazil (U.S.$346 million) with high maturity levels and insufficient oil and gas production to cover production costs, and  due to the impairment of assets held for sale, particularly in the refining and distribution segments in Argentina (U.S.$56 million). The impairment charge in 2009 was primarily attributable to producing properties in Brazil and related mainly to Petrobras’ Agua Grande field. See Notes 9(c) and 20(b) to our consolidated financial statements for the year ended December 31, 2010.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 27.9% to U.S.$8,977 million for 2010 compared to U.S.$7,020 million for 2009.

Selling expenses increased 33.7% to U.S.$4,514 million for 2010 compared to U.S.$3,375 million for 2009. This increase was primarily attributable to the impact of the appreciation of the Real, increased domestic sales volumes, higher freight expenses, an increase in the use/cost of third-party services and higher sales expenses related to NGL reconverter ships.

General and administrative expenses increased 22.4% to U.S.$4,463 million for 2010 compared to U.S.$3,645 million for 2009. The increase in general and administrative expenses was primarily attributable to the impact of the appreciation of the Real and also to higher personnel expenses due to increased workforce and pay raises.

Research and Development Expenses

Research and development expenses increased 45.8% to U.S.$993 million for 2010 compared to U.S.$681 million for 2009. This higher expense was primarily due to increased average sales prices, which are the basis for a fixed 0.5% provision for expenses on research and development investment required by Brazilian law.

Employee Benefit Expense for Non-Active Participants

Employee benefit expense for non-active participants consists of financial costs associated with our expected pension and health care costs of retired employees. Our employee benefit expense for non-active participants increased 4.6% to U.S.$752 million for 2010 compared to U.S.$719 million for 2009, remaining relatively constant during the year.

Other Operating Expenses

Other operating expenses increased 15.0% to U.S.$3,588 million for 2010 compared to U.S.$3,120 million for 2009.  A breakdown of other operating expenses by segment is included on page 30.

The most significant changes between 2010 and 2009 are described below: 

These increases were partially offset by:

Equity in Results of Non-Consolidated Companies

Equity in results of non-consolidated companies increased 163.1% to a gain of U.S.$413 million for 2010 compared to a gain of U.S.$157 million for 2009, primarily due to better results generated by gas distribution and international companies.

Financial Income

We derive financial income from several sources, including interest on cash and cash equivalents. The majority of our cash equivalents are short-term Brazilian government securities, including securities indexed to the U.S. dollar. We also hold U.S. dollar deposits.

Financial income increased 38.5% to U.S.$2,630 million for 2010 compared to U.S.$1,899 million for 2009. This increase was primarily attributable to higher income on marketable securities (U.S.$309 million increase) and on financial investments (U.S.$273 million increase) generated by the assignment agreement. A breakdown of financial income is set forth in Note 13 of our consolidated financial statements for the year ended December 31, 2010.

Financial Expenses

Financial expenses increased 26.9% to U.S.$1,643 million for 2010 compared to U.S.$1,295 million for 2009. This increase was primarily attributable to increased financial expenses related to our debt (U.S.$1,722 million increase), partially offset by higher capitalized interest income (which resulted in a U.S.$1,129 million decrease in financial expenses) and by lower losses on derivative instruments (U.S.$254 million decrease). A breakdown of financial expense is set forth in Note 13 of our consolidated financial statements for the year ended December 31, 2010.

Monetary and Exchange Variation

Monetary and exchange variation increased to a gain of U.S.$714 million for 2010 compared to a loss of U.S.$175 million for 2009.  The gain in 2010 compared to the loss in 2009 was primarily due to lower foreign exchange losses on net monetary assets denominated in U.S. dollars.

Other Taxes

Other taxes, consisting of various taxes on financial transactions, increased 57.1% to U.S.$523 million for 2010 compared to U.S.$333 million for 2009. This increase was primarily attributable to the impact of the appreciation of the Real and also to losses on the recoverable amounts of tax credits.

