Translation of auditor s report originally issued in Spanish See Note 31 to the financial statements

Transcription

1 Red de Energía del Perú S.A. Financial statements as of December 31, 2011, 2010 and as of January 1, 2010 with the report of Independent Registered Public Accounting Firm

2 Red de Energía del Perú S.A. Financial statements as of December 31, 2011, 2010 and as of January 1, 2010 with the report of Independent Registered Public Accounting Firm Content Report of the Independent Registered Public Accounting Firm Financial statements Statement of financial position Statement of comprehensive income Statement of changes in equity Statement of Cash flow Notes to the financial statements

3 Report of the Independent Registered Public Accounting Firm To the Shareholders of Red de Energía del Perú S.A. We have audited the accompanying financial statements of Red de Energía del Perú S.A. (a subsidiary of Interconexión Eléctrica S.A. E.S.P. from Colombia), which comprise the statement of financial position as of December 31, 2011 and 2010 an as of January 1, 2010, and the related statement of comprehensive income, statement of changes in equity and statement of cash flows for the years ended December 31, 2011 and 2010, and a summary of significant accounting policies and other explanatory notes. Management responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and for the internal control that Management determines is appropriate to the preparation of financial statements that are free from material misstatement, whether due fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in force in Peru. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Management, as well as evaluating the overall presentation of the financial statements. Inscrita en la partida del Registro de Personas Jurídicas de Lima y Callao Miembro de Ernst & Young Global

4 Report of the Independent Registered Public Accounting Firm (continued) We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material aspects, the financial position of Red de Energía del Perú S.A. as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years ended at those dates, in accordance with International Financial Reporting Standards. Lima, Peru, February 2, 2012 Signed by: Moisés Marquina C.P.C.C. Register No.15627

5 Red de Energía del Perú S.A. Statement of financial position As of December 31, 2011 and 2010, and as of January 1, 2010 Assets Current assets Note Cash and cash equivalents 7 11,841,678 3,564,147 16,830,746 Trade accounts receivable 8 9,184,914 9,044,960 9,282,551 Accounts receivable from related parties 26(b) 44,037,412 5,725,920 11,430,662 Other accounts receivable 1,345,190 2,107, ,253 Supplies and spare parts 9 5,591,058 4,152,010 4,640,202 Prepaid expenses 1,408,031 1,097,126 1,203,780 Total current assets 73,408,283 25,692,158 44,039,194 Long-term accounts receivable from related parties 26(b) 50,000,000 30,000,000 30,000,000 Facilities, furniture and equipment, net 10 13,263,256 14,421,336 13,802,408 Intangible assets, net ,765, ,597, ,216,487 Total asset 527,436, ,711, ,058,089 Liabilities and equity Current liabilities Trade accounts payable 12 8,532,455 9,982,224 6,459,294 Accounts payable to related parties 26(b) 2,002,916 1,923,889 1,291,852 Other accounts payable 13(a) 4,407,364 4,667,409 5,580,164 Provisions 13(b) 7,125,140 7,111,876 7,171,234 Financial obligations 14(a) 68,346,784 21,713,358 19,592,422 Total current liabilities 90,414,659 45,398,756 40,094,966 Long-term financial obligations 14(a) 152,007, ,539, ,082,132 Long-term provisions 13(b) 26,118,470 19,361,180 15,947,725 Deferred income tax liability, net 15 34,298,394 32,667,829 30,277,601 Total liabilities 302,838, ,966, ,402,424 Equity 16 Capital stock 23,682,675 23,682,675 23,682,675 Additional capital 97,571,273 97,571,273 97,571,273 Legal reserve 4,736,535 4,736,535 4,736,535 Retained earnings 98,607,556 81,753,972 61,665,182 Total equity 224,598, ,744, ,655,665 Total liabilities and equity 527,436, ,711, ,058,089 The accompanying notes are an integral part of the statement of financial position.

6 Red de Energía del Perú S.A. Statement of comprehensive income For the years ended as of December 31, 2011 and 2010 Operating income Nota Electric power transmission services 2 85,627,220 81,658,030 Construction services 26(j) 44,157,314 40,148,818 Complementary services 18 13,642,497 11,787, ,427, ,594,405 Cost of electric power transmission services 19 (47,141,660) (41,355,452) Cost of construction services 26(j) (44,157,314) (40,148,818) Gross profit 52,128,057 52,090,135 Operating expenses Administrative expenses 20 (9,902,658) (10,848,344) Provision for maintenance and replacement 13(b) (10,405,038) (8,524,184) Other operating income, net 22 1,241,990 1,405,520 (19,065,706) (17,967,008) Operating margin 33,062,351 34,123,127 Other income (expenses) Financial income 23 3,972,724 2,908,175 Financial expenses 24 (13,238,310) (9,269,291) (9,265,586) (6,361,116) Profit before income tax 23,796,765 27,762,011 Income tax 15(c) (6,943,181) (7,673,221) Net profit 16,853,584 20,088,790 Basic and diluted earnings per common share (in US dollars) Weighted average number of shares in circulation (units) 27 72,160,000 72,160,000 The accompanying notes are an integral part of this statement.

7 Red de Energía del Perú S.A. Statement of changes in equity For the years ended December 31, 2011 and 2010 Capital Additional Legal Retained stock capital reserve earnings Total Balances as of January 1, ,682,675 97,571,273 4,736,535 61,665, ,655,665 Net profit ,088,790 20,088,790 Balances as of December 31, ,682,675 97,571,273 4,736,535 81,753, ,744,455 Net profit ,853,584 16,853,584 Balances as of December 31, ,682,675 97,571,273 4,736,535 98,607, ,598,039 The accompanying notes are an integral part of this statement.

8 Red de Energía del Perú S.A. Statement of cash flow For the years as of December 31, 2011 and Operating activities Customers collections 99,129,763 93,683,178 Other operating collections 1,942,181 9,795,272 Payments to suppliers and employees (43,677,737) (45,999,080) Income tax paid (6,211,014) (6,794,345) Interest payments (9,613,829) (7,017,300) Net cash and cash equivalents provided by operational activities 41,569,364 43,667,725 Actividades de inversión Collections related to loans granted to related parties 32,800,000 10,900,000 Purchase of intangible assets (45,305,051) (41,807,817) Loans to related parties (88,500,000) (5,200,000) Purchase of fixed assets (502,566) (1,630,450) Sale of fixed asset - 205,981 Net cash and cash equivalents used in investment activities (101,507,617) (37,532,286) Financing activities Issue of corporative bonds 58,000,000 - Proceeds from borrowings 32,000,000 - Amortization of bonds (18,414,086) (16,022,038) Amortization of borrowings (3,400,000) (3,400,000) Net cash and cash equivalents provided by (used in ) financing activities 68,185,914 (19,422,038) Net increase (decrease) in cash and cash equivalents for the period 8,247,661 (13,286,599) Net exchange difference 29,870 20,000 Cash and cash equivalents at beginning of year 3,564,147 16,830,746 Cash and cash equivalents as of year end 11,841,678 3,564,147

9 Statement of cash flow (continuation) Reconciliation of net income to cash and cash equivalents provided by (used in) operating activities Net profit 16,853,584 20,088,790 Add (less) non-cash adjustments: Depreciation and amortization 19,798,911 15,432,351 Provision for maintenance and replacement 10,405,038 8,524,184 Unwinding of discount of the provision for maintenance and replacement 1,631,740 1,410,236 Deferred income tax 1,630,565 2,390,228 Exchange difference from corporative bonds 872, ,814 Financial obligations at amortized cost 1,043,264 (160,765) Write-down of supplies and spare parts - 107,213 Net changes in assets and liabilities accounts : Net decrease (net increase) of operational assets Trade accounts receivable (139,954) 237,591 Accounts receivable from related parties (2,611,492) 4,742 Other receivable accounts 762,805 (1,456,742) Supplies and spares parts (1,439,048) 516,773 Prepaid expenses (310,905) 106,655 Net increase (decrease) in operating liabilities Trade accounts payable (1,449,769) 3,522,930 Accounts payable to related parties 79, ,037 Other payable accounts (5,556,717) (8,476,312) Net cash and cash equivalents provided by operational activities 41,569,364 43,667,725 Non-generating cash flow transactions Income from construction services, note 26 (j) 44,157,314 40,148,818 The accompanying notes are an integral part of this statement.

10 Red de Energía del Perú S.A. Notes to the financial statements As of December 31, 2011 and Identification and business activity (a) Identification - Red de Energía del Perú S.A. (hereafter the Company ) was incorporated in July 3, The Company is a subsidiary of Interconexión Eléctrica S.A. E.S.P. (company with legal address in Colombia). The Company's legal address is Av. Canaval y Moreyra 522, floor 11, San Isidro, Lima, Peru. (b) Business activity - The Company s principal business activity is the electric power transmission produced by generating companies. The Company also provides operational and maintenance services to private entities that run transmission lines and sub-stations. The Company s electric power transmission operations are develop in accordance with the Electrical concession Law and its rules and are regulated and supervised by the Supervising Organism of Investment in Energy and Mining (OSINERGMIN for its Spanish acronym). (c) Approval of financial statements - The financial statements as of December 31, 2011 (date at which the IFRS were adopted) and 2010, and as of January 1, 2010 (transitional date for adopting the IFRS), were approved by the Company s Management on January 30, 2012, and will be presented for the approval of the Board of Directors and to the Shareholders within the terms established by law. In Management s opinion, the accompanying financial statements will be approved without changes by the Board of Directors, and Shareholders Meetings that will be held in the first quarter of Concession contract of electrical transmission systems On June 5, 2002, the Peruvian State awarded to a Interconexión Eléctrica S.A. E.S.P. (hereafter ISA ) the electrical transmission systems concessions operated by Empresa de Transmisión Eléctrica Centro Norte S.A. ETECEN and Empresa de Transmisión Eléctrica del Sur S.A. ETESUR. As a result of the award, the Company was incorporated and made a payment of 286,657,295, see note 11(a), starting its operations on September 5, In this date was signed the contract by which ISA transfers to the Company its concession rights. The concession contract establishes the rights and obligations of the parties and the rules and procedures governing each other for the supply of goods and services and operates the transmission line, service delivery and transfer of all assets to the State at the end of the concession period. The concession period is thirty years from September 5, According to the concession contract, ISA is the pre-qualified operator of the concession, so the Company, in accordance with its statutes, it pays a royalty equivalent to 1 percent of its income.

