Dominican Power Partners (An Indirect Wholly-Owned Subsidiary of The AES Corporation)

Transcription

1 Audited Financial Statements as of December 31, 2012 and 2011 with Report of Independent Auditors

2 Financial Statements CONTENT Pages Report of Independent Auditors.1-2 Audited Financial Statements: Balance Sheets Statements of Income... 5 Statements of Changes in Shareholder s Equity... 6 Statements of Cash Flows... 7 Notes to the Financial Statements

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5 BALANCE SHEETS As of ASSETS Notes CURRENT ASSETS Cash and cash equivalents 1d, 2 $ 14,122,577 $ 49,557,687 Accounts receivable - net 4 71,227,381 54,175,361 Accounts receivable related parties 3 31,999,597 13,536,888 Other receivables 9 16,249 8,503,380 Inventories 1f 1,047, ,121 Prepaid expenses 5 926, ,492 Derivative asset 1o 302,578 - Total current assets 119,642, ,368,929 PROPERTY, PLANT AND EQUIPMENT Land 3,086,092 2,677,590 Plant and electricity generating equipment 145,952, ,578,683 Less accumulated depreciation (64,779,499) (61,036,968) Property, plant and equipment, net 1g, 6 84,258,602 80,219,305 OTHER ASSETS Restricted cash 1d 8,322 47,376 Long term accounts receivable 4, 14 14,325,730 19,773,833 Prepayments 5,801, ,144 Deferred tax asset 9-6,137,010 Other assets 9-5,349,257 Total other assets 20,135,112 31,914,620 TOTAL $ 224,036,629 $ 239,502,854 3

6 BALANCE SHEETS (CONTINUED) As of LIABILITIES AND SHAREHOLDER'S EQUITY Notes CURRENT LIABILITIES Accounts payable and accrued liabilities 7 $ 4,484,136 $ 2,008,325 Accounts payable and accrued liabilities related parties 3 89,375, ,848,307 Derivative liability 1o - 746,851 Taxes payable 9 209,871 4,259,368 Total current liabilities 94,069, ,862,851 LONG TERM LIABILITIES Deferred income tax 1h, 9 3,299,103 - Long-term compensation 32,612 78,279 97,401, ,941,130 SHAREHOLDER'S EQUITY Common stock, US$1 par value; 500,000,000 shares authorized; 15,000,100 shares issued and outstanding 15,000,100 15,000,100 Contributed capital 108,420, ,420,212 Additional paid in capital 673, ,928 Retained earnings (accumulated deficit) 2,548,356 (10,481,740) Accumulated other comprehensive loss (6,622) (35,776) Total shareholder's equity 126,635, ,561,724 TOTAL $ 224,036,629 $ 239,502,854. The accompanying notes are an integral part of these financial statements. 4

7 STATEMENTS OF INCOME For the years ended REVENUES Notes Electricity sales contracts $ 106,187,789 $ 124,894,506 Electricity sales spot market 3 63,326,722 63,275,008 Total revenues 1i 169,514, ,169,514 OPERATING COSTS AND EXPENSES Cost of revenues electricity purchases 3 50,070,983 45,361,675 Cost of revenues fuel and fuel related costs 3 85,086,966 99,344,361 Operating, maintenance and general expenses 3, 10 12,199,458 10,133,670 Depreciation 6 5,135,349 3,363,145 Total operating costs and expenses 152,492, ,202,851 OPERATING INCOME 17,021,755 29,966,663 OTHER INCOME (EXPENSE) Interest income net 11 15,086,800 7,787,959 Other (expense) income net 12 (3,854,617) 13,912,273 Foreign currency loss (2,253,093) (1,128,928) Total other income - net 8,979,090 20,571,304 Income before income tax expense 26,000,845 50,537,967 Income tax expense 1h, 9 12,970,749 7,353,035 NET INCOME $ 13,030,096 $ 43,184,932 The accompanying notes are an integral part of these financial statements. 5

8 (An Indirectly Wholly-Owned Subsidiary of The AES Corporation) STATEMENTS OF CHANGES IN SHAREHOLDER S EQUITY For the years ended Additional Retained earnings Number of Contributed paid in (accumulated Accumulated other Note Shares Common stock capital capital deficit) comphrensive loss Total Balance as of January 1, ,000,100 $ 15,000,100 $ 108,420,212 $ 578,335 $ (53,666,672) $ (34,077) $ 43,763,522 Net income ,184,932-43,184,932 Accumulated other comprehensive loss: Foreign currency translation (1,699) (1,699) Total comprehensive income 43,183,233 Stock based compensation 1k, , ,593 Balance as of December 31, ,000,100 15,000, ,420, ,928 (10,481,740) (35,776) 113,561,724 Net income ,030,096-13,030,096 Accumulated other comprehensive loss: Foreign currency translation ,154 29,154 Total comprehensive income 13,059,250 Stock based compensation 1k, , ,493 Balance as of December 31, ,000,100 $ 15,000,100 $ 108,420,212 $ 673,421 $ 2,548,356 $ (6,622) $ 126,635,467 The accompanying notes are an integral part of these financial statements 6