Other Expenses, Net

Other expenses, net are primarily composed of gains and losses recorded on sales of fixed assets and certain other non-recurring charges. Other expenses, net amounted to a gain of U.S.$82 million for 2010 compared to a loss of U.S.$61 million for 2009, primarily due to the U.S.$147 million provision for losses from the Pasadena Refinery in the United States made in the first quarter of 2009.

Income Tax (Expense) Benefit

Income before income taxes and non-controlling interest increased 17.1% to U.S.$25,831 million for 2010 compared to U.S.$22,061 million for 2009. Income tax expense increased 21.3% to U.S.$6,356 million for 2010, compared to U.S.$5,238 million for 2009, primarily due to the increase of taxable income. The reconciliation between the tax calculated based upon statutory tax rates to income tax expense and effective rates is set forth in Note 3 of our consolidated financial statements for the year ended December 31, 2010.

NET INCOME BY BUSINESS SEGMENT

Petrobras is an integrated energy company, with the greater part of oil and gas production in the Exploration and Production segment being sold or transferred to other business segments of the Company. We provide below financial information from our different business segments and related operating information.

EXPLORATION AND PRODUCTION

Our Exploration and Production segment includes our exploration, development and production activities in Brazil, sales and transfers of crude oil in domestic and foreign markets, transfers of natural gas to our Gas and Power segment and sales of oil products produced at natural gas processing plants.

The increased net income from Exploration and Production in 2010 compared to 2009 reflects the growth in international prices, a 1.6% increase in oil and NGL production and reduced losses and contingencies related to legal proceedings.

These effects were partially offset by higher production taxes and non-recurring expenses with project financings related to the Barracuda and Caratinga fields.

The spread between the average price of domestic oil sold/transferred and the average Brent price decreased from US$ 7.29/bbl in 2009 to US$ 4.81/bbl in 2010, primarily due to the recovery of the international market of heavy oil in relation to light oil.

Other information relevant for this segment:

(1)             Includes production from shale oil reserves.

(2)             Does not  include LNG. Includes reinjected gas.

(2010 x 2009): Increased production from platforms P-51 in the Marlim Sul field, P-53 in the Marlim Leste field, FPSO-Capixaba (Cachalote/Baleia Franca), P-34 and P-57 (Jubarte), the Tiro extended well test (EWT) in the SS-11 field, the Guará extended well test (FPWSO-Dynamic Producer), FPSO-Cidade de Niterói in the Marlim Leste field, FPSO-Frade (Frade), FPSO-Cidade de Vitória (Golfinho), FPSO-Espírito Santo (Parque da Conchas), FPSO-Cidade de Santos (Uruguá/Tambaú) and FPSO-Angra dos Reis (Piloto de Lula) more than offset the natural decline in crude oil and NGL production from mature fields.

Domestic natural gas production increased 5.4% to 2,004 mmcf/d for 2010 compared to 1,902 mmcf/d for 2009 due to increased production from our platforms.

(1)             Production taxes include royalties, special government participation and rental of areas.

Lifting Costs - Excluding production taxes

(2010 x 2009): Our unit lifting cost in Brazil, excluding production taxes (consisting of royalties, special government participation and rental of areas) increased 14.2% to U.S.$10.03/bbl for 2010 compared to U.S.$8.78/bbl for 2009. Excluding the impact of the appreciation of the Real, our unit lifting costs in Brazil increased 5% in 2010 compared to 2009 due to higher well interventions in the Albacora Leste, Barracuda, Caratinga, Marlim, Albacora and Bicudo fields and also to increased personnel expenses.

Lifting Costs - Including production taxes

(2010 x 2009): Our unit lifting cost in Brazil, including production taxes, increased 20.1% to U.S.$24.64/bbl for 2010 compared to U.S.$20.51/bbl for 2009. Excluding the impact of the appreciation of the Real, our unit lifting costs in Brazil, including production taxes, increased 16% in 2010 compared to 2009, primarily attributable to a 29.3% increase in the reference price for domestic oil, which avereraged U.S.$70.34 in 2010 compared to U.S.$54.40 in 2009, reflecting the Brent price on the international market.