11 In reward for its electric power transmission service, the Company receives an annual remuneration, which it was initially set at 58,638,000 annually. During the concession s lifetime the remuneration is adjusted annually in accordance with the US Finished Goods Less Food and Energy index. The Peruvian State, via the Ministry of Energy and Mines, guarantees that the Energy and Mining Superintendence Organism (OSINERGMIN) will put in place the tariff mechanisms necessary to insure that the remuneration received by the Company in return for their transmission services will be entirely recovered from their customers. The Company recognized an annual income deriving from their electrical transmission service for 2011 and 2010 amounting to 85,627,220 and 81,658,030 respectively. Amendments to the concession contract Between the years 2006 and 2010, they were approved additional clauses to the concession contract in order to execute the following extensions, which at the time have already been capitalized: - Extension N 1: The service became operational in The final investment audited by an independent party as of April 18, 2008 amounted to $ 33,968, Extension N 2: The service became operational in March The final investment audited by an independent party as of November 24, 2008 amounted to 34,810, Extension N 3: The service became operational in February The final investment audited by an independent party as of May 31, 2009 amounting to 16,581, Extension N 4: The service became operational in January The final investment audited by an independent party as of May 31, 2009 amounting to 4,828, Extension N 5: The service became operational in January 2011 and investments have been made by 41,429, Extension N 6: The service became operational in August 2011 and investments have been made by 21,482, Extension N 8: The service became operational in September 2011 and investments have been made by 2,659,845. Also, in recent years were approved additional clauses to the concession contract in order to execute the following extensions, which they still in progress at the date: - Extension N 7: The extension should become operational within a period not greater than 21 months and 14 days, which means finalize in February The initial budget for this project amounting to 22,739,737. As of December 31, 2011, the Company has made investments by 15,429,711 (1,030,920 as of December 31, 2010). See note 11(i). 2

12 - Extension N 9: The extension should become operational within a period not greater than 21 months, which means finalize in September The initial budget for this project amounting to 29,606,503. As of December 31, 2011, the Company has made investments by 43,712. See note 11(i). - Extension N 10: The extension should become operational within a period not greater than 21 months, which means finalize in March The initial budget for this project amounting to 4,731,811. As of December 31, 2011, the Company has made investments by 11,662,201 (2,859 as of December 31, 2010). See note 11(i). - Extension N 11: The extension should become operational within a period not greater than 19 months. That period started on June 15, 2011, date in which the additional clause N 11 was signed, and should be finalized in January The initial budget for this project amounting to 5,811,530. As of December 31, 2011, the Company has made investments by 63,427. See note 11(i). - Extension N 12: The extension should become operational within a period not greater than 21 months. That period will start in the date in which the additional clause N 12 be signed. The initial budget for this project amounting to 7,078,606. As of December 31, 2011, the Company has made investments by 16,223. See note 11(i). 3. Summary of significant accounting policies 3.1 Basis of preparation The financial statements of the company have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), in force at December 31, 2011, the year of the adoption of IRFS by the company (see note 5). Previously, the Company s financial statements were prepared in accordance with generally accepted accounting principles in Peru. The information contained in these financial statements is the responsibility of the Company s Management, which expressly state that have fully implemented the principles and criteria contained in the International Financial Reporting Standards (IFRS) issued by the IASB. The financial statements have been prepared on a historical cost basis, from the accounting records kept by the Company. The financial statements are presented in United States dollars, the functional and presentation currency of the Company. 3.2 Significant accounting judgments, estimates and assumptions The preparation of the Company s financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes 3

13 that require a material adjustment to the carrying amount of the asset or liability affected in future periods. (a) Significant judgments - The most significant judgements in relation with the financial statements are described below: (i) Identification of the concession as an intangible asset (see note 11) - As a result of an analysis of the IFRIC 12 Service Concession Arrangements, the Company has concluded that the model corresponding to intangible assets is the correct model for registering transmission line concessions granted by the Peruvian State. According to Company Management s judgment exercised during the preparation of the financial statements, whilst the compensatory fee is determined on an annual basis by the Peruvian State over the lifetime of the concession, the terms of the concession Contracts establish no obligation on the State s part to assume responsibility for the payment of subsequent obligations assigned to each of the service s end-users as a result of the annual fee. This means, there is no mechanism established in the Concession Contracts that unconditionally guarantees payment collections for services rendered by the Company. Furthermore, Company Management considers that the right to charge each transmission service end-user is generated on an annual basis whilst the Company remains capable of maintaining the transmission lines to a certain standard of service over the lifetime of each concession. If the service were not maintained to the standard specified no counterpart exists to guarantee payment for the service. Moreover, and according to the terms established in the concession Contracts, insofar as the Peruvian State cannot guarantee the permanent presence of electricity generating firms in the concession zones, it was established that in the absence of end-users the corresponding concession Contracts be placed in abeyance until such time as new generators come on line. As a result of the above considerations, Company Management concludes that although the Peruvian State provides for the assignation of the service to each enduser it does not guarantee the payment of the corresponding service fee. Therefore, and in accordance with the IFRIC 12 Service Concession Arrangements, the Company considers its concessions as intangibles. 4

14 (b) Estimates and assumptions - The most significant estimates and assumptions in relation with the preparation of the financial statements are described below: (i) Impairment of non-financial assets (see notes 10 (d) and 11(f)) - The Company assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset s recoverable amount. At the reporting date, there are available projections of those variables which show favorable trends in a view of the Company s objectives. These projections support the recoverability of its non-financial assets. (ii) Provision for significant maintenance and replacement costs The provision for maintenance and replacements represents the present value of the costs of significant maintenance and replacement outlays expected during the remaining lifetime of the concession. This provision corresponds mainly to those expenses necessary in order to maintain the transmission line s infrastructure in the operative conditions demanded by the Peruvian State and set out in the corresponding concession contract. The provision is calculated by the Transmission Management staff and is based on an assessment of factors relating to the condition and age of the transmission lines and sub-stations. The evaluation includes both a qualitative analysis that incorporates climate factors, the number of technical faults and technical inspections and a quantitative analysis (samples, physical-chemical analysis, and laboratory). Budget estimates are reviewed annually and take into consideration any material changes to previous projections. However, it should be pointed out that significant upkeep and replacement outlays are dependent upon market prices, maintenance activity and the price of required equipment as affected by future economic conditions. Based on the capital expenses budget previously approved by the Board, the financial planning staff indexes cash outflows, inflation and updates budget flows by applying an annual risk-free rate that takes into consideration market conditions and the specific risk of the related liability. The principal criteria and assumptions used for calculating the provision for significant maintenance and replacement are set out in note 13 (b). 5

15 (iii) Taxes (see note 17) - Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. Given the nature of the long-term concession contract and the complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Group establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective counties in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective Company's domicile. As the Company assesses the probability for litigation and subsequent cash outflow with respect to taxes as remote, no contingent liability has been recognized. (iv) Recoverability of the deferred income taxes (see note 15) - Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. Given the nature of the long-term concession contract and the complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Group establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective counties in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective Company's domicile. As the Company assesses the probability for litigation and subsequent cash outflow with respect to taxes as remote, no contingent liability has been recognized. (i) Recoverability of the deferred income taxes (see note 15) - Significant management judgment is required to determine the amount of deferred tax assets that can be recognized in the statement of financial position. The deferred income taxes require the Management assesses if is probable that taxable profit will be available in future periods in order to use the recorded deferred tax 6

16 asset. The estimate future taxable profit is base on the projections of the operative cash flows and the applying of the corresponding tax laws in each jurisdiction. If the future cash flows and the taxable profit are significantly different from the estimates, such situation could have an impact in the Company s capacity to recover the net deferred tax asset recorded at the reporting date. In addition, future changes in tax laws could limit the Company s capacity to obtaining tax deductions in future periods. Any difference between the estimates and subsequent real outflows is recorded in the period in which occur. In Management opinion, the estimates included in the financial statements were effected take into consideration the best knowledge of the relevant facts and circumstances at the reporting date. However, the final results could be different from the estimates included in the financial statements. 3.3 Summary of significant accounting policies - (a) Financial instruments: initial recognition and subsequent measurement - (i) Financial assets - Initial recognition and measurement - Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-forsale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Corporation determines the classification of its financial assets at initial recognition. All financial assets are recognized initially at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognized on the trade date, i.e., the date that the Corporation commits to purchase or sell the asset. The Company s financial assets include cash and cash equivalent, trade and other receivables and account receivables from related parties. 7

17 Subsequent measurement - The subsequent measurement of financial assets depends on their classification as described below: Financial assets at fair value through profit - Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments as defined by IAS 39. Financial assets at fair value through profit and loss are carried in the statement of financial position at fair value with net changes in fair value recognized in finance costs in the income statement. The Company did not have financial assets at fair value through profit as of December 31, 2011 and Loans and receivables - The Company s financial assets include cash and cash equivalents, trade and other receivables, and account receivables from related parties, which are stated at the value of the transaction, less impairment if applies. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortized cost using the effective interest rate method, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate amortization is included in finance income in the income statement. The losses arising from impairment are recognized in the income statement in finance costs for loans and in cost of sales or other operating expenses for receivables. Held-to-maturity investments - Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held-to maturity when the Company has the positive intention and ability to hold them to maturity. After initial measurement, held-to-maturity investments are measured at amortized cost using the effective interest rate, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The effective interest rate amortization is 8

18 included in finance income in the income statement. The losses arising from impairment are recognized in the income statement in finance costs. The Company did not have any held-to-maturity investments during the years ended 31 December 2011 and Available-for-sale financial investments - Available-for-sale financial investments include equity investments and debt securities. Equity investments classified as available-for-sale are those that are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those that are intended to be held for an indefinite period of time and that may be sold in response to needs for liquidity or in response to changes in the market conditions. After initial measurement, available-for-sale financial investments are subsequently measured at fair value with unrealized gains or losses recognized as other comprehensive income in the available-for-sale reserve until the investment is derecognized, at which time the cumulative gain or loss is recognized in other operating income, or the investment is determined to be impaired, when the cumulative loss is reclassified from the available-forsale reserve to the income statement in finance costs. When, in rare circumstances, the company is unable to determine a fair value due to inactive markets, or relevant information for its determination, these financial assets are shown at cost. The Company did not have any available-for-sale financial investments during the years ended 31 December 2011 and Derecognition - A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when: - The rights to receive cash flows from the asset have expired; - The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. 9

19 When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the asset is recognized to the extent of the Group s continuing involvement in the asset. In that case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay. (ii) Financial liabilities - Initial recognition and measurement - Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognized initially at fair value plus, in the case of loans and borrowings, directly attributable transaction costs. The Company s financial liabilities include trade and other payables, loans and borrowings, financial guarantee contracts and accounts payable to related parties. Subsequent measurement The subsequent measurement of financial liabilities depends on their classification as follows: Financial liabilities at fair value through profit or loss - Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognized in the income statement. 10

20 The Company has not designated any financial liability upon initial recognition as at fair value through profit or loss as of December 31, 2011 and The Company did not have any financial liabilities at fair value through profit or loss during the years ended 31 December 2011 and Loans and borrowings - After their initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the effective interest rate method. Gains and loss are recognized in the income statement when the liabilities are derecognized as well as through the effective interest rate method (EIR) amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in finance costs in the income statement. Derecognition - A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. When an existing financial liability is replaced by another one from the same lender on substantially different terms, or the terms are substantially modified, such replacement or amendment is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amount is recognized in the income statement. (b) Offsetting of financial instruments - Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if There is a currently enforceable legal right to offset the recognized amounts, and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously. (c) Fair value of financial instruments - The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. In the case of financial instruments are not traded in an active market, fair value is determined using appropriate valuation techniques. Such techniques may include using recent arm s length market transactions, reference to the current fair value of another instrument that is substantially the same, a discounted cash flow analysis or other valuation models. 11

21 No changes in valuation techniques as of December 31, 2011 and 2010, and as of January 1, An analysis of fair values of financial instruments and further details as to how they are measured are provided in note 27. (d) Foreign currency translation - The Company s financial statements are presented in US dollars, which is also the Company s functional currency. Transactions and balances The transactions carried out in a currency other than the functional currency are considered as transactions in foreign currency. Transactions in foreign currencies are initially recorded by the Company at the functional currency rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate exchange ruling at the reporting date. All differences are taken to the income statement should the specific criteria be met. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as of the dates of the initial transactions. (e) Cash and cash equivalents - Cash and cash equivalents in the statement of financial position comprise cash at cash balances held in banks. For the purpose of the financial statement of cash flows, cash and cash equivalents consist of cash and short-term deposits with a maturity of three months or less. These accounts do not have any significant valuation risk. (f) Supplies and spare parts Supplies and spare parts are valued at the lower of cost and net realizable value. Cost is determined based on a weighted average. The provision for supplies impairment loss is calculated based on a specific analysis performed annually by Management and is charged as profit or loss in the year in which the requirement of that provision is determined. (g) Facilities, furniture and equipment - Facilities, machinery and equipment are stated at historical cost, net of accumulated depreciation and/or accumulated impairment losses, if any. 12