9 STATEMENTS OF CASH FLOWS OPERATING ACTIVITIES: Net income $ 13,030,096 $ 43,184,932 Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation 5,135,349 3,363,145 Foreign currency loss 2,253,093 1,128,928 Long term compensation 14, ,242 Deferred tax expense (benefit) 9,307,811 (10,935,962) Changes in assets and liabilities: Increase in accounts receivable and other receivable (4,381,625) (8,389,006) Increase in other receivable related parties (18,462,709) (9,283,812) Increase in inventories (215,449) (100,914) Decrease (increase) in prepaid expenses and other assets 4,883,208 (3,589,894) (Decrease) in accounts payable and accrued liabillities (5,868,074) (4,702,083) (Decrease) increase in accounts payable related parties (29,472,867) 5,429,129 Increase in income tax payable 3,662,938 3,582,927 INVESTING ACTIVITIES: Net cash (used in) provided by operating activities (20,113,736) 19,847,632 Additions to property, plant and equipment (8,600,268) (6,326,256) Advance payments for the acquisition of fixed assets (5,801,060) (607,144) Decrease (increase) in restricted cash 39,054 (38,437) Net cash used by investing activities (14,362,274) (6,971,837) EFFECT OF EXCHANGE RATE CHANGES ON CASH (959,100) (699,788) NET (DECREASE) INCREASE IN CASH (35,435,110) 12,176,007 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 49,557,687 37,381,680 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 14,122,577 $ 49,557,687 Supplemental disclosures of cash flow information: Cash payments for income taxes $ 7,712,435 $ 13,866,221 Interest paid $ 142,420 $ 29,100 Supplemental disclosures of non-cash operating activities: Property, plant and equipment purchases not paid at year end $ - $ 32,766 Recovery of tax paid to CDEEE $ - $ 13,930,000 Offsetting with CDEEE $ 9,000,000 $ - The accompanying notes are an integral part of these financial statements. 7

10 1. NATURE OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES Nature of Business Dominican Power Partners ( the Company or DPP ) is an indirect wholly-owned subsidiary of The AES Corporation ( the Parent Company or AES ). The Company was organized under the laws of the Cayman Islands and was incorporated on November 14, DPP has a Branch in Santo Domingo, Dominican Republic that owns the generation units Los Mina V and VI. The plants have a gross generating capacity of 236 megawatts and consist of two simple cycle turbo gas turbines and related electricity generating equipment. The plants began commercial operations on May 4, In 2002 and 2003 the plants received an upgrade with the installation of a wet compression system and an evaporative cooler. In March 2003, the Company implemented its conversion to natural gas fired operations resulting in a cleaner generating facility. The plants were originally developed by Destec under a Build Operate Transfer ( BOT ) arrangement with Corporación Dominicana de Empresas Eléctricas Estatales ( CDEEE ), the state owned electricity company (formerly known as Corporación Dominicana de Electricidad or CDE ), whereby the Company operated the plant to generate and sell electricity to CDEEE under a capacity sales agreement for fifteen years. On June 30, 1997, DPP was acquired by the Parent Company through several wholly-owned subsidiaries of AES. Until September 2001, DPP operated the plants following the BOT arrangement. In early 2002, DPP signed an agreement with CDEEE and the Government of the Dominican Republic ( the Termination Agreement ) which, retroactive to September 2001, ended the BOT and transferred ownership of the plant and land to DPP. In addition, CDEEE transferred its rights under the power purchase agreement to Empresa Distribuidora de Electricidad del Este, S. A. ( EDE Este ), a distribution company serving the eastern region of the Dominican Republic, which includes part of the Capital City, Santo Domingo. The Company s administrative offices are located at Avenida Winston Churchill No.1099, Torre Acrópolis, 23 floor, Santo Domingo, Dominican Republic. 8

11 1. NATURE OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basis of presentation The Company and the Branch maintain their books in U.S. dollars and prepare their financial statements in accordance with accounting principles generally accepted in the United States of America ( US GAAP ). Significant Accounting Policies A summary of the significant accounting policies used in the preparation of the accompanying financial statements are as follows: a. Use of estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes the estimates and assumptions used in the preparation of these financial statements were appropriate in the circumstances, actual results could differ from those estimates and assumptions. b. Transactions in foreign currency The functional and reporting currency of the Company is the U.S. dollar, because the majority of its cash flows are currently, and are expected in the future to be, denominated in U.S. dollars. Transactions denominated in other currencies (mainly local Dominican Republic currency Dominican peso DOP) are recorded at the rate of exchange in effect at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are converted into the Company s functional currency at the rate of exchange in effect at the balance sheet dates; the effect of changes in exchange rates is recognized in the statements of income as foreign currency gain or loss. c. Cash and cash equivalents The Company considers all highly-liquid instruments purchased with an original maturity of three months or less to be cash equivalents. d. Restricted cash Restricted cash includes cash and cash equivalents which are restricted as to withdrawal or usage. The nature of restriction includes a bank embargo ordered by a Judge which is related to tax litigation with the Dominican Tax Authority. Additionally, part of the restricted cash includes a certificate of deposit used as guarantee for employees financing. 9