REFINING, TRANSPORTATION AND MARKETING

Our Refining, Transportation and Marketing segment includes refining, logistics, transportation, export and the purchase of crude oil, as well as the purchase and sale of oil products and ethanol. Additionally, this segment includes the petrochemical division, which includes investments in domestic petrochemical companies.

The decreased net income for our Refining, Transportation and Marketing segment in 2010 compared to 2009 was due to the higher oil acquisition/transfer costs and higher oil product import costs.

These effects were partially offset by higher domestic oil product sales volumes (mainly for gasoline, diesel and jet fuel sales volumes), an increase in the average realization price of exports and the upturn of domestic prices, where oil products are indexed to international prices, despite the reduction in the price of diesel and gasoline in June 2009. 

Other information relevant for this segment:

(1)             Includes crude oil export volumes of Refining, Transportation and Marketing and Exploration and Production segments.

(2)             Includes exports in progress.

(2010 x 2009): Higher crude oil exports are primarily attributable to higher production and to a decline in the volume of crude oil processed due to scheduled stoppages at the Replan Refinery, in 2010.  Higher oil product imports were due to higher domestic demand mainly for diesel, resulting from the recovery of economic activity, and higher demand for gasoline due to lower ethanol availability in the market in the beginning of 2010.

(1)             As registered by the National Petroleum, Natural Gas and Biofuels Agency (ANP).

(2010 x 2009): Refinery output in Brazil remained relatively constant in 2010 compared to 2009.

(2010 x 2009): Excluding the impact of the appreciation of the Real, our refining costs in Brazil increased 22% in 2010 compared to 2009 due to higher personnel expenses, increased scheduled stoppages and higher third-party service costs mainly related to equipment maintenance and repairs.

GAS AND POWER

Our Gas and Power segment consists principally of the purchase, sale, transportation and distribution of natural gas produced in or imported into Brazil. Additionally, this segment includes our participation in domestic natural gas transportation, natural gas distribution, thermoelectric power generation and our two domestic fertilizer plants.

The improved result for our Gas and Power segment for 2010 compared to 2009 was due to higher natural gas sales, led by growth in the industrial sector and increased demand for energy; increased fixed income from energy auctions and higher thermoelectric income generation; lower acquisition/transfer costs of domestic natural gas reflecting international prices and also the impact of the appreciation of the Real.

These effects were partially offset by increasing LNG import costs and higher selling expenses related to NGL reconverter ships.

Other information relevant for this segment:

(1) Weekly weighed price, per output level (light, medium and heavy), number of hours and submarket capacity.

(2010 x 2009): The 20.7% increase in imports of LPG volumes from Bolivia was primarily a result of higher thermoelectric demand generated by lower levels of rainfall in Brazil (decreasing hydroelectric supply) and by the recovery of Brazilian economy.

The 7.3% increase in sales of electricity was attributable to an increase in sales volumes of electricity reserves in the short-term and to additional sales at electronic auctions. Our participation at these auctions became possible due to the higher availability of reserves, which allowed us to capture market opportunities.

The 249.9% increase in electricity output was attributable to a decision made by the Operador Nacional do Sistema Elétrico (National Electricity System Operator - ONS) to increase electricity generation, in anticipation of increased demand as a result of higher temperatures registered in early 2010.  

The 127.0% increase of the settlement price of differences was due to the reduction in reservoir levels in 2010.

DISTRIBUTION

Our Distribution segment comprises the oil product and ethanol distribution activities conducted by our majority owned subsidiary, Petrobras Distribuidora S.A., in Brazil.

The increased net income from the Distribution segment in 2010 compared to 2009 was primarily due to higher sales margins and an 8% increase in sales volumes. These effects were partially offset by higher third-party service and personnel expenses and by a provision for tax contingencies.

The Distribution segment accounted for 38.8% of the national fuel distribution market in 2010, versus 38.6% in 2009.

INTERNATIONAL

The International segment comprises our activities in countries other than Brazil, which include exploration and production, refining, transportation and marketing, distribution and gas and power.

The improved result in the International segment in 2010 compared to 2009 was due to the higher commodities prices in 2010 and higher sales volumes of crude oil, as a result of the start-up of production in Akpo, Nigeria in March 2009.