22 The initial cost of an asset comprises its purchase price or construction cost, including customs duties and non-reimbursable taxes, as well as any expense necessary to put such asset into operation. Such cost includes the cost of replacing part of the plant and equipment when that cost is incurred, if the recognition criteria are met. In addition, when each major inspection is performed, its cost is recognized in the carrying amount of the asset as a replacement if the recognition criteria are satisfied. Other repair and maintenance costs are recognized as expenses as incurred. Depreciation - Depreciation is calculated following the straight-line method using the following estimated useful lives: Years Upgrades in leased facilities 10 Vehicles 5 Furniture and fixtures 10 Other equipment 4 to 10 The asset s residual value, useful lives and methods of depreciation/amortization are reviewed at each reporting period, and adjusted prospectively if appropriate. An item of property, plant and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement when the asset is derecognized. (h) Borrowing costs - The costs of financial obligations are accounted for as expenses when incurred, except for those directly related to the acquisition or construction of a qualified good, which are activated as part of the caption of plant and equipment and/or intangibles, as appropriate. The capitalization of costs of financial obligations start when the activities to prepare the good are in course and are incurred in the expenses and costs of the loan. The interest capitalization is performed until the assets are ready for their expected use. If the resulting asset value exceeds its recoverable value, an impairment loss is recorded. The costs of the financial obligations include charges for interests and other costs incurred related to the loans, to the extent that it corresponds to an adjustment of interest costs. 13

23 The capitalization of borrowing costs starts when the activities needed to prepare the qualified asset is in process and the borrowing s expenses and costs are being incurred. The capitalization of borrowings costs ends when the qualified asset is finalized and ready for its purpose. If the total cost asset is greater than its recoverable value, the Company should record an impairment loss. The Company capitalizes borrowing costs for all eligible assets where construction was commenced since the adoption of IFRS (on January 1, 2009). (i) Intangible assets Concession agreement with the Peruvian State - The Company has adopted IFRIC 12, Service Concession Arrangements, to record its concession contracts with the Peruvian Government (see note 2). As explained in note 2, the following two criteria are met for the company s concession contract and, as result, are within the scope of IFRIC 12: - The grantor controls or regulates what services the operator must provide using the assets, to whom, and at what price; and - The grantor controls, through ownership, beneficial entitlement or otherwise, any significant residual interest in the assets at the end of the term of the arrangement. The Company uses the Intangible Assets model to record its concession agreements. This model applies when the users pay the operator or when the grantor does not guarantee unconditionally the collection of the accounts receivable. The intangible asset represents the right granted by the Peruvian State to perform charges to electric power transmission service users. Extensions to the infrastructure are recorded as additions to intangible assets because they are expected to generate future economic benefits to the Company. The significant replacements and maintenance that the Company must perform to the infrastructure of the electric power transmission system, in order to maintain the quality and reliability standards, required in the Concession Agreements and do not create future economic flows for the company, are recorded as expenses as they are incurred. The intangible asset arising from the Concession contract is amortized using the straight line method during the effective period of the contract. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible assets. 14

24 Software - The software licenses acquired are capitalized based on the costs incurred to acquire or set-up the specific computer software. These costs are amortized in 5 years. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is derecognised. (j) Impairment of long-term assets - At the end of each year end the Company evaluates if there are indicators that an asset could be impaired. The Company prepares an estimate of the recoverable amount of the asset when events or economic changes occur that indicate that the value of assets may be impaired, or when it is required to perform the annual asset impairment test. The recoverable amount of an asset is the greater of the fair value of the unit cash of production less the costs to sell and its value in use, and it is determined for an individual asset, unless the asset does not generate cash flows in an independent manner. When the book value of an asset exceeds its recoverable value, an asset is considered impaired and it is reduced to its recoverable value. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. The impairment losses are recognized in the statement of income. That assessment requires certain estimates and assumptions such as volume of projects, investments, working capital budgets, discount rates, list prices and operating costs. As of December 31, 2011 and 2010, the Company's management believes that there is no evidence of operational and / or economic to indicate that the carrying amount of machinery and equipment and intangible, cannot be recovered. (k) Revenue and expenses recognition - Income is recognized when all inherent risks and benefits of the service are transferred, to the extent that it is probable that the economic benefits related to the transaction will flow to the Company and the revenue can be reliably measured, without considering the time in which the payment is carried out. The revenues are measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The following specific criteria must be met to recognize an income: 15

25 Construction services - The revenues and cost for the projects construction services are recognized in the income statement in accordance with the percentage of advance method at the reporting date. The Company has not recognized any profit margin from these construction services due to these are rendered, administered and supervised by a related party. The related party is the only entity which recognizes a profit margin for those services in its financial statements. Energy transmission services Revenues from the power transmission services are recognized in the related accounting period as established under the concession agreement signed by the Peruvian State. The transmission service rendered and not billed is accounted for on the basis of estimates of power transmission, which does not differ significantly from the subsequent actual billing. Operation and maintenance services - Revenues from operation and maintenance services to third party installations are recognized as the services are provided. Interests Interest income is recognized on a time-proportion basis using the effective interest method. Costs and expenses - The costs and expenses are recognized as they are accrued, independent to the moment of payment, and are recorded in the periods to which they are related. (l) Taxes - Current income tax - Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The income tax s calculated based on the Company s financial information. The current income tax is calculated and recorded in accordance with the legal stability agreement signed with the Peruvian state in Deferred portion of income tax - The income tax is recognized following the liability method based, for the effect of timing differences between the accounting basis and the tax basis on each statement of financial position date. 16

26 Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized. The carrying amount of the deferred asset is reviewed at each statement of financial position date and is reduced to the extent that it is no longer probable that sufficient future taxable income will be available to allow the benefit of part or the entire deferred asset to be utilized. Unrecognized deferred assets are re-assessed on each statement of financial position date. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax items are recognized in correlation to the underlying transaction either in other comprehensive income or directly in equity. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the Value added tax - Revenues, expenses and assets are recognized net of the amount of sales tax, except: - Where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable.; - Receivables and payables are stated with the amount of sales tax included. The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. (m) Provisions - A provision is recognized only when the Company has a present obligation (legal or implied) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and the amount of the obligation can be reliably estimated. The expense relating to any provision is presented in the statement of comprehensive income, net of any reimbursement. If the time value of money is material, the provisions are discounted using a pre-tax rate that reflects, when appropriate, the risks specific to the liability. When the discount is made, the increase in the provision due to the passage of time is recognized as a financial cost. 17

27 Provision for maintenances and significant replacements - As part of its obligations under the Concession Agreement subscribed with the Peruvian State (note 2), the Company takes responsibility for the significant maintenances and replacements of the infrastructure it maintains. The future maintenance and replacement costs, necessary to maintain the infrastructure in the conditions required by the Peruvian State, are estimated and recorded as an expense and a provision at year end, in accordance to the estimated period of use of the assets that will be maintained or replaced. Technical standard of quality provision in electric services - Supreme Decree N EM approved the Technical Standard of Quality in Electrical Services, that establishes the minimum levels of quality in electrical services to regulated customers and, in a supplementary manner, for free customers, including the public lighting system, and the obligations of electrical sector companies and the customers that operate within the framework of the Law of Electrical Concessions. These obligations are recorded in the income statement at the time of the interruption s events are in progress, and those exceed the tolerance level. This economic consideration by the compensation for interruption of power supply is calculated based on the number of interruptions and the total duration of interruptions, and is paid to the generators that have been affected. Compensation arising from deficiencies in the transmission lines may not exceed 10% of the half-year sales of the Company. (n) Employees benefits - The Company has short-term obligations for employee benefits including salaries, severance contributions, legal bonuses, performance bonuses and profit sharing. These obligations are monthly recorded, on accrual basis. (o) Contingencies - A contingent liability is disclosed when the existence of an obligation will only be confirmed by future events or when the amount of the obligation cannot be reliably measured. Contingent assets are not recognized, but are disclosed when an inflow of economic benefits is probable. Contingent assets are not recorded in the financial statements, but they are disclosed in notes to the financial statements when the degree of contingency is probable. (p) Subsequent events - Events occurred subsequent to the year-end which provide additional information about financial status of the Corporation at the statement of financial position date (adjustment events) are included as part of the financial statements. Subsequent events that do not represent adjustment events are disclosed in notes to the financial statements. 18

28 (q) Earning per share - Basic and diluted earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. As of December 31, 2011 and 2010, the Company does not have financial instruments with diluted effect. (r) Segments - A business segment is a distinguishable component of an enterprise that provides a single product or service or group of products or related services, and subject to risks and returns that are different from other business segments. A geographical segment is a distinguishable component of an enterprise that is dedicated to providing products or services within a particular economic environment and is subject to risks and returns that are different from those of components operating in other economic environments. Companies should consider its organizational structure and management and its internal financial reporting systems to identify segments. The only segment to the Company is the transmission of electrical power. (s) Standards issued but not yet effective - Certain new standards and interpretations to existing standards have been published and are mandatory for the Group s accounting periods beginning on or after January 1, 2012 or later periods but which the Group has not adopted early. Those that are applicable to the Group are as follows: - IAS 1 Financial Statement Presentation Presentation of items of Other Comprehensive Income The amendments to IAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or recycled ) to profit or loss at a future point in time (for example, upon de-recognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has there no impact on the Group s consolidated financial position or performance. The amendment becomes effective for annual periods beginning on or after 1 July IFRS 7 Financial Instruments: Disclosures Enhanced De-recognition. Disclosure Requirements The amendment requires additional disclosure about financial assets that have been transferred but not derecognized to enable the user of the Group s financial statements to understand the relationship with those assets that have not been derecognized and their associated liabilities. In addition, the amendment requires disclosures about continuing involvement in those derecognized assets. The amendment becomes effective for annual periods beginning on or after 1 July The amendment affects disclosure only and has no impact on the Group s financial position or performance. 19

29 - IFRS 9 Financial Instruments: Classification and Measurement IFRS 9 as issued reflects the first phase of the IASBs work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The amendments no longer require restatement of comparative figures. Instead, IFRS 7 has been amended to require additional disclosures on transition from IAS 39 to IFRS 9. The new disclosures are either required or permitted on the basis of the entity s date of transition. - IAS 12 Income taxes The amendment clarified the determination of deferred tax on investment property measured at fair value. The amendment introduces a rebuttable presumption that deferred tax on investment property measured using the fair value model in IAS 40 should be determined on the basis that its carrying amount will be recovered through sale. Furthermore, it introduces the requirement that deferred tax on non-depreciable assets that are measured using the revaluation model in IAS 16 always be measured on a sale basis of the asset. The amendment becomes effective for annual periods beginning on or after 1 January IFRS 13 Fair Value Measurement IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The Group is currently assessing the impact that this standard will have in the financial position and performance. This standard becomes effective for annual periods beginning on or after January 1, The Group is still assessing the impact, if any, of adopting this guidance. As of this date, the Company s management is analyzing the impact that these standards will have on its operations. 4. Initial application - International Financial Reporting Standards ( IFRS ) As a step towards the adoption of the International Financial Reporting Standards (IFRS) in Peru, on October 14, 2010 the Stock Market Superintendence (Peruvian acronym: SmV) issued their Resolution N EF/ This regulation required all registered limited companies to adopt the IFRS for the 2011 financial year. In order to comply with Peruvian legislation, the Company applied the IFRS from January 1, The standards are applied retrospectively on the date of transition. All adjustments to assets and liabilities are registered according to accounting practices that are generally accepted in Peru under the entry Accrued results, less certain exemptions to the rule. 20

30 Until the financial year ending on December 31, 2010, the Company prepared its financial statements in accordance with accounting practices generally accepted in Peru. The financial statements that correspond to the year ending on December 31, 2011 are the first that the Company has prepared in accordance with the International Financial Reporting Standards (IFRS). The Company has taken the January 1, as the transitional date for the preparation of their initial financial statements prepared under IFRS rules. The Company has decided not to apply any exemption nor exception in its process of first time IFRS adoption. The following explanatory notes give a detailed description of the main differences between the Generally Accepted Accounting Standards in Peru (Peruvian GAAP s) and the international Financial Reporting Standards (IFRS) applied by the Company and the impact on the equity as of December 31, 2011 and 2010 and as of January 1, 2010, and the impact on the net profit as of December 31, 2010, see notes 4.1, 4.2, 4.3, 4.4 and