12 1. NATURE OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) e. Inventories Inventories consist of materials and spare parts, and are stated at the lower of cost or market value. Costs are determined using the weighted average cost method. f. Concentration of credit risk EDE Este is DPP s main customer. Therefore, DPP s accounts receivable are exposed to potential credit loss of that entity. Contract revenues to EDE Este represented approximately 63% and 68% of total electricity sales in 2012 and 2011, respectively, and the accounts receivable from EDE Este represented 55% and 37% of current assets as of, respectively. g. Property, plant and equipment Property, plant and equipment, including the cost of improvements, are stated at cost. Cost includes major expenditures for improvements and replacements, which extend useful lives or increase capacity. Maintenance and repairs are expensed as incurred. The Company incurred maintenance expenses of $1,966,268 and $1,666,135 for the years ended December 31, 2012 and 2011, respectively. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the assets, which are determined on a composite basis. The depreciation rates used are based on the estimated useful lives of the assets, which are indicated below: Estimated Useful Life Generation plant 8 to 40 years Buildings 25 to 50 years Vehicles 4 to 7 years Spare parts 8 to 40 years Computer equipment and software 1 to 10 years In accordance with Accounting Standards Codification No. 360, Property, Plant and Equipment ( ASC No ), the Company evaluates the impairment of long lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets are determined to be impaired when the estimated future undiscounted cash flows expected to result from the use of the asset, or its fair value are less than the carrying value of the asset. 10

13 1. NATURE OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) h. Income taxes Income tax comprises both current and deferred taxes. Current tax is the tax expected to be paid in relation to the year s taxable income, using rates in effect as of the date of the balance sheets, and any adjustment for taxes payable for prior years. Deferred tax is provided using the liability method in which deferred tax assets and liabilities are recognized based on temporary differences between the financial statement carrying amounts of the existing assets and liabilities, and their respective income tax bases. Deferred tax assets and liabilities offset each other and are presented in the balance sheets as a deferred tax asset or liability. The carrying amount of a deferred tax asset is subjected to review at each balance sheet date. The Company reduces the amount of the deferred tax asset balance, to the extent that it estimates that it is likely that it will not have sufficient taxable profits in the future to allow to charge against it all or part of the benefits that comprise the deferred tax asset. As of each financial annual close, the Company reconsiders the deferred tax assets that it had not recognized previously. i. Revenue recognition and unbilled revenues Revenues from the sale of electricity are recorded based on physical and contractual delivery of energy and capacity at the rates specified in the respective contracts or at prevailing market rates. Revenues include income from energy and capacity supplied but not billed at each period end, which is accounted for at the contractual rates or estimated spot market prices existing at each respective period end. These amounts are included in current assets as accounts receivable. The related cost of this energy has been included in operating costs and expenses. Accounts receivable included unbilled revenues of $7,487,332 and $15,535,186 as of, respectively. The actual amounts subsequently billed suffered no material changes with respect to the estimates reported as of, respectively. j. Offsetting of assets and liabilities Receivables and payables are offset when a right to set off exists and therefore all of the following conditions are met: (1) each of two parties owes the other determinable amounts; (2) the reporting party has the right to set off the amount owed with the amount owed by the other party; (3) the reporting party intends to set off; and (4) the right of set off is enforceable at law. 11

14 1. NATURE OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) k. Stock plans Certain of the Company s employees were granted stock options under option plans created by The AES Corporation ( the AES Plans ). The AES Plans allow issuance of options to purchase common stock of The AES Corporation at a price equal to 100% of the market price at the date the option is granted. Generally, stock options issued under these plans become exercisable by employees one year from the grant date (100% in one year), and others vest over three years from the date of grant (33% each year). The exercise prices of the options were $13.70 and $12.88 per share for the years ended, respectively. The weighted average fair value of the options granted under the AES Plans was estimated as of the grants date using the Black Scholes option pricing model with the following weighted average assumptions: Assumptions Estimated life of the option 6 years 6 years Risk-free interest rate 1.08% 2.65% Expected volatility 26% 31% Dividend yield 1% 0% Cost is measured at the time the option is granted based on the fair value of the option or liability recorded by the Corporation and an expense is recorded on a straight line basis during the period the employee s service is required to earn the right to exercise the option, against a capital contribution in the line for additional paid-in capital. l. Environmental costs The Company may be exposed to environmental costs in the ordinary course of business. Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized, as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current and future revenue generation, are expensed. Liabilities are recorded when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors, 12

