GENERAL NOTES. 1. General Information

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1 ISAGEN S.A. E.S.P. NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 2017 and 2016 (Amounts expressed in million COP $ and in thousands of United States Dollars USD, unless otherwise indicated) GENERAL NOTES 1. General Information The individual financial statement of ISAGEN S.A. E.S.P. (hereinafter also referred to as the Company or ISAGEN ) as of December 31, 2017 were considered for issue in accordance with a resolution of Board of Directors and authorized for issue on February 22, ISAGEN is a public services company, incorporated as a Colombian corporation sociedad anónima, as set forth in public deed No. 230 from the Single Notary Office of Sabaneta, Department of Antioquia, on April 4, 1995, for an undefined period of duration. Its main offices are located at Carrera 30 No. 10 C 280 in the Municipality of Medellín, Department of Antioquia, Colombia. In 2016 Brookfield Asset Management Inc. (Brookfield) acquired ISAGEN through its subsidiary BRE Colombia Hydro Investments Limited. Brookfield is a leading global alternative asset manager with 100 years of experience investing in high quality assets across real estate, infrastructure, renewable power and private equity, in over 30 countries. ISAGEN main corporate purpose is the generation and marketing of electric power, marketing of natural gas through networks, and the marketing of coal, steam and other energy sources for industrial use. In order to develop its corporate purpose, the Company has the following power generation plants: San Carlos Hydroelectric Jaguas Hydroelectric Calderas Hydroelectric Miel I Hydroelectric Amoyá Hydroelectric Termocentro combined cycle thermal power plant Sogamoso Hydroelectric

2 1.2 Translation of financial statements These financial statements have been translated into English for the convenience of English-speaking readers. The financial statements are the English translation of those originally prepared by the Company in Spanish and presented in accordance with International Financial Reporting Standards. 2. Merger Note On October 31, 2017 through Resolution No issued by the Colombian Superintendence of Companies, the merger between ISAGEN and BRE Colombia Holdings S.A.S. The merger was registered by public deed No of November 21, 2017 at Notary 2 of Medellin and registered in the Chamber of Commerce of this same city on November 28, 2017 under No , Book IX of the commercial register. The absorbing company was ISAGEN, a company that had at the time of the merger a subscribed and paid-in capital of $ 133,578 represented by 2,726,072,000 shares at a par value of $49 per share. The absorbed company was BRE Colombia Holdings S.A.S., a company that had at the time of the merger a subscribed and paid-up capital of $ 631,783 represented by 631,783,191 shares at a nominal value of $ 1,000* per share. The effects on the capital stock of the Company are explained in note 13 Capital Stock and in note 5 the effect of the merger is presented in the 2016 and 2017 financial statements as it would have taken place in 2016, only for purposes comparative. * Amount expressed in Colombian pesos 3. Summary of accounting policies The accounting policies applied in the preparation of the financial statements are explained below. Such policies have been consistently applied in all the years presented. 3.1 Basis for preparation ISAGEN prepares its financial statements in accordance with the provisions in force issued by Law 1314 of 2009 regulated by Decrees 2420 of 2015 modified by Decree 2496 of 2015 and 2131 of 2016, accordance with accounting and financial reporting standards accepted in Colombia NCIF, which are based on International Financial Reporting Standards (IFRS) in conjunction with their interpretations, translated into Spanish and issued by the International Accounting Standards Board (IASB) as of December 31,

3 In addition, the Company, in compliance with the Law, Decrees and other current regulations, applies in Decree 2131 of By means of which it is determined to disclose the calculation of the pension liabilities according to the parameters established in Decree 1625 of 2016, in case of partial pension commutations in accordance with the parameters of Decree 1833 of 2016 and the differences with the calculation made in accordance with IAS 19 - Employee Benefits. The financial statements have been prepared based on historical cost, with the exception of certain financial instruments that are measured according to amortized cost or fair value, as explained in the accounting policies included hereunder. In general, historical cost is based on the fair value of the payment given or received in exchange for goods or services involved in transactions. Fair value is the price to be received for selling an asset or paid for transferring a liability through an ordered transaction among market participants on the date of its estimation. Financial statement preparation in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to use its judgment in the process of accounting policy application. The areas involving a higher degree of judgment or complexity or the areas in which assumptions and estimates are significant in the financial statements are described in Note 3.22 Judgements, estimates and relevant accounting criteria. These financial statements present comparative information with respect to the previous annual period. 3.2 Accrual Basis of Accounting The Company prepares its financial statements applying the accrual basis of accounting, with the exception of cash flow statement which is prepared on a cash basis. 3.3 Changes in accounting policies and disclosures Numeral 3 article of book 2, part 1 of Decree 2420 of 2015 modified by Decrees 2496 of 2015 and 2131 of 2016 includes the standards that have been issued by the IASB and adopted in Colombia which are be effective after Annual improvements Annual Improvements to IFRS Cycle The Annual Improvements to IFRSs Cycle include a number of amendments to various IFRSs, which are summarized below: 2

4 IAS 12 Income Tax Consequences in the income tax of payments for financial instruments such as equity. Current and deferred taxes are recognized as income and expense and are included in the result of the period, except to the extent that the tax is paid for transactions that are recognized, in the same or a different period, outside profit or loss, either in other comprehensive income, directly in equity or a business combination (IFRS 10 Consolidated Financial Statements, of a subsidiary that requires fair value with changes in results). Another example provided describes the consequences of the divisions of income tax in relation to transactions or past events, related to distributions made to owners. Therefore, an entity recognizes the consequences of dividends on income tax in profit or loss for the period. An entity recognizes the consequences of dividends in the income tax when it recognizes a liability to pay the dividend. There is no impact due to this clarification that the Company recognizes the effects for financial instruments directly in the result. IAS 23 Loan Costs Costs for loans subject to capitalization. This amendment clarifies the exclusion in the calculation of the capitalization rate on generic loans specifically taken to finance a qualifying asset. There is no material impact due to the implementation of this modification as the company does not have generic credits for the construction of a suitable asset. IAS 28 Investments in Associates and Joint Ventures Long-term interests in a joint venture or joint venture. This amendment incorporates the application of IFRS 9 to other financial instruments in an associates or join ventures for which the equity method does not apply. These include financial instruments that are long term, in essence, they are part of the investment of the entity in an associated company or business. This amendment has no impact on the Company. Annual improvements to IFRS Cycle IFRS 1 First-time Adoption of International Financial Reporting Standards: 3

5 This amendment removed the short-term exemptions from Financial Instruments, Employee Benefits, Investment Entities, for first-time adopters IFRS 1. This amendment will apply for periods beginning on or after January 1, Early adoption is permitted. This amendment has no impact on the Company. IFRS 12 Disclosures about Shares in Other Entities: This amendment clarifies the scope of IFRS 12 - Disclosures about Investments in Other Entities, specifying disclosure requirements, other than those included in paragraphs B10-B16, apply to the interests in entities within the scope of IFRS 5, or those included in a disposal group that are classified as held for sale, held for distribution or as discontinued operations. This amendment will apply for periods beginning on or after January 1, The company does not foresee impacts by the adoption of this amendment. IAS 28 Investments in Associates and Joint Ventures: The amendments clarify the exemption from measuring the application of the equity method for investments in associates or joint ventures measured at fair value through profit or loss in Venture Capital Companies or a collective investment fund, investment trust or other entity Analogous. This amendment will apply for periods beginning on or after January 1, Early adoption is permitted. Currently ISAGEN does not have investments in associates or joint ventures and therefore there are no impacts due to the implementation of this amendment New standards and revised standards that are not Mandatory Effective for the Year Ended December 31, 2017 Standards issued but not yet mandatory are listed below. ISAGEN will them at the mandatory date established for their enforcement. Amendments to IAS 12 Income Taxes: Recognition of Deferred Tax Assets for Unrealized Losses This amendment is included in Annex 1.2 to Decree 2420 of 2015, through Decree 2131 of 2016, effective January 1, This amendment establishes the need for a company to consider whether tax revenues are restricted by tax sources against which deductible temporary differences can be charged, in addition to providing 4

6 guidance on how a company can determine its taxable income and the circumstances in which taxable profit can include the recovery of active assets for a value greater than the book value. IFRS 9 Financial Instruments IFRS 9 issued in November 2009 introduced new measuring and classification requirements of financial assets. This standard was modified in October 2010 to include requirements for