31 4.1 Reconciliation of the statement of financial position (a) The reconciliation between the statement of financial position under Peruvian GAAP s and IFRS as of January 1, 2010 (date of transition to IFRS) is detailed below: Assets Current assets Balances as of Adjustments Notes Balances as of under IFRS Cash and cash equivalents 16,830,746-16,830,746 Trade accounts receivable 9,282,551-9,282,551 Accounts receivable from related parties 11,430,662 11,430,662 Other accounts receivable 651, ,253 Supplies and spare parts 4,640,202-4,640,202 Prepaid expenses 1,203,780-1,203,780 Total current assets 44,039,194-44,039,194 Long-term accounts receivable from related parties 30,000,000-30,000,000 Facilities, furniture and equipment, net 13,802,408-13,802,408 Intangible assets, net 336,216, ,216,487 Total asset 424,058, ,058,089 Liabilities and equity Current liabilities Trade accounts payable 6,459,294-6,459,294 Accounts payable to related parties 1,291,852-1,291,852 Other accounts payable 5,580,164-5,580,164 Provisions 7,171,234-7,171,234 Financial obligations 19,592,422-19,592,422 Total current liabilities 40,094,966-40,094,966 Long-term financial obligations 150,082, ,082,132 Long-term provisions 15,947,725-15,947,725 Deferred income tax liability, net 34,370,684 (4,093,083) ,277,601 Total liabilities 240,495,507 (4,093,083) 236,402,424 Equity Capital stock 23,682,675-23,682,675 Additional capital 97,571,273-97,571,273 Legal reserve 4,736,535-4,736,535 Retained earnings 57,572,099 4,093, (a) 61,665,182 Total equity 183,562,582 4,093, ,655,665 Total liabilities and equity 424,058, ,058,089 22

32 (b) Likewise, reconciliation of the balances of the statement of financial position at December 31, 2010 is presented below: Assets Current assets Balances as of Adjustments Notes Balances as of Under IFRS Cash and cash equivalents 3,564,147-3,564,147 Trade accounts receivable 9,044,960-9,044,960 Accounts receivable from related parties 5,725,920 5,725,920 Other accounts receivable 2,107,995-2,107,995 Supplies and spare parts 4,152,010-4,152,010 Prepaid expenses 1,097,126-1,097,126 Total current assets 25,692,158-25,692,158 Long-term accounts receivable from related parties 30,000,000-30,000,000 Facilities, furniture and equipment, net 14,421,336-14,421,336 Intangible assets, net 363,597, ,597,884 Total asset 433,711, ,711,378 Liabilities and equity Current liabilities Trade accounts payable 9,982,224-9,982,224 Accounts payable to related parties 1,923,889-1,923,889 Other accounts payable 4,667,409-4,667,409 Provisions 7,111,876-7,111,876 Financial obligations 21,713,358-21,713,358 Total current liabilities 45,398,756-45,398,756 Long-term financial obligations 128,539, ,539,158 Long-term provisions 19,361,180-19,361,180 Deferred income tax liability, net 37,084,035 (4,416,206) ,667,829 Total liabilities 230,383,129 (4,416,206) 225,966,923 Equity Capital stock 23,682,675-23,682,675 Additional capital 97,571,273-97,571,273 Legal reserve 4,736,535-4,736,535 Retained earnings 77,337,766 4,416, (b) 81,753,972 Total equity 203,328,249 4,416, ,744,455 Total liabilities and equity 433,711, ,711,378 23

33 4.2 Reconciliation of the statement of comprehensive income The reconciliation between the statement of comprehensive income under Peruvian GAAP s and IFRS for the year 2010 is detailed below: Balances as of Balances as of Adjustments Notes under IFRS Operating income Electric power transmission services 81,658,030-81,658,030 Construction services 40,148,818-40,148,818 Complementary services 11,787,557-11,787,557 Cost of electric power transmission 133,594, ,594,405 services (40,524,917) (830,535) 4.5 (41,355,452) Cost of construction services (40,148,818) - (40,148,818) Gross profit 52,920,670 (830,535) 52,090,135 Operating expenses Administrative expenses (10,649,056) (199,288) 4.5 (10,848,344) Provision for maintenance and replacement (8,524,184) - (8,524,184) Other operating income, net 1,405,520-1,405,520 (17,767,720) (199,288) (17,967,008) Operating margin 35,152,950 (1,029,823) 34,123,127 Other income (expenses) Financial income 2,908,175-2,908,175 Financial expenses (9,269,291) - (9,269,291) Profit before workers profit sharing and (6,361,116) - (6,361,116) income tax 28,791,834 (1,029,823) 27,762,011 Workers profit sharing (1,472,458) 1,472,458 - Income tax (7,553,709) (119,512) (7,673,221) Net profit 19,765, , ,088,790 Basic and diluted earnings per common share (in US dollars) Weighted average number of shares in circulation (units) 72,160,000 72,160,000 24

34 4.3. Reconciliation of statement of changes in equity The reconciliation between the statement of changes in equity under Peruvian GAAP s and IFRS for the year 2010 is detailed below: (a) Reconciliation of net equity from Peruvian GAAP s to IFRS as of January 1, 2010: Patrimonio neto Equity of Peruvian GAAP s as of January 1, ,562,582 Effect in retained earnings by adjustment in: Deferred liability from workers profit sharing 4.5 4,093,083 4,093,083 Net equity according to IFRS as of January 1, ,655,665 (b) Reconciliation of net equity from Peruvian GAAP s to IFRS as of December 31, 2010: Patrimonio neto Equity of Peruvian GAAP s as of December 31, ,328,249 Effect in retained earnings by adjustment in: Deferred liability from workers profit sharing 4.5 4,416,206 4,416,206 Net equity according to IFRS as of December 31, ,744, Reconciliation with the statement of cash flow The adoption of IFRS has no effect on cash flows generated by the Company under accounting principles generally accepted in Peru and IFRS for the year Notes to the reconciliation of the statements of financial position and results Beginning balances Opening balances are derived from financial statements in conformity with accounting principles generally accepted in Peru, which include the International Financial Reporting Standards (IFRS), formalized through resolutions issued at the date of issuance of financial statements by the Accounting Standards Board (CNC). The IFRS includes International Accounting Standards (IAS) and the pronouncements of the respective Interpretations Committees (SIC and IFRIC) 25

35 Adjustments The adoption of IFRS has required adjustments to the balances in the financial statements under generally accepted accounting principles. The most significant adjustment is: Workers profit sharing The International Financial Reporting Interpretations Committee (IFRIC), concluded in November 2010 that worker s profit sharing must be recorded in accordance with IAS 19 Employee benefits and not under IAS 12 Income taxes. Consequently, an entity is only required to recognize a liability when an employee has provided services, therefore, under this consideration, the Company should not calculate deferred worker s profit sharing as they relate to future services that must not be considered as obligations or rights under IAS 19 to the date of the statement of financial position. Peru used the criteria of IAS 12, and the practice was to calculate and record the deferred worker s profit sharing participation in the financial statements until 2010, adopting the interpretation in advance was allowed in the year As result of the adjustment to transition to IFRS was recorded a decrease of Deferred liability of income tax and workers profit sharing, net by 4,416,206 as of December 31, 2010 (4,093,083 as of January 1, 2010) with credit to the account Retained earnings. Following the application of IAS 19, is distributed in the following expense items by the current portion of workers profit sharing in the statement of comprehensive income of year 2010: - The item "Cost of services" increased by for personnel costs related to production, see note The item Administrative expenses increased by for personnel costs related to the administrative area, see note Uniformity The statements of financial position as of December 31, 2011, and 2010 and at 1 January 2010, together with the statements of comprehensive income, equity and cash flow for the financial years ended December 31, 2011 and 2010 included in this report for comparative purposes, have been prepared in accordance with the guidelines set out in the IFRS. Both accounting practices and criteria have been applied in a consistent manner. 6. Foreign currency transactions Operations in foreign currency were effected at free market exchange rates as published by the Superintendence of Banking, Insurance and AFP. As of December 31, 2011 the average weighted free market exchange rates for the United States dollar were (buy) and (sell). As of December 31, 2010 the respective rates were and

36 As of December 31, 2011 the Company held the following assets and liabilities in new soles: S/. S/. Assets Cash and cash equivalents 10,817,666 4,457,942 Trade accounts receivable 24,750,509 23,316,246 Other accounts receivable 1,289, ,903 Liabilities 36,858,104 27,937,091 Trade accounts payable 4,288,808 5,707,860 Other accounts payable 9,383,405 2,015,028 Financial obligations 29,238,343 38,305,779 42,910,556 46,028,667 Net passive position (6,052,452) (18,091,576) As of December 31, 2011 and 2010 the Company had no operations in force involving products derived to cover exchange risks. 7. Cash and cash equivalents (a) Details of this item are set out below: Cash 54,890 56,334 56,590 Saving bank accounts 14,851 19,585 25,969 Current bank accounts (b) 2,618,226 1,432,270 1,085,325 Short-term deposits (c) 9,119,428 2,055,958 15,649,533 Trust fund collection bank accounts, note 14(h) 34,283-13,329 11,841,678 3,564,147 16,830, _- (b) Current accounts held in banks and short-term deposits are held in both national and foreign currency. All are held in local banks, is freely available and generate interest at market rates. 27

37 (c) Short-term deposits fall due at under 90 days in the first instance and are renewable at the end of each term. At December 31, 2011 these deposits accrued interest at an effective rate that fluctuated between 4.07 and 4.24 percent for deposits in new soles and between 0.20 and 0.38 percent for deposits in foreign currency. At December 31, 2010 the rates for new soles were 2.30 and 2.55 percent; foreign currency rates were 1.15 and 1.30 percent. At January 1, 2010 the rates for new soles were 1.03 and1.10 percent; foreign currency rates were 0.20 and 0.45 percent. 8. Trade accounts receivable, net (a) Details of this item are set out below: Accounts receivable 1,807,408 1,490,176 1,488,683 Estimate of accrued transmission services (f) 7,527,415 7,704,693 7,939,567 9,334,823 9,194,869 9,428,250 Allowance for doubtful accounts (d) (149,909) (149,909) (145,699) 9,184,914 9,044,960 9,282,551 (b) Trade accounts receivable are designated principally in new soles, mature currently and do not generate interest. (c) According to an analysis carried out by Management, a receivable account is considered doubtful when it remains unpaid for more than 365 days and is consequently categorized as a bad debt. For this reason it is included in the allowance for doubtful debt item. As of December 31, 2011 and 2010 and at January 1, 2010 the Company s Management deems, except for the account receivables recorded as doubtful accounts, that it is unnecessary to register an estimate of doubtful debts, due to its principal clients have a recognised prestige in the international market and they do not show evidence of financial or corporate problems or impairment indicators at the close of the financial year. The Company s Management continually monitors market conditions for the purpose of updating the allowance for doubtful accounts using aging analyses and risk classification reports applicable to commercial operations. 28

38 (d) The movement of the allowance for doubtful accounts for the years 2011, 2010 and as of January 1, 2010 is as follow: Beginning balance 149, ,699 Exchange difference adjustment - 4,210 Balance at the end of the period 149, ,909 (e) An analysis of aging of the current portion of trade accounts receivable as of December 31, 2011 and 2010, and at January 1, 2010 is set out below Total 9,184,914 9,044,960 9,282,551 Non-impaired and yet to fall due 7,527,415 7,704,693 7,939,567 Matured and non-impaired Under 30 days 1,639,544 1,213,379 1,253,406 From 31 to 60 days 7,434 87,474 37,068 From 61 to 90 days - 18,181 - From 91 to 120 days 5,502 21,233 52,510 Over 120 days 5, (f) Corresponds to invoicing for transmission services rendered in December 2011 and collected in their entirety during February Supplies and spare parts, net (a) Details of this item are set out below: Supplies and spare parts 5,680,425 4,259,223 4,775,996 Less Impairment of supplies and spare parts (b) (89,367) (107,213) (135,794) 5,591,058 4,152,010 4,640,202 29