15 and include estimates of associated legal costs. As of, there are no known environmental liabilities that the Company is aware of. 1. NATURE OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) m. Provision for severance benefits The Dominican Republic Labor Code requires severance benefits be paid to employees terminated without justified cause. DPP Branch records this severance benefits as incurred and has not recorded a liability for such benefits because of the uncertainty. n. Fair Value The fair value of the current financial assets and current financial liabilities are estimated to be similar to their reported carrying amounts due to the short-term maturities of these instruments. The fair value of affiliate receivables and payables is not practical to estimate due to the related party nature. The long term account receivable is based on a fixed interest rate and exposes the Company to fair value interest rate risk. o. Derivative Financial Instruments The Company records all derivatives on the balance sheets at fair value, regardless of the purpose or intent for holding them. The accounting for changes in fair value of the derivatives varies, depending on whether the derivative is considered to be a hedge for accounting purposes, and whether the hedging instrument is a fair value or a cash flow hedge. Derivatives that are considered to be hedges from an accounting perspective are recognized in the balance sheets at fair value with changes in fair value either: (1) offset by changes in fair value of the hedged assets, liabilities or firm commitments through earnings as a component of the corresponding asset or liability if the derivative is designated as a fair value hedge, or (2) recognized in other comprehensive income until the hedged item is recognized in earnings if the derivative is designated as a cash flow hedge. The ineffective portion of the change in fair value for a hedging derivative is immediately recognized in earnings regardless of whether the hedging derivative is designated as a cash flow or fair value hedge. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument goes further than the current period and it is not expected to be realized or settled within the current period. Other derivatives are presented as current assets or current liabilities. 13

16 1. NATURE OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Certain derivatives are not designated as hedging instruments. While these instruments economically hedge interest rate risk, foreign exchange risk or commodity price risk, they do not qualify for hedge accounting treatment. Changes in fair value are recognized in earnings in the current period. 2. CASH AND CASH EQUIVALENTS Cash and cash equivalents are detailed as follows: Cash in US dollars $ 286,426 $ 802,485 Cash in Dominican Pesos 95,152 3,235,658 Term deposits in US dollars, average annual rate 0.75% and 3.38% for the years ended, respectively. 11,774,999 43,569,999 Investment certificates in Dominican Pesos - 3% and 0.15% for the years ended December 31, 2012 and 2011, respectively. 1,966,000 1,949,545 Total $ 14,122,577 $ 49,557, RELATED PARTIES In 2002, DPP signed both a natural gas purchase agreement ( the Gas Purchase Contract ) and a Natural Gas Transportation Contract with AES Andres, B.V. (an affiliated entity under common control) ( Andres ), that commenced upon completion of the Andres Liquefied Natural Gas (LNG) facility and gas pipeline in March Both contracts expire in An Amendment No. 2 to the Gas Purchase Contract was entered by and between Andres and the Company, dated December 30, 2003 in order to change the pricing structure. Also, on September 29, 2008, both parties entered into the Amendment No. 2 to the Natural Gas Transportation Contract in order to reduce to $700,000, the charge for transportation services. The cost associated with this contract is presented in the statements of income as cost of revenues fuel and fuel related costs of $85,086,966 and $99,344,361 for the years ended, respectively. 14

17 3. RELATED PARTIES (CONTINUED) Similarly, in 2003, the Company signed a real demand energy and capacity contract with Andres, whereby the Company purchases energy and capacity not covered by its own generation and firm capacity assigned, in order to meet the supply required for its energy sales contracts. In 2004, this contract expired and the Company signed a contract with Andres, which is in effect indefinitely unless both parties agree on its suspension with 15 days notice. The costs associated with this contract are presented in the statements of income as part of the cost of revenue electricity purchases for $40,324,113 and $41,865,545 for the years ended, respectively. DPP is unconditional and irrevocable guarantor, along with Andres of the new issuance of bonds performed by AES Andres Dominicana, Ltd. (a subsidiary fully controlled by AES) for the amount of $ million as of November 5, The Company has a comprehensive insurance contract with AES Global Insurance Corporation, an affiliate, which covers all operating risks, including broken machinery and interruption of the business. The expense for this concept was $2,070,382 and $1,373,520 for the years ended, respectively. The total pending amortization was $558,982 and $367,249 as of, respectively. Energy sales and frequency regulation negotiated in the spot market with related company Empresa Generadora de Electricidad Itabo, S.A. amounted to $7,324,291 and $7,882,435 for the years ended, respectively, and is included in electricity sales spot market in the statements of income. 15

18 3. RELATED PARTIES (CONTINUED) As a result of the operations and contracts mentioned and other less significant transactions carried out with affiliates, related party accounts receivable and payable are as follows: Accounts receivable - related parties: Empresa Generadora de Electricidad Itabo, S.A. $ 23,474,260 $ 12,298,421 AES Andres, B.V. 8,347, ,156 Other 177, ,311 Total accounts receivables - related parties $ 31,999,597 $ 13,536,888 Accounts payable and accrued liabilities - related parties: AES Andres, B.V. $ 85,405,807 $ 115,320,955 The AES Corporation 3,286,727 3,416,965 New Caribbean Investments, S.A. 49,058 48,961 AES Solutions, LLC. - 30,874 AES Servicios America S.R.L. 174,617 - AES Panamá, S.A. 253,869 9,964 Empresa Generadora de Electricidad Itabo, S.A. 38, Others 166,745 20,375 Total accounts payable and accrued liabilities - related parties $ 89,375,440 $ 118,848, ACCOUNTS RECEIVABLE, NET The accounts receivable balances consist of the following: Empresa Distribuidora de Electricidad del Este $ 66,229,353 $ 46,679,737 Corporación Dominicana de Empresas Eléctricas Estatales 1,232,015 2,892,040 Spot market 4,857,590 6,075,024 Allowance for doubtful accounts (1,091,577) (1,471,440) Accounts Receivable - net $ 71,227,381 $ 54,175,361 16

19 4. ACCOUNTS RECEIVABLE, NET (CONTINUED) Factoring Agreement On December 27, 2011, the Company signed a factoring agreement with EDE Este, Banco de Reservas de la República Dominicana and Banco de Servicios Múltiples, in which the Bank committed and paid $28.3 million for the Company s accounts receivable to distribution companies, assuming the credit risk as of that moment. Sector Agreements In April 2008 a new General Sector Agreement was signed, in which the Government of the Dominican Republic commits to look for the mechanisms necessary to pay off the accounts payable to the electricity sector corresponding to In September 2008 the payment agreements on accounts receivable were formalized with the Dominican Government and distribution companies. The agreement signed with EDE-Este accrues an annual interest of 12% and ends in March As a result of this agreement $14,325,730 and $19,773,833 are presented in the long term accounts receivable in the Company s balance sheets as of, respectively. On August 8, 2013 and December 13, 2013, the Company signed a new factoring agreement with EDE-Este and CITIBANK, NA, in which the Bank committed and paid $14 million, 90% of accounts receivable long term and interests held by the Company, assuming the credit risk from that time. In addition to this transaction, the Company received from CITIBANK, NA, a premium of $0.142 million. 5. PREPAID EXPENSES The prepaid expenses balances consist of the following: Prepaid Expenses $ 644,836 $ 441,819 Other 282, ,673 Total $ 926,963 $ 763,492 17

20 6. PROPERTY, PLANT AND EQUIPMENT - NET Net property, plant and equipment consist of the following: 2011 Additions Retirements Transfer 2012 Original value: Generation plant $ 125,629,854 $ - $ (1,269,766) $ (4,807,334) $ 119,552,754 Buildings 693, , ,817 Vehicles 238,853 45, ,853 Leasehold improvements 6, ,742 Spare Parts 9,671,229 5,078,939-7,687,096 22,437,264 Office equipment and others 2,236,495 79,004 (123,052) 1,518 2,193,965 Subtotal 138,476,749 5,202,943 (1,392,818) 3,097, ,384,395 Accumulated depreciation: Generation plant (56,946,562) (4,168,319) 1,346,277 7,687,096 (52,081,508) Buildings (296,167) (321,901) - - (618,068) Vehicles 10,027 (134,643) - - (124,616) Leasehold - improvements (6,743) (6,743) Spare parts (3,287,576) (380,838) 46,541 (7,687,096) (11,308,969) Office equipment - and others (509,947) (129,648) - - (639,595) Subtotal (61,036,968) (5,135,349) 1,392,818 - (64,779,499) - Subtotal 77,439,781 67,594-3,097,521 80,604,896 Land 2,677, , ,086,092 Construction in progress 101,934 3,563,201 - (3,097,521) 567,614 Total $ 80,219,305 $ 4,039,297 $ - $ - $ 84,258,602 During the years ended, the Company recorded depreciation expense of $5,135,349 and $3,363,145, respectively. 18

21 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The accounts payable and accrued liabilities balances consist of: Suppliers $ 3,529,634 $ 1,056,915 Incentive compensation payable 741, ,069 Other accrued liabilities 213, ,341 Total $ 4,484,136 $ 2,008, COMPENSATION - STOCK COMPENSATION Effective January 1, 2003, The AES Corporation adopted the fair value recognition provision of ASC No. 718, as amended by SFAS No. 148, prospectively to all employee awards granted, modified or settled after December 1, 2001, and pushed-down those costs to the Company, resulting in the stock based compensation cost during 2012 and 2011 by $14,493 and $80,593, respectively, with a related credit to shareholder s equity. 9. INCOME TAX DPP is a company incorporated with limited liability in the Cayman Islands which operates in the Dominican Republic through a Branch office, therefore, is not subject to the payment of income taxes in the Cayman Islands. For Dominican tax purposes, DPP s Branch is considered a foreign entity, therefore subject to the Dominican tax regime applicable to business activities established by the Law of May 31, 1992, plus its subsequent amendments. Even though the Branch has the US Dollar as its functional currency, income tax calculations are determined in local currency, the Dominican Peso. Transactional agreement with tax authorities DPP s Branch in the Dominican Republic has benefited from a tax exemption until April 30, 2011 in virtue of the agreement executed with CDEEE on behalf of the Dominican Government, signed on January According to such agreement, CDEEE and the Dominican Government agreed to submit to the National Congress the exemption for all taxes due by DPP s Branch, either by its own activities or withheld amounts affecting its activities. 19

22 9. INCOME TAX (continued) In the event that CDEEE or the Dominican Government were not able to obtain the respective exemption, such agreement provides DPP with the following warranties: DPP s Branch has the right for a cash reimbursement from CDEEE to be harmless from any damage or expense which might be incurred or benefits it is unable to obtain. Since inception DPP s Branch has not paid any income taxes in the Dominican Republic. Neither CDEEE nor the Dominican Government obtained the referred approval from the National Congress of the tax exemption; therefore, local tax authority legally claimed the respective tax payments. Until 2010 DPP filed the Income Tax Returns assuming that it had a tax exemption which has been disregarded by local tax authority. On October 31, 2011, DPP signed an agreement with the tax authorities (Transactional Agreement) by which DPP recognizes all taxes corresponding to the period totaling $7.9 million and proceeded to amend the respective tax returns for all of the open periods from 2006 up to 2010, recognizing a new liability of $5.9 million. In accordance with the Transactional Agreement, DPP paid to the tax authorities DOP$532,740,221 (equivalent to $13.8 million). Within this new agreement, tax authorities recognize DPP s right to use the losses generated in fiscal periods 2004, 2007, 2008 and 2009 totaling $108.2 million. In addition, the tax authorities recognized and certified that the reimbursed taxes by CDEEE to DPP are not considered taxable income for tax purposes. In addition, this agreement generated in 2011 an accounts receivable from CDEEE for a total of $13.8 million. The Company registered as part of other receivables short term an amount of $8.5 million and the remaining balance of $5.3 as other assets long term. In December 2012, CDEEE and DPP signed a new transactional agreement resulting in DPP recognizing $4.3 million on other expense. Current income tax In June 24, 2011, the Government of the Dominican Republic enacted the Tax Reform Law , increasing the income tax rate for legal entities for fiscal years 2011 and 2012 from 25% to 29%. This temporary increase was established for a period of two years. On November 13, 2012, the government of Dominican Republic established Law on strengthening the State's revenue capacity for Fiscal Sustainability and Sustainable Development. The Act amends the income tax, Tax on Transfer of Industrialized Goods and Services (ITBIS for its Spanish acronym), Excise (ISC for its Spanish acronym), Real Property Tax (IVSS / IPI for its Spanish acronym) and tax onvehicle traffic. Additional issues limit certain tax incentives provided by special arrangements and expand the scope of the transfer pricing rules. It extends the life the 29% tax rate until 2013, decreasing to 28% in 2014 and 27% in

23 9. INCOME TAX (CONTINUED) The Law established a tax on dividends and remittances of profit from branches or permanent establishment to main offices. The most important consequence of this Law change is that the Company began recognizing in 2012 a deferred tax liability on unremitted earnings from the branch. Tax on assets The tax on assets corresponds to 1% of the taxable assets. For electricity companies, taxable assets correspond to the total fixed assets net of accumulated depreciation. This tax must be used as a credit against the income tax as follows: if the income tax is greater than the tax on assets there is no obligation to pay the latter; otherwise, the difference between the income tax paid and the tax on assets must be paid. Loss carry-forward According to Article I of Law No , which modifies letter K or Article No. 287 of the Tax Code, applicable as of January 1, 2006, losses incurred by corporations in their economic activities may be compensated during the following fiscal periods, without exceeding five (5) years. However, this compensation will be subject to the following conditions: only 20% may be compensated per year. In The fourth year this 20% may not exceed 80% of the net taxable income, and in the fifth year it must not exceed 70%. The portion not used each year cannot be used in the following periods. For the taxable years ended Dec 31, 2004, 2007, 2008 and 2009 DPP generated net fiscal losses. The Company has recorded a deferred tax asset related to their net operating loss carry forwards ( NOLs ). DPP had NOLs to compensate in the future of DOP$940 million (approx. $23.4 million) for income tax purposes at December 31, The NOLs will expire in various amounts beginning in 2013 to 2014, if not used. The local tax authorities ( DGII ) approved tax return amendments for the fiscal years (2005, 2006, 2007, 2008, 2009 and 2010) in which the losses giving rise to the NOLs were reported, and the DGII are unable to challenge any past and future use of the NOLs. 21

24 9. INCOME TAX (CONTINUED) As of December 31, 2012, the maturities of fiscal losses that can be carried forward by the Company are as follows: Years US$ 2013 $16,086, ,295,333 Total $ 23,381,870 The income tax payable balance as of consists of: Beginning balance $ (4,259,368) $ - Income taxes paid 7,712,435 13,866,221 Payable balance (DGII Settlements -Income Tax returns amendments ) - (13,850,729) Current income tax expense (3,662,938) (4,274,860) Total income tax payable, end of year $ (209,871) $ (4,259,368) Deferred income tax is comprised as follows: Assets: Loss carry forwards $ 6,313,105 $ 10,498,015 Provision and other temporary differences 275, ,695 Total deferred income tax asset $ 6,588,635 $ 10,902,710 Liabilities: Accelerated tax depreciation $ (4,228,838) $ (4,765,700) Withholding of unremitted earnings from Branch (5,658,900) - Total deferred tax liability $ (9,887,738) $ (4,765,700) Net long-term deferred income tax (liability) asset $ (3,299,103) $ 6,137,010 22

25 9. INCOME TAX (CONTINUED) The income tax expense is comprised as follows: Income tax expense: Current tax expense $ 3,662,938 $ 4,274,860 DGII Settlements (Income Tax return amendments ) - 14,014,137 Deferred tax expense (benefit) 9,307,811 (10,935,962) Total income tax expense $ 12,970,749 $ 7,353,035 In accordance with ASC 740, Incomes Taxes, tax positions are recognized in financial statements if that position is more likely than not to be sustained by the taxing authority. Any interest and penalties related to income tax exposures would be recognized within interest expense and other non-operating income (expense), respectively, in the statements of income. The Company has not recorded any liabilities for uncertain tax positions as of December 31, 2012 and December 31, OPERATING, MAINTENANCE AND GENERAL EXPENSES The operating, maintenance and general expenses consist of the following: Salaries, wages and benefits $ 3,473,396 $ 3,080,241 Maintenance expenses 2,358,253 2,231,377 Insurance 2,232,689 1,514,404 Advisory and legal fees 1,512,284 1,456,673 Business Development costs (Combined Cycle) 1,126,403 - Media Services/Publications 361, ,907 Travel and transportation 120, ,712 Property rental 165, ,183 Security services 113, ,728 Other expenses 735, ,445 $ 12,199,458 $ 10,133,670 23

26 11. INTEREST INCOME NET Net interest income consists of the following: Interest expense - trade $ (408,722) $ (111,567) Interest income - trade 15,172,846 7,731,667 Interest income - financial 322, ,859 Subtotal 15,495,522 7,899,526 Total $ 15,086,800 $ 7,787,959 Accounts receivable and payable in the electricity spot market, denominated in Dominican pesos, are subject to the Central Bank s active interest rate plus a penalty, which was not charged from March 2006 to December 2008, as a result of the signing of the Sector Agreement executed in March The average interest rate applied in dollars was 6.82% and 7.19% for the years ended, respectively and in Dominican pesos was 12.86% and 17.22% for the years ended. On January 13, 2011, the General Agreement of the Dominican Electric Sector was signed by CDEEE and all companies in the sector, in which they agree to retroactively elimination from January 2009 to December 31, 2011, the penalty charge of eighteen percent (18%) established in Article 355 of the Rules of Application of the General Electricity Law. 12. OTHER (EXPENSE) INCOME NET Other expense (income) net consists of: Recovery of taxes paid (See note 9) $ - $ 13,930,387 Adjustment to 2011 tax settlement agreement (see note 9) (4,344,761) - Gain in the sale of scrap metal 68,028 38,793 Other expense 422,116 (56,907) Total $ (3,854,617) $ 13,912,273 24

27 12. OTHER (EXPENSE) INCOME NET (CONTINUED) DPP was involved in certain tax claims due to the fact that the local Tax Authority (DGII) never recognized the tax exemption granted to DPP by the Dominican government through an agreement (Termination Agreement) signed between the government entity Corporación Dominicana de Empresas Eléctricas Estatales (CDEEE for its Spanish acronym) and DPP. DPP s Management signed an agreement with CDEEE to solve, among others, the payment of taxes that was produced from the lack of recognition of the tax exemption by the government under said agreement. Based on this agreement, DPP surrendered its position on the tax exemption and paid the taxes owed to the DGII for DOP$531.7 million. Subsequently, the CDEEE should have reimbursed this same amount to DPP, in conformity with the original Termination Agreement, during a period of 18 months. The amount to be reimbursed by CDEEE was recorded as other income in In December 2012, the CDEEE and DPP declared and accepted to compensate the amount owed between them of US$9 million, and thus the claim is considered resolved. Consequently, DPP eliminated the account receivable from CDEEE that was previously recorded and recognizes a loss of US$4.3 million, the difference between the accounts receivable previously recognized of $13.8 million and the settled amount of $9 million. 13. COMMITMENTS AND CONTINGENCIES Commitments As of December 31, 2012, the main commitments of the Company are the following: a. Energy sales contract with EDE Este DPP Plant was originally developed under BOT (Build, Operate, Transfer) arrangement with CDEEE, which included a 15-year power off take agreement. However, in 2001 this contract was renegotiated, and DPP signed an energy sales contract with EDE Este, as explained in Note 1. Through this contract DPP provides 210 MW of capacity at a base price per KW, adjusted for U.S. inflation, and associated energy at a base price per KWH, adjusted for cost of fuel and U.S. inflation. This contract will be in force until July 31, The revenues associated with this contract consist of energy and capacity sales that are presented in the statements of income as electricity sales of $106,187,789 and $124,894,506 for the years ended, respectively. 25

28 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) b. Operating lease In October 2010, the Company signed an amendment to extend the period and price of the contract. Rental expense under this lease was $165,309 and $159,183 in 2011 and 2010, respectively. This expense is presented under operating, maintenance and general expenses, in the accompanying statement of income. As of May 22, 2013, the Company signed a fifth amendment that extends the term of the contract until June The payment commitment for the next years in relation to this contract is the following: Lease Year (in US$) c. Guarantees 2013 $ 175, ,345 Total $ 245,345 Since November 5, 2010, DPP is the unconditional and irrevocable guarantor, along with AES Andres, B. V., of the new issuance of bonds issued by AES Andres Dominicana, Ltd. for $167,560, FAIR VALUE OF FINANCIAL INSTRUMENTS The Company established a process to determine fair value of its financial instruments. The determination of fair value takes into consideration the market quoted price; however, in many cases there are no quoted market prices for various financial instruments of the Company. In cases where a market quote is not available, the fair values are based on estimates using the current value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and the future cash flows. (a) Financial Instruments with Book Value Approximate to Fair Value The book value of certain financial assets, including cash, accounts receivable, accounts receivable related party, and certain financial liabilities, including accounts payable and accounts payable related party are considered to be equal to their fair value given their short maturity nature. 26

29 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) This standard defines fair value as the price that would be received to sell an asset or paid to transfer to a liability ( exit price ) in the principal or most advantageous market for an asset or liability in an orderly transaction between participants market at the measurement date. Additionally, the rule established a hierarchical framework that prioritizes and directs the level of observable market price used to measure investments at fair value. The observables are affected by a number of factors, including the type of investment and the specific characteristics to the investment. Investments with readily available quoted prices or for which fair value can be measured based on actively quoted prices generally will have a higher level or observable market price and a lower level of criteria to measure fair value. To increase consistency and enhance disclosure of fair value, the fair value measurement accounting guidance creates a fair value hierarchy to prioritize the inputs used to measure fair value into three categories. An asset or liability s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement, where Level 1 is the highest and Level 3 is the lowest. The three levels are defined as follows: Level 1 unadjusted quoted prices in active markets accessible by the reporting entity for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 pricing inputs other than quoted market prices included in Level 1 which are based on observable market data that are directly or indirectly observable for substantially the full term of the asset or liability. These include quoted market prices for similar assets or liabilities, quoted market prices for identical or similar assets in markets that are not active, adjusted quoted market prices, inputs from observable data such as interest rate and yield curves, volatilities or default rates observable at commonly quoted intervals or inputs derived from observable market data by correlation or other means. The fair value of most over-the-counter derivatives derived from internal valuation models using market inputs and most investments in marketable debt securities qualify as Level 2. 27

30 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Level 3 pricing inputs that are unobservable, or less observable, from objective sources. Unobservable inputs are only used to the extent observable inputs are not available. These inputs maintain the concept of an exit price from the perspective of a market participant and should reflect assumptions of other market participants. An entity should consider all market participant assumptions that are available without unreasonable cost and effort. These are given the lowest priority and are generally used in internally developed methodologies to generate management s best estimate of the fair value when no observable market data is available. The fair value of implied goodwill and long lived assets determined using discounted cash flows valuation models for impairment evaluation purposes qualify as Level 3. Any transfers between all levels within the fair value hierarchy levels are recognized at the end of the reporting period. Long term accounts receivable The estimated fair value as of is based on information available as of the date of the balance sheets. The Company does not have knowledge of any factor that might significantly affect the estimates of fair value as of that date. For long term accounts receivable with a fixed rate, the Company established a process to determine its fair value. Management estimates the fair value of the Company s long term account receivable by discounting their future cash flows at market rates and is classified at Level 2 in the hierarchy of fair value. The fair value estimated for this long term accounts receivable as of December 31, 2012 and 2011 is as follow: Carrying amount Fair value Financial assets Long term accounts receivable $14,325,730 $19,773,833 $15,142,116 $21,292, SUBSEQUENT EVENTS Subsequent events were assessed by Management through May 29, 2014, the date when the financial statements were authorized to be issued. ********* 28