Other information relevant for this segment:

(1)             Includes production from shale oil reserves.

(2)             Does not include LNG. Includes reinjected gas.

(3)             Non-consolidated companies in Venezuela.

(2010 x 2009): International consolidated crude oil and NGL production increased 9.1% due to the start-up of production in Akpo, Nigeria in March 2009, partially offset by decreased investments in Guando, Colômbia and the decline of mature fields in the Neuquina Basin in Argentina.

International consolidated gas production decreased 3.1% as a result of the decline of mature wells in the Neuquina Basin in Argentina.

(2010 x 2009): The 8.1% increase in our international lifting costs was primarily due to higher third-party services in Argentina, due to higher contractual prices.

(2010 x 2009): Our international refinery output increased 4.3% as a result of the improved operational performance at the Pasadena Refinery in the United States due to improved operating reliability of the U.S. refinery and improved margins in Argentina. Our increased output was partially offset by a scheduled stoppage at the Nansei Sekiyu Refinery in Japan, which occurred in May and June 2010.

(2010 x 2009): International refining costs decreased 8.0% in 2010 compared to 2009 due to lower maintenance expenses and higher processed crude volumes in Argentina and also at the Pasadena Refinery in the United States, which is a result of improved operating reliability.

(1)             Mainly composed of asphalt sales volume, due to higher consumption in infrastructure sectors.

(2)             Includes third-party sales by our international subsidiary, Petrobras International Finance Company (PifCo).

Our domestic sales volumes increased 12.9% to 2,378 mbbl/d in 2010 compared to 2,106 mbbl/d in 2009, primarily due to:

·         Diesel (increase of 9.3%) – The increase in diesel sales was primarily due to the recovery of domestic industrial activity, increased agricultural activity and growing investments in infrastructure projects.

·         Gasoline (increase of 16.6%) – The increase in gasoline sales volume was due to higher gasoline consumption in flex-fuel vehicles as a result of low ethanol supply in the beginning of 2010, which also generated higher gasoline prices and a decrease in the mandatory percentage of ethanol content in gasoline sold in Brazil, from 25% to 20%, since February 2010.

·         Natural gas (increase of 32.9%) – The increase in natural gas sales was due to higher natural gas consumption in the recovered industrial sector after the global financial crisis of 2009, and also by increased power generation at gas-fired thermoelectric plants.

·         Jet fuel (increase of  19.5%) – The increase in jet fuel sales was due to the recovery of the Brazilian economy and to the improved performance in the aviation market.

LIQUIDITY AND CAPITAL RESOURCES

Our principal uses of funds are for capital expenditures, dividend payments and repayment of debt. In 2008, 2009 and 2010, we met these requirements with internally generated funds, short-term debt, long-term debt and cash generated by capital increase. We believe these sources of funds, together with our strong position of cash and cash equivalents, will continue to allow us to meet our current capital requirements.

Financing Strategy

On June 18, 2010, our Board of Directors approved our Business Plan for 2010 through 2014, providing for planned  investments totaling U.S.$224 billion for the period.  We will continue our policy of extending the term of our debt maturity profile. We intend to fund our financial needs by making use of the financing capacity at the domestic market, in addition to raising debt capital through a variety of medium and long-term financing arrangements, including the issuance of bonds in the international capital markets, supplier financing, project financing and bank financing.   

The funds raised on our Global Offering occurred in September 2010 will be used for the planned investments of our Business Plan mentioned above.

On February 25, 2011, our Board of Directors approved our Business Plan for 2011, providing for planned investments in the amount of U.S.$56,217 million for the year.

Government Regulation

The Brazilian Ministry of Planning, Budget and Management controls the total amount of medium and long-term debt that we and our Brazilian subsidiaries can incur through the annual budget approval process. Before issuing medium and long-term debt, we and our Brazilian subsidiaries must also obtain the approval of the National Treasury Secretariat.