39 (b) The movement of impairment of supplies and spare parts for the years 2011 and 2010, is as follow: Beginning balance 107, ,794 Additions, note ,213 Disponsals (17,846) (135,794) Balance at the end of the period 89, ,213 The Company's Management believes it is not necessary to record any additional provision for impairment of inventories as of December 31, 2011 and

40 10. Facilities, furniture and equipment, net (a) The movement of the cost of this caption and its corresponding accumulated depreciation as of December 31, 2011 and 2010 is as follow: Cost 2011 Upgrades in Furnitures and Other Units in leased facilities Vehicles fixtures equipment transit Total Balances as of January 1 862,210 3,814, ,514 10,734,174 8,304,984 24,169,489 Additions - 6,500 6, , , ,566 Disposals - (169,609) (169,609) Transfers (c) ,359,305 (8,359,305) - Balance as of December ,210 3,651, ,006 19,472,441 56,291 24,502,446 Accumulated depreciation Balances as of January 1 472,665 3,012, ,042 6,021,391-9,744,061 Additions 86, ,852 45,516 1,655,417-2,005,006 Disposals - (169,609) (169,609) Others (344,360) - (344,360) Balance as of December ,886 3,061, ,558 7,332,448-11,235,098 Net book value before allowance for impairment 303, , ,448 12,139,993 56,291 13,267,348 Allowance for impairment (4,092) (4,092) Net book value 299, , ,448 12,139,993 56,291 13,263,256 Cost 2010 Upgrades in leased Furnitures and Other Units in facilitites Vehicles fixtures equipment transit Total Balances as of January 1 862,210 3,463, ,172 9,816,434 8,178,167 22,730,319 Additions - 542,551 43, , ,817 1,630,450 Disposals - (191,280) (191,280) Balance as of December ,210 3,814, ,514 10,734,174 8,304,984 24,169,489 Accumulated depreciation Balances as of January 1 386,444 2,986, ,903 5,357,155-8,923,819 Additions 86, ,335 43, ,236-1,005,931 Disposals - (185,689) (185,689) Balance as of December ,665 3,012, ,042 6,021,391-9,744,061 Net book value before allowance for impairment 389, , ,472 4,712,783 8,304,984 14,425,428 Allowance for impairment (4,092) (4,092) Net book value 385, , ,472 4,712,783 8,304,984 14,421,336 31

41 (b) Depreciation expense is shown in the statement of comprehensive income as follows: Cost of electric power transmission services, note 19 1,753, ,386 Administrative expenses, note , ,545 2,005,006 1,005,931 (c) Transformers in reserve, classified as units in transit at December 31, 2010 due to they were in testing process, are now available for use and have been reclassified during the year 2011 to other equipments caption. (d) As of December 31, 2011, the Group has assessed the use conditions of its long-term assets and did not find any indicator that these assets may be impaired. 32

42 11. Intangible assets, net (a) The movement and corresponding accumulated amortization of intangibles is presented below: 2011 Electric transmission system Additional extensions to the Projects in concessions (b) concession (c) Software process (i) Total Cost Balances as of January 1 286,657, ,055,432 2,328,209 47,615, ,656,095 Additions ,377 45,171,674 45,305,051 Transfers (g) - 65,571,559 - (65,571,559) - Balance as of December ,657, ,626,991 2,461,586 27,215, ,961,146 Accumulated amortization Balances as of January 1 79,625,900 16,472,876 1,959,435-98,058,211 Additions 9,555,243 8,134, ,995-17,793,905 Others - 343, ,782 Balance as of December 31 89,181,143 24,951,325 2,063, ,195,898 Net book value 197,476, ,675, ,156 27,215, ,765,248 33

43 2010 Electric transmission system Additional extensions to the Projects in concessions (b) concession (c) Software process (i) Total Cost Balances as of January 1 286,657, ,235,383 2,173,073 27,782, ,848,278 Additions - 427, ,136 41,225,582 41,807,817 Transfers (g) - 21,392,950 - (21,392,950) - Balance as of December ,657, ,055,432 2,328,209 47,615, ,656,095 Accumulated amortization Balances as of January 1 70,070,657 11,769,603 1,791,531-83,631,791 Additions 9,555,243 4,703, ,904-14,426,420 Transfers to supplies and spare parts Balance as of December 31 79,625,900 16,472,876 1,959,435-98,058,211 Net book value 207,031, ,582, ,774 47,615, ,597,884 (b) The item Electric transmission system concessions corresponds to the payment carried out to the Peruvian Government in respect of the award of the electrical transmission systems concessions operated by ETECEN and ETESUR (note 2). (c) The item Additional extensions to the concession corresponds to the incurred cost to fulfill with the investment commitments greed with Peruvian State (note 2). The investment by extension is detailed below: Extension N 5 41,429,565 - Extension N 1 33,968,262 33,968,262 Extension N 2 34,810,997 34,810,997 Extension N 6 21,482,149 - Extension N 3 16,581,231 16,581,231 Extension N 4 4,828,985 4,828,985 Extension N 8 2,659,845 - Other extensions 34,865,957 34,865,957 Total 190,626, ,055,432 34

44 (d) As of December 31, 2011, and in guarantee of the obligations set out in not (c), the Company mortgaged the concession together with the concession s assets. (e) The Company has insured its principal assets in accordance with Management policy. In the opinion of Management, the practices adopted with regard to insurance are consistent with international norms and the risks of eventual loss or losses attributable to accidents or damage outlined in the relevant policies are reasonable given the type of assets in the Company s inventory. (f) As of December 31, 2011 and 2010, the Company s Management evaluated the condition and use of its intangible assets. No indication of devaluation was found in said assets. (g) Transfers of current projects to the item Additional extensions to the concession correspond to the capitalization of the extensions N 5, N 6 and N 8 carried out during the year As of December 31, 2010, transfers of current projects to the item Additional extensions to the concession correspond to the capitalization of the extensions N 3 and N 4. (h) Annual amortization expenses are shown in the statement of comprehensive income as follow: Cost of electric power transmission services, note 19 17,718,129 14,360,064 Administrative expenses, note 20 75,776 66,356 17,793,905 14,426,420 (i) As of December 31, 2011 and 2010, Project in process caption corresponds to the following extensions, (see note 2): Extension N 7 15,429,711 1,030,920 Extension N 9 11,662, ,368 Extension N 11 63,427 - Extension N 10 43,712 - Extension N 12 16,223 - Extension N 5-38,870,030 Extension N 6-7,299,766 Extension N 8-8,075 Total 27,215,274 47,615,159 35

45 (j) Projects are primarily financed with generic loans, through standard financing agreements (see note 14(b), (c) and (d)). As of December 31, 2011, the rate employed for the determination of costs of loans susceptible to capitalization was 6.55 percent - the same as the weighted average rate for capitalization. Additions to current projects in 2011 include capitalized financial expenses for a total of 1,035,097 (6772,600 in 2010). See note Trade account payables Details of this item are set out below: Local suppliers 5,564,415 5,450,443 5,178,286 Foreigner suppliers 160,981 3,325, ,414 Provision payables 2,807,059 1,206, ,594 8,532,455 9,982,224 6,459,294 Payable trade accounts correspond primarily from the purchase of goods and services destined to contribute to the development of the Company s operations. These liabilities exist in new soles and foreign currencies, are not subject to interest and are normally settled within 15 days. No specific guarantees have been issued to underwrite these obligations. 13. Other accounts payable and provisions (a) Details of this item are set out below: Interest pending payment 1,783,762 1,139,734 1,301,216 Remuneration payable 1,683,221 1,571, ,364 Income tax pending payment 747,071 1,797,573 3,350,912 Other accounts pending payment 193, , ,672 4,407,364 4,667,409 5,580,164 36

46 (b) The following table details the entry for provisions: Provision for Workers profit sharing Electrical Services Technical Standard Maintenance and replacement provision Total At 1 January ,619 1,566,564 20,716,776 23,118,959 Disbursements (880,757) (1,023,605) (6,552,241) (8,456,603) Provision for the year 1,029, ,457 8,524,184 10,400,464 Update of current value see note ,410,236 1,410, ,685 1,389,416 24,098,955 26,473,056 At 31 December 2010 Current portion 984,685 1,389,416 4,737,775 7,111,876 Non- current portion ,361,180 19,361, ,685 1,389,416 24,098,955 26,473,056 At 1 January ,685 1,389,416 24,098,955 26,473,056 Disbursements (1,118,878) (222,042) (5,342,039) (6,682,959) Provision for the year 1,035, ,137 10,405,038 11,821,773 Update of current value see note ,631,740 1,631,740 At 31December ,405 1,548,511 30,793,694 33,243,610 Current portion 901,405 1,548,511 4,675,224 7,125,140 Non- current portion ,118,470 26,118, ,405 1,548,511 30,793,694 33,243,610 Workers profit sharing According to Peruvian laws, the Company has a workers profit sharing plan of 10 percent of the annual net income tax. The distribution of this profit among the employees is based on two guidelines (i) 50 percent of the profit is distributed based on the number of days worked by each employee in the prior year and (ii) 50 percent of the profit is distributed based on the proportion of their annual salaries. 37

47 Provision for Electrical Services Technical Standard (Peruvian acronym NTCSE) In accordance with Supreme Decree N EM Electrical Services Technical Standard, the Company registers the monetary refunds which it is obliged to pay its customers (i.e. the purchasers of its transmission service) in the event of technical malfunction. These monetary compensations for electrical outages are calculated on the basis of the number of occurrences and the total duration of the outages and are paid to the injured parties i.e. the electrical generating companies. Provision for maintenance and replacement The provision for maintenance and replacement represents the current value of significant maintenance and replacement costs that the Company expects to incur in the years between 2012 and 2041 on the Mantaro-Socabaya transmission line. The provision for maintenance and replacement corresponds principally to the outlays required to maintain the transmission line s infrastructure in accordance with the operational standards specified by the Peruvian State in the relevant concession contract. These costs have been estimated by the Transmission Management on the basis of the physical condition and age of the transmission lines. The budgets for maintenance and replacement used for calculating the corresponding provision are based upon maintenance estimates plus current available information relative to operational concessions. They cover a period of 30 years. Budgets are regularly reviewed with a view to incorporate any material change to previous projections. However, significant upkeep and replacement outlays are dependent upon market prices, maintenance activity and the price of plant required. These factors are subject to future economic conditions. Furthermore, disbursement schedules depend upon the useful life of units to be maintained or replaced. As of December 31, 2011 the future value of the provision for significant maintenance and replacement was 123,679,132 (116,408,291 as of December 31, 2010). The current value of said provision was calculated using a discount factor of 7.70 percent (8.55 percent for the value as of December 31, 2010), and its recognizing has been estimated based on the usage period of the assets subject to maintenance or those to be replaced. The Company s Management is of the opinion that this liability is sufficient to fulfill the conditions of quality and efficiency demanded by the Peruvian State. 38

48 14. Financial obligations (a) Details of this item are set out below: Corporate bonds Corporate bonds, (b) and (g) 171,232, ,634, ,464,506 Structuring commissions (44,053) - - Bank loans 171,188, ,634, ,464,506 Banco de Crédito del Perú S.A.A. (c) 17,000,000 19,619,067 23,195,646 Other loans 244,169 93, ,100 Structuring commissions (79,069) (94,883) (110,698) 17,165,100 19,618,009 23,210,048 Promissory notes BBVA Banco Continental (d) 32,000, Total financial obligations 220,354, ,252, ,674,554 Current portion (68,346,784) (21,713,358) (19,592,422) Non current portion 152,007, ,539, ,082,132 39

49 (b) Corporate bonds - The following chart details debt corresponding to corporate bonds: Authorized and disbursed sum Disbursement date Annual Maturity interest rate Payment date % First program First issue Series A 30,000,000 July Quarterly July ,696,970 12,818,182 16,090,909 Second issue S/.69,540,000 November Quarterly November ,845,082 13,670,870 16,073,597 Third issue Series A 14,200,000 July Quarterly July ,881,000 9,301,000 10,508,000 Third issue Series B 5,800,000 August Quarterly August ,219,000 3,799,000 4,292,000 Fifth issue Series A 30,000,000 December 2004 Libor to 3 months Quarterly December ,000,000 12,000,000 15,000,000 Second program Third issue Series A 8,500,000 February Quarterly December ,602,273 6,375,000 7,147,727 Third issue Series B 30,000,000 December Quarterly October ,818,182 24,545,455 27,272,727 Fourth issue Series A 21,500,000 December 2004 Libor+0.75 Quarterly February ,170,455 16,125,000 18,079,546 Eleventh issue Series A (*) 12,000,000 May Quarterly May ,000,000 12,000,000 12,000,000 Fifteenth issue Series A (*) 20,000,000 May Quarterly May ,000,000 20,000,000 20,000,000 Seventeenth issue Series A (*) 20,000,000 January Quarterly January ,000, Twentieth issue Series A (*) 38,000,000 January Quarterly January ,000, ,232, ,634, ,464,506 (*) The payment of capital of these bonds will be carried out in one payment in years 2012, 2016, 2018 and 2026, respectively. 40

50 Guarantees and obligations - The corporate bonds are underwritten by a first and preferential guarantee mortgage on transmission lines. Among the obligations that the Company must fulfill, and which result from the issue of first program of the corporate bonds, are the following financial ratios (additionally, ratios calculated by the Company corresponding to December 31, 2011 and 2010 are shown between brackets): (i) Gearing ratio under 1.5 (1.37 and 1.17 as of December 31, 2011 and 2010, respectively). (ii) Minimum equity of 90,000,000 (224,598,039 and 203,328,248 as of December 31, 2011 and 2010, respectively). (iii) Debt service ratio no less than a 1.3. (1.91 and 2.09 as of December 31, 2011 and 2010, respectively). (iv) Interest coverage ratio greater than 3.5 (5.88 and 8.49 as of December 31, 2011 and 2010, respectively). Among the obligations that the Company must fulfill, and which result from the issue of second program of the corporate bonds, are the following financial ratios (additionally, ratios calculated by the Company corresponding to December 31, 2011 and 2010 are shown between brackets): (i) Gearing ratio under 1.5 (1.37 and 1.17 as of December 31, 2011 and 2010, respectively). (ii) Debt service ratio no less than a 1.3. (1.91 and 2.09 as of December 31, 2011 and 2010, respectively). (iii) Interest coverage ratio greater than 3.5 (5.88 and 8.49 as of December 31, 2011 and 2010, respectively). (c) Banco de Crédito del Perú loan- On February 15, 2006 the Company signed a loan agreement with Banco de Crédito del Perú S.A.A. by 34,000,000. This loan was used to pay off the sindicated loan received in prior years. The loan term is 129 months, which includes a 9-month grace period to pay the capital. Such loan accrues interest at the annual rate equivalent to Libor percent. The Company has granted the following guarantees for this loan: (i) First and preferred mortgage on the right to the transmission system concession as well as concession assets by the amount of 250,247,

51 (ii) Pledge over the shares owned by shareholders of the Company: Interconexión Eléctrica S.A. E.S.P., Transelca S.A. E.S.P. and Empresa de Energía de Bogotá S.A. E.S.P. Among the obligations that the Company must fulfill, and which result from the granted loan, are the following financial ratios (additionally, ratios calculated by the Company corresponding to December 31, 2011 and 2010 are shown between brackets): (i) Gearing ratio under 1.5 (1.37 and 1.17 as of December 31, 2011 and 2010, respectively). (ii) Interest coverage ratio greater than 2.8 (5.88 and 8.49 as of December 31, 2011 and 2010, respectively). (iii) Debt service ratio no less than a 1.3. (1.91 and 2.09 as of December 31, 2011 and 2010, respectively). (d) Promissory notes with BBVA Banco Continental The Company signed two short-term promissory notes with BBVA Banco Continental by 15,000,000 and 17,000,000 on November 21 and December 5, 2011, respectively Those notes were used to financing the extension projects. The term of both notes is 6 and 5 months, respectively, and accrue interest at the effective annual rate of 3.4 percent and they do not have specific guarantees. (e) Restrictive clauses The corporate bonds and certain bank loans issued in the Company s favour include restrictive clauses that establish compliance with the financial ratios, as set out in paragraph (b) and (c). Dividend declarations are limited under certain circumstances Management is of the opinion that as of December 31, 2011 and 2010 the Company has fulfilled the obligations and met the financial ratios criteria outlined in the bond and loan contracts. 42

52 (f) Payment schedule - As of December 31, 2011 and 2010, and at January 1, 2010, the timetable for amortizing the non-current portion of the long-term debt is as follows: ,478, ,125,584 35,968, ,404,359 22,964,091 23,230, ,254,545 14,254,545 28,239, ,254,545 11,254,545 11,254, forward 103,216,899 57,035,276 30,021,629 Less: structuring comissions (123,123) (94,883) (110,698) 152,007, ,539, ,082,132 (g) Additional guarantee On August 29, 2002 the Company (trustor), the Continental Bank (Trustee) and Bank Boston, Peru Branch (Trust) signed the Trust Flow agreement to ensure compliance with the obligations in favor of creditors of corporate bonds of the Company. On March 31, 2005 Bank Boston, Sucursal del Peru transferred its contractual position in the contract in favor of BNP Paribas Banque SA Andes. Then on June 28, 2006 Banque BNP Paribas SA Andes transferred its contractual position in said contract in favor of Banco Internacional del Peru SAA. The contract is guaranteed through the property constituting the trust fund, timely and complete fulfillment of the obligations guaranteed. Under this contract flows deposited by customers of the Company in collecting accounts are transferred to the account of the settlor to the next business day. If there has been an event of default, the trustee will withhold 25 percent of flows deposited in the accounts until the rectified gathering the event of default and also if the Company fails to fulfill any obligation secured, the trustee retain 100 percent of the flows deposited in these accounts. At December 31, 2011 and 2010, does not hold balances in these accounts, because the collections are maintained only temporarily. The contract period will continue until the cancellation is made full and effective of the secured obligations assumed by the trustee for the creditors or otherwise, at the time the extinction of all rights and assets that comprise the trust fund. 43

53 15. Deferred income tax liability, net (a) Details of this item are set out below, together with their respective originating entries: Deferred asset At 1 January, (Debit)/credit to the statement of comprehensive At 31 December (Debit)/credit to the statement of comprehensive At 31 December 2010 income 2010 income 2011 Provision for maintenance and replacements 7,191,301 2,682,293 9,873,594 3,319,645 13,193,239 Outlays for replacing concession assets 915, , ,061 Provision for Electrical Services Technical Standard 422,972 (47,830) 375,142 42, ,098 Depreciation of replacement units 147,500 44, , , ,642 Vacations payable 177,996 7, ,768 16, ,216 Other provisions 59,049 (7,717) 51,332 (4,818) 46,514 Financial obligations at amortized cost (222,953) (39,136) (262,089) 294,772 32,683 8,690,926 2,639,818 11,330,744 3,825,709 15,156,453 Deferred liability Effect of the differing rate of amortizing intangible assets (38,101,810) (5,068,619) (43,170,429) (5,159,871) (48,330,300) Effect of capitalized borrowing costs (866,717) 38,573 (828,144) (296,403) (1,124,547) (38,968,527) (5,030,046) (43,998,573) (5,456,274) (49,454,847) (30,277,601) (2,390,228) (32,667,829) (1,630,565) (34,298,394) As of December 31, 2011 and 2010, Management considers that the deferred assets and liabilities fulfill the conditions detailed in the respective legislation to be offset, insofar as a legal right exists whereby current tax assets may be offset against current tax liabilities. Furthermore, deferred tax payments are coordinated with the tax authorities. 44

54 (b) A reconciliation of the effective income tax rate for 2011 and 2010 is detailed below: Profit before income tax 23,796,765 27,762,011 Theoretical income tax (27%) 6,425,127 7,495,743 Permanent differences Non taxable income (37,541) (39,874) Non deductible expenses, net 555, ,352 Income tax 6,943,181 7,673,221 (c) Income tax cost, as shown in the statement of comprehensive income, breaks down as follows: Income tax Current 5,312,616 5,282,993 Deferred 1,630,565 2,390,228 6,943,181 7,673, Equity (a) Capital stock At December 31, 2011 and 2010 equity capital was represented by 72,160,000 common shares, totally subscribed and paid up. The nominal value of each share is one new sol. As of December 31, the Company s corporate structure was as follows: Percentage of individual stock participation Number of shareholders Total percentage participation From to 30 percent 2 60 From to 40 percent According to legislation in force as of December 31,2011 and 2010, there are no restrictions to the remittance of profits or to the repatriation of capital. 45

55 (b) Additional capital Corresponds to an additional premium of capital contributed by shareholders on August 28, (c) Legal reserve Company law in Peru requires that each financial year a minimum of 10 percent of distributable profits, net of income tax, be transferred to a legal reserve until this reaches an equivalent of 20 percent of the firm s capital. The legal reserve may be used to compensate looses or may be capitalized, but in either circumstance must be replaced. As of December 31, 2011 and 2010, the legal reserve has reached the minimum exigible amount. 17. Tax situation (a) On July 26, 2002 the Company subscribed a Legal Stability agreement with the Peruvian State which remains in force during the lifetime of every concession granted. In general terms, the agreement guarantees the Company s investors stable tax (Income tax) and staff employment regimes. This agreement is related with the investments of the shareholders through capital contributions to be made by an amount of 20,000,000. Income tax rate is 27 percent on taxable profits. (b) Management considers that it has determined taxable profits according to the tax regime in force in 2002 and it is therefore obligated to deduct or add those taxable or non-taxable entries pertinent to that regime and to include the results in the financial statements. (c) Since January 2005, in accordance with Article 87 of the Tax Code, and in compliance with the legislation detailed in Supreme Decree No EF, the Company s accounts are maintained in US dollars. (d) With the purpose of determining the income tax and the value added tax, the transfer prices among related parties and for transactions with companies domiciled in countries considered tax havens, prices should be supported by documentation containing information about the valuation methods applied and criteria used in its determination. Based on an analysis of the Company s operations, Management and its legal advisors do not believe that the new regulations will result in significant contingencies for the Company as of December 31, 2011 and (e) The tax authorities are empowered to review and, if applicable, amend the Income Tax and Value Added Tax as calculated by the Company over the four years from the date the tax declaration was presented. Sworn income tax declarations for the years 2007, 2008, 2010 and 2011 and VAT declarations corresponding to the years 2007 through 2011 are pending revision by the tax authorities. During 2011, the Tax Authority finalized the audit of income tax for 2009 and found no objections to it. 46

56 Due to the possible interpretations the tax authorities may apply to the legislation currently in force, at this time it is not possible to determine whether future revisions would affect the Company s liabilities. Therefore any eventual increased taxation or fine resulting from a fiscal revision would be applied to the financial year in which the revision took place. However, it is the opinion of Management and its legal advisors that any eventual additional tax charge would have no significant effect on the financial statements as of December 31, 2011 and During 2011, it was resolved the claim of the Resolution of Determination, for the taxable year 2002 by S/.2,661,037, which was favorable to the Company, annulling such Resolution. 18. Complementary services Details of this item are set out below: Services rendered to related parties, note 26(a) 5,450,076 5,399,181 Additional transmission services 4,570,011 3,820,875 Operating and maintenance services 2,971,701 1,876,338 Specialized technical services 629, ,163 Others 20,769-13,642,497 11,787, Cost of the electrical energy transmission service Details of this item are set out below: Amortization, note 11(h) 17,718,129 14,360,064 Personnel charges, note 21 (a) 13,043,405 12,299,405 Services rendered by third parties 9,281,335 8,197,226 Depreciation, note 10(b) 1,753, ,386 Taxes 1,206,905 1,209,373 Royalties paid to related parties, note 26(a) 1,005, ,590 Services rendered by related parties, note 26(a) 909, ,949 Consumption of supplies 759,058 1,172,454 Write down of supplies, note 9(b) - 107,213 Other indirect expenses 1,465,288 1,873,792 47,141,660 41,355,452 47

57 20. Administrative expenses Details of this item are set out below: Personnel charges, note 21 4,634,824 5,087,698 Services rendered by third parties 2,809,668 2,775,509 Other indirect expenses 1,740,030 2,230,257 Depreciation, note 10(b) 251, ,545 Taxes 214, ,593 Consumption of supplies 175, ,386 Amortization, note 11(h) 75,776 66,356 9,902,658 10,848,344 48

58 21. Personnel expenses and average number of employees Details of this item are set out below: Cost of services, Administrative expenses, Total note 19 note Salaries 5,786,158 5,299,782 2,123,681 2,010,906 7,909,839 7,310,688 Bonuses 1,098,950 1,046, , ,926 1,317,819 1,341,486 Social security 1,407,668 1,313, , ,611 1,864,715 1,637,416 Various bonuses 1,506,221 1,316, , ,530 2,081,914 1,934,200 Workers profit sharing 835, , , ,288 1,035,597 1,029,823 Contributions to Essalud 676, , , , , ,933 Compensation to workers 671, , , , , ,842 Vacations 571, , ,508 93, , ,440 Other personnel expenses 489, , ,743 1,256,870 1,125,873 1,972,275 13,043,405 12,299,405 4,634,824 5,087,698 17,678,229 17,387,103 Number of employees

59 22. Other operating income, net Details of this item are set out below: Services rendered to third parties 850, ,829 Disposal of equipment - 205,981 Recovery of disaster - 155,825 Other incomes 391, ,885 1,241,990 1,405, Financial income Details of this item are set out below: Interest by loans to related parties, note 26(a) 3,691,058 2,546,912 Interest on short-term deposits 268, ,373 Other minor entries 13, ,890 3,972,724 2,908, Financial expenses Details of this item are set out below: Interest on long-term debt and bonds 11,299,566 7,628,462 Update of the current value of the provision for maintenance and replacement, note 13(b) 1,631,740 1,410,236 Loss on exchange difference 1,062, ,155 Other minor entries 279, ,038 Sub total 14,273,408 10,041,891 Capitalized financial expenses, note 11(j) (1,035,098) (772,600) Total 13,238,310 9,269,291 50

60 25. Commitment Guarantees At December 31, 2011, the Company has letters of guarantee and promissory notes with local financial institutions for 5,235,531 and 32,000,000, respectively (7,334,257 and 20,400,000, respectively, at December 31, 2010) mainly with financial institutions related to compliance with the contractual terms of the concession contracts. 51

61 26. Related party transactions (a) The principal transactions as of December 31, 2011 and 2010 are set out below: Granted services Income Expenses Intangible Income Expenses Intangible Income from operating and maintenance services (c) 2,760, ,399, Income from specialized services (d) 2,091, ,849, Incorme from management services (e) 358, , Other income 239, , Total income from services, note 18 5,450, ,399, Other operations Acquisition of construction services (i) - - 3,101, ,244,857 Acquisition of services (f), note , ,949 - Royalty expenses (g), note 19-1,005, ,590 - Interest from granted loans (h), note 23 3,691, ,546, (b) Balances of receivable and payable accounts pertaining to related parties as of December 31, 2011 and 2010, and at January 1, 2010 are detailed in the following chart: Trade: At Accounts Accounts Accounts Accounts Accounts Accounts receivable payable receivable payable receivable payable Interconexión Eléctrica S.A. E.S.P. Sucursal del Perú (c) - 8,700 37,333-55,499 - Interconexión Eléctrica S.A. E.S.P.(g) 97,609 1,180,070-1,216, ,466 Interconexión Eléctrica ISA Perú S.A. (c) - - 2, Consorcio Transmantaro S.A. (c) and (d) 2,972,520 66, ,079 1, , ,082 Internexa S.A. (d) 51, ,625 87,626 42,810 24,715 21,234 ISA Bolivia Proyecto de Infraestructura del Perú S.A (i) 1, , , ,010 Loans Consorcio Transmantaro S.A.(h) 90,000,000-34,300,000-40,000,000 - Various: - Consorcio Transmantaro S.A.(e) 905, , ,553 - Interconexión Eléctrica S.A. E.S.P. (f) , ,405 - Empresa de Energía de Bogotá S.A Transnexa S.A. E.M.A. 9, ,960 XM Expertos en Mercado S.A. E.S.P ,100 Total accounts receivable/payable 94,037,412 2,002,916 35,725,920 1,923,889 41,430,662 1,291,852 Current portion (44,037,412) (2,002,916) (5,725,920) (1,923,889) (11,430,662) (1,291,852) Non current portion 50,000,000-30,000,000-30,000,000 - Except by the loans granted to Consorcio Transmantaro S.A., the accounts receivables and payables to related parties have short-term maturities, do not accrue interests and do not have specific guarantees. 52

62 (c) The Company renders operating and maintenance services to the electrical transmission lines to its related parties Consorcio Transmantaro S.A., Interconexión Eléctrica ISA Perú S.A. and Interconexión Eléctrica Sucursal Perú S.A. (d) The Company provides specialized technical services of supervising for constructionof transmission lines to Consorcio Transmantaro S.A. and for installing optical fiber in the transmission system to Internexa S.A. (e) These services include administrative, managerial and financial resources provided by the Company to its related parties Consorcio Transmantaro S.A., Interconexión Eléctrica ISA Perú S.A and Interconexión Eléctrica S.A. Sucursal Perú. (f) These services include connectivity services provided by the related party Internexa S.A. and consulting services, advice and analysis provided by Interconexión Eléctrica E.S.P. S.A. (g) Corresponds to the royalty paid to its parent Interconexión Eléctrica E.S.P. according to the concession contract, see note 2. (h) Corresponds to the long-term loans granted to Consorcio Transmantaro S.A. The balances of accounts receivable at December 31, 2011 and 2010, and January 1, 2010 are as follows: Balance at : Sum disbursed Interest rate Maturity date % 30,000, % April ,000,000 30,000,000 30,000,000 34,000, % January ,000, ,000, % November ,000, ,000, % March ,000, ,000, % June ,000,000 10,000, % January ,300,000-90,000,000 34,300,000 40,000,000 53

63 Additionally, during 2011 and 2010 the Company made short-term loans to the Company for 25,500,000 and 5,200,000 respectively. The average annual interest for these loans was set at 2.53 and 3.45 percent respectively. Both loans were cleared within the years they were granted. A further debt of 4,300,000, pending as of December 31, 2010, was settled during the course of 2011, and was paid 3,000,000 from the loan granted by 9,000,000. (i) The Company subscribed contracts with Proyectos de Infraestructura del Perú S.A.C. (PDI), a related party, with the purpose of constructing transmission lines. These contracts provided for the supply of services conceived to manage, administer and supervise construction, as well as to put into service and operate the extension of transmission lines described in note 2. Said contracts provide for a construction timetables that vary between 12 and 24 months. With respect to the above-mentioned construction concessions, the Company disbursed the following sums to PDI Extension N 7 1,069,092 1,095,666 Extension n N 9 1,362,263 - Extension N 6 558, ,228 Extension N 11 48,108 - Extension N 5 32,062 1,319,963 Extension N 10 31,611 - Total 3,101,376 3,244,857 (j) Company disbursements in favor of its related party and third parties and relating to the construction of electrical energy transmission lines were as follows: Disbursements in favor of third parties 41,055,938 36,903,961 Disbursements in favor of PDI (i) 3,101,376 3,244,857 44,157,314 40,148,818 In accordance with the requirements of the IFRIC 12 service concession arrangements, the Company recognizes these incurred costs in the statement of comprehensive income as part of the cost of the construction service. According to this interpretation, the Company renders a construction service in favor of the Peruvian State. Furthermore, the interpretation establishes that earnings equating to a fair value placed on the construction service should be recognized. In the Company s particular case, this revenue, entered in the statement of comprehensive income, corresponds to the same value as expenses incurred, inasmuch as the Company generates no 54

64 profit margin for rendering these services since they are provided, administered and/or supervised by their related party PDI (see paragraph (e)). (k) Transactions with related parties were effected in accordance under normal market conditions. Taxes generated by these operations and the basis of their calculation, are in line with current industry practice and are settled in accordance with tax legislation currently in force. (l) Board and Management remuneration Outlays related to Board and Management remunerations and related concepts amounted to 2,889,449 during 2011 (3,369,441 for 2010). The Company provides Management with no post-employment or post-contract benefits and no equity participation scheme exists. 27. Basic and diluted earnings per share As of December 31, 2011 and 2010, there were 580,714,259 shares in circulation. Set out below is a table indicating the basic and diluted earnings per share: 2011 Earnings (numerator) Shares (denominator) Earnings per share Basic and diluted earnings per share 16,853,584 72,160, Earnings (numerator) Shares (denominator) Earnings per share Basic and diluted earnings per share 20,088,790 72,160, Objectives and financial risk management policies The Company s principal financial liabilities include trade accounts payable, other accounts payable, accounts payable to related parties and financial commitments. The primary purpose of these financial liabilities is to procure finance for the Company s operations and to underwrite said operations. The Company possesses trade accounts receivable, accounts receivable from related parties, other accounts receivable, cash and cash equivalents, all of which derive directly from its operations in the field. By the nature of its activities, the Company is exposed to market, credit and liquidity risks. These are managed through a policy of identification, assessment and continuous monitoring and are subject to risk limits and other controls. The process of financial risk management is of cardinal importance to the company s continuing profitability. The independent risk control process does not contemplate business risks such as climate or environmental change or developments in technology or to industry. These are monitored through the Company s strategic planning program. 55

65 (a) Risk management structure - Risk management structure is the responsibility of the Company s Board and Management, who are entrusted to identify and control risks in coordination with other areas of the Company, as explained below: (i) Board of Directors - The Board is responsible for guiding the general focus of risk management, and indicates the principals to be employed to this purpose as well as the policies to be adopted in specific areas. These may include exchange rate risks, interest rate risks, credit risks and liquidity risks. (ii) Treasury and finances - The treasury and finance area is responsible for the Company s daily cash flow administration whilst bearing in mind the policies, procedures and limits imposed by the Board. The area is also responsible for arranging credit lines with finance houses when deemed necessary. (b) Risk mitigation - As part of their ongoing risk management policy, the Company constantly evaluates different scenarios and identifies different strategies designed to alleviate eventual exposures to changes to interest rates, foreign exchange rates as well as risks to capital and credit risks. The Board reviews and imposes the policies for management of each of the risks which are detailed in the following paragraphs: Market risk Market risk is defined as a risk whereby a fair value, or a financial instrument s future cash flow, fluctuates as a result of changes to market prices. In the Company s case, market prices include two types of risk: interest rate risk and currency exchange rate risk. Financial instruments exposed to market risk include term deposits, loans and financial commitments. The sensitivity analyses displayed in the paragraphs below are based upon the situation as of December 31, 2011 and These analyses are prepared based on the supposition that the net amount of debt, the coefficient of a fixed interest rate applied to the debt s variable interest rates, and the proportion of foreign currency financial instruments all remain constant. These analyses do not contemplate the impact of a variation of tax or labor legislation (or provisions for the same) on the Company s books. 56

66 (a) Interest rate risk - Interest rate risk is defined as a risk whereby a fair value, or a financial instrument s future cash flow, fluctuates as a result of changes to interest rates in the market. The Company s exposure to market interest rate risk relates principally to term deposits and to long term financial obligations with variable interest rates. The Company manages its interest rate risk by negotiating loans subject to fixed interest rates (76.84 percent of the total debt). As of 31 December, 2011 the Company had a debt amounting to 40,170,455, subject to variable interest rates. The table below details the effects of earnings before income tax that derive from a reasonable variation in interest rates. Other variables remain constant in this chart: Increase / decrease in basic points Effect on earnings before income tax , (220,354) , (150,253) (b) Exchange rate risk - Exchange rate risk is defined as a risk whereby a fair value, or a financial instrument s future cash flow, fluctuates as a result of changes to rates of exchange. The Company s exposure to exchange rate risk relates principally to its operational activities and when earnings and expenses are incurred in currency not normally employed by the Company. As of December 31, 2011 and 2010 the Company registered net passive positions of S/.6,052,452 and S/.18,091,576 respectively, see note 4. The table below details the effects of earnings before income tax that derive from a reasonable variation in foreign currency exchange rates against the new sol. Other variables remain constant in this chart: Increase/ decrease to exchange rate Effect on earnings before income tax % 185, % (185,237) % 585, % (585,185) 57

67 Credit risk Credit risk is the risk that the counterpart cannot fulfill his obligations with regard to a financial instrument or a sales contract, thus generating a financial loss. The Company is exposed to credit risks due to the nature of its operational activities (primarily through accounts receivable and loans) and its financial activities that include deposits in banks and finance institutions. Trade accounts receivable - Customer credit risk is based upon policies, procedures and controls exercised through Company credit risk management. Customer credit rating is assigned based on a detailed credit risk rating chart. The requirement to assess deterioration is evaluated at the close of each financial year. The assessment is on an individual basis for the most important clients. Calculations rely heavily upon historical experience. The Company considers trade accounts receivable to be a low credit risk as far as its principal customers are concerned inasmuch as the risk is reduced due to the fact that the sums invoiced to each transmission service end user and the collection dates are regulated by OSINERGMIN and through procedures set out by the National Grid Operations Committee (Peruvian acronym: COES). In 2011 the two most important customers represented 39 and 8 percent of total sales (41 and 7 percent of total sales in 2010). As of December 31, 2011, 53 percent of accounts receivable were attributable to these clients (47 percent as of December 31,2010). The Company s electrical energy transmission services connect the generating companies to the Peruvian national grid (SEIN) and to certain mining companies. Deteriorated collection accounts are evaluated and updated on an individual basis and are concurrent with the preparation of the financial statements. Account receivables to related parties - The Company believes that there is no credit risk with respect to accounts receivable to related parties, primarily because the principal accounts are with Interconexión Eléctrica S.A. E.S.P., Consorcio Transmantaro S.A. and Proyectos de Infraestructura del Perú S.A.. These internationally and nationally prestigious corporations maintain regular trading relationships with the Company. The maximum exposure to credit risk at the date of the statement of financial position is the book value of each class of financial asset described in Notes 8 and 26 (b). 58

68 Cash deposits - Credit risks applicable to banks and financial houses are assessed by the treasury and financial department in accordance with Company policy. Investment of excess funds is only transacted with approved counterparts and within the credit limits assigned to each recipient. The Company s Management reviews counterparts credit limits annually, but these may be updated during the course of the financial year. Credit limits are established with a view to minimize risk concentration and mitigate any eventual financial loss that might result from a counterpart s failure to fulfill an obligation. The Company s maximum exposure to credit risks pertaining to the statement of financial position at December 31, 2011 and 2010 is their book value as set out in note 7. Insofar as banks and financial houses are concerned, the Company only accepts those institutions that possess a minimum independent risk rating of A. Liquidity risk The Company constantly monitors the risk of a deficit of funds with recurrent short-term and long-term cash flow projections. Access to financing sources is sufficiently assured, whilst debts that mature within 12 months could be refinanced, if necessary, by existing lenders. 59

69 The following chart summarizes the maturity profiles pertaining to the Company s liabilities and is based upon non-discounted payments as set out in the respective contracts: Under 3 From 3 to 12 From 1 to 5 Over 5 Matured months months years years Total At 31 December 2011 Accounts payable (trade and non-trade) - 14,195, ,195,664 Financial obligations - 6,061,696 62,285,088 85,022,541 66,984, ,354,009 Future interest - 1,783,762 7,825,871 24,647,288 20,822,257 55,079,178-22,041,122 70,110, ,669,829 87,806, ,628,851 At 31 December 2010 Accounts payable (trade and non-trade) - 14,775, ,775,949 Financial obligations - 5,101,778 16,611,580 23,404, ,134, ,252,516 Future interest - 1,139,734 5,917,207 17,143,482 1,017,798 25,218,221-21,017,461 22,528,787 40,547, ,152, ,246,686 60

70 Capital management - The Company capital management policy s principal objective is to ensure that the Corporation maintains a solid credit rating and healthy capital ratios, with a view to grow the business and maximize its value to the stockholder. The Company manages its capital structure and implements pertinent adjustments in accordance with changes to the economic climate. The Company may vary dividend payments to shareholders, reimburse capital or issue shares all with the purpose of maintaining or modifying capital structure. During the financial years closing on December 31, 2011 and 2010 there were no changes to capital management objectives, policies or processes. The Company has a clear focus for achieving an optimum structured capital (debt and property as the sole financing sources) which will enhance the Corporation s profitability and allow the Firm to fulfill its obligations to both creditors and shareholders. Company policy for maintaining or adjusting capital structure involves negotiating new loans after previous financial commitments have been amortized. At the same time, a policy is in place whereby dividends and maximum permitted credit lines are evaluated in accordance with the financial ratios agreed with the Company s creditors and which permit optimum capital structure of 60 percent debt and 40 percent equity. The debt is calculated considering all the liabilities from de Company. Liability and equity balances, together with their percentage participation, as of December 31, 2011 and 2010 are detailed below: 2011 % 2010 % Total liabilty 302,838, ,966, Total equity 224,598, ,744, Total liability and equity 527,436, ,711, The Company controls capital using a debt ratio defined as the quotient between net debt and total capital plus net debt. The Company s policy is to keep the debt ratio between 60 percent and 40 percent. Net debt includes loans, trade account payables and other accounts payables, less cash and cash equivalents. 61

71 Debt ratios as of December 31, 2011 and 2010 are set out below: Total financial obligations 220,354, ,252,516 (-) cash and cash flow (11,841,678) (3,564,147) Net debt 208,512, ,688,369 Total equity 224,598, ,744,455 Total liabilities and equity 527,436, ,711,378 Gearing ratio 39.53% 33.82% 29. Information concerning fair values of financial instruments Fair value is defined as the amount for which an asset could be exchanged or a liability settled between both parts knowledgeable and willing to do so in a current transaction, under the assumption that the entity is a going concern. When a financial instrument is traded in a functioning active market, its standard market price is the best evidence of fair value. When the market price does not exist, or when this is not an adequate indicator of the instrument s worth, another substantially similar instrument may be employed to assess fair value. An analysis of discounted cash flows and other techniques are also available, but these are significantly affected by assumptions or the relevant adopted hypotheses. Despite the fact that Management has used its best judgment with a view to estimating fair values of the Company s financial instruments, any technique for such a process is inherently fragile. Consequently, fair value is not necessarily a true indicator of net market prices if the Company s financial instruments were to be liquidated. The following methods and assumptions were adopted to assess fair values: (a) Financial instruments with fair values similar to values on the books These are financial assets or liabilities that are cleared or mature in the short term (within three months), such as cash and cash equivalents, accounts receivable, accounts payable and other current liabilities. Fair value of these instruments is considered similar to book value. (b) Fixed rate financial instruments Fair values of fixed rate financial assets and liabilities at amortized cost are determined by comparing market interest rates at the time of their initial uptake with current rates applicable to similar instruments. The estimated fair values of interest-bearing deposits are determined through discounted cash flows that are prepared using market interest rates in the prevalent currency and considering products with similar maturity dates and inherent risks. Fair values of long-term financial commitments are approximately the same as their book values, insofar as interest rates are similar to those currently in force in the market. 62

72 The following chart compares the Company financial instruments book values with fair values, as detailed in the financial statements: Value in books Fair value Financial assets Cash and cash equivalents 11,841,678 3,564,147 11,841,678 3,564,147 Trade accounts receivable, net 9,184,914 9,044,960 9,184,914 9,044,960 Accounts receivable from related parties 94,037,412 35,725,920 94,037,412 35,725,920 Other accounts receivable 1,345,190 2,107,995 1,345,190 2,107,995 Total 116,409,194 50,443, ,409,194 50,443,022 Financial liabilities Trade accounts payable 8,532,455 9,982,224 8,532,455 9,982,224 Accounts payable to related parties 2,002,916 1,923,889 2,002,916 1,923,889 Other accounts payable 4,407,364 4,667,409 4,407,364 4,667,409 Financial commitments: Loans at variable rates 40,170,455 47,744,067 38,918,835 46,256,470 Fixed rate loans 180,183, ,508, ,672, ,337,967 Total 235,296, ,826, ,534, ,167,959 Fair values of financial assets and liabilities are shown at prices which could be obtained in current transactions between willing parties, and not at a forced or liquidation sale. The following methods and assumptions are employed when estimating fair values: - Cash and short-term deposits, together with trade accounts receivable, are to a greater degree the same as their book values insofar as these instruments mature in the short term. - The estimated fair values of interest-bearing financial obligations are determined through discounted cash flows that are prepared using prevailing market interest rates for like products with similar maturity dates and inherent risks. 30. Standards for protecting the environment and technical standard (a) Standards for protecting the environment - In accordance with the General Environment Law (Law N 28611) and the Electrical Activities Environmental Protection Regulation (Supreme Decree N EM) the State establishes principals, policies and standards designed to protect the environment, to promote the rational use of natural resources, and to encourage sustainable development of activities relating to the generation, transmission and distribution of electrical energy. 63

73 As of December 31, 2011 and 2010, Company Management is of the opinion that any contingency relating to the environment would have a negligible effect upon the financial statements in general. (b) Technical standard - Electrical Services Technical Quality Standard - Supreme Decree N EM endorses the Electrical Services Technical Quality Standard (Peruvian acronym NTCSE) which establishes minimum levels for the quality of services rendered to regulated customers and, in supplementary fashion, for independent clients. The standard applies to street lighting and to obligations undertaken by companies pertaining to the electricity sector as well as to firms that operate within the framework of the Electrical concession Law. The NTCSE contemplates measurement procedures and tolerances which encompass quality standards that are applicable to electricity services and to street lighting. OSINERGMIN is the entity responsible for overseeing and monitoring the above-mentioned standard with reference to both electrical companies and their customers. OSINERGMIN is also empowered to regulate the application of sanctions and compensatory fines when an entity does not fulfill its obligations within the parameters established by the NTCSE. Law N awards COES - SINAC la faculty to assign responsibility when the NTCSE standard is transgressed and to calculate the corresponding compensatory penalties. Company Management considers that if any contingency relating an incident of non-compliance of the parameters set out by the NTCSE were to arise due to damaged equipment, the event would be covered by the firm s insurance policies. 31. Explanation added for English language translation The accompanying financial statements are presented on the basis of International Financial Reporting Standards. Certain accounting practices applied by the Company that conform with International Financial Reporting Standards may differ, in certain respects, to generally accepted accounting principles in other countries. 64

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