All of our foreign currency denominated debt, as well as the foreign currency denominated debt of our Brazilian subsidiaries, require registration with the Central Bank. The issuance of debt by our international subsidiaries, however, is not subject to registration with the Central Bank or approval by the National Treasury Secretariat. In addition, all issuances of medium and long-term notes and debentures require the approval of our board of directors. Borrowings that exceed the approved budgeted amount for any year also require approval of the Brazilian Senate.

Sources of Funds

Our Cash Flow

On December 31, 2010, we had cash and cash equivalents of U.S.$17,633 million compared to U.S.$16,169 million at December 31, 2009.

Operating activities provided net cash flows of U.S.$28,495 million for 2010 compared to U.S.$24,920 million for 2009. Cash generated by operating activities was mainly affected by net operating revenues, which increased U.S.$28,183 million during 2010 compared to 2009.

Net cash used in investing activities increased to U.S.$63,020 million for 2010 compared to U.S.$35,120 million for 2009. This increase was primarily due to investments in Brazilian Treasury Securities from funds raised on our Global Offering, totaling U.S.$15,319 million in the fourth quarter of 2010, and capital expenditures related to exploration and production projects in Brazil (U.S.$5,734 million) and to the modernization of  our refineries (U.S.$4,890 million).

Net cash provided by financing activities was U.S.$35,386 million for 2010 compared to net cash provided by financing activities of U.S.$16,935 million for 2009. This increase was primarily due to the capital increase of U.S.$30,563 million generated by the Global Offering.

Our net debt decreased 12.1% to U.S.$36,701 million as of December 31, 2010 compared to U.S.$41,733 million as of December 31, 2009, primarily due to the increase of cash raised by the Global Offering mentioned above.

The Global Offering, concluded on October 1, 2010, resulted in higher cash and cash equivalents, amounting to U.S.$17,633 million for the year ended December 31, 2010. In addition, during the third and fourth quarters of 2010, Petrobras invested a portion of the resources raised in the Global Offering in the total amount of U.S.$15,319 million primarily in Brazilian Treasury Securities with original maturity of at least three months, which generated total cash of U.S.$32,952 million for 2010 compared to U.S.$16,169 million for 2009. The financial leverage level (net debt divided by the sum of net debt and Petrobras’ shareholders’ equity) decreased to 16.8% for 2010, compared to 30.7% for 2009, below the maximum limit established by the Company of 35%.

(1)     Our net debt is not computed in accordance with U.S. GAAP and should not be considered in isolation or as a substitute for total long-term debt calculated in accordance with U.S. GAAP.  Our calculation of net debt may not be comparable to the calculation of net debt by other companies. Management believes that net debt is an appropriate supplemental measure that helps investors assess our liquidity and assists management in targeting leverage improvements. Please see the table above for a reconciliation of net debt to total long-term debt.

(2)     Petrobras’ shareholders’ equity includes adjustments in the amount of U.S.$2,719 million (loss) on December 31, 2010 and U.S.$1,646 million (loss) on December 31, 2009, related to “Post-retirement benefit reserves adjustments, net of tax - pension and health care costs”.

(3)     Total capitalization is calculated as Petrobras’ shareholders’ equity plus short-term debt, total long-term debt and total capital lease obligations.

Total Short-Term Debt

Our outstanding short-term debt serves mainly to support our working capital and our imports of crude oil and oil products, and is provided almost entirely by international banks. On December 31, 2010, our total short-term debt amounted to U.S.$8,960 million compared to U.S.$8,431 million on December 31, 2009.

Total Long-Term Debt

Our outstanding long-term debt consists primarily of securities issued in the international capital markets, debentures issued in the domestic capital markets, amounts outstanding under facilities guaranteed by export credit agencies and multilateral agencies, loans from the BNDES and other financial institutions and project financings. Our total long-term debt amounted to U.S.$60,471 million on December 31, 2010 compared to U.S.$49,041 million on December 31, 2009. See Note 12 of our consolidated financial statements as of December 31, 2010.

The following table summarizes our international debt issues at December 31, 2010:

As of December 31, 2010, there were no off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

The following table summarizes our outstanding contractual obligations and commitments at December 31, 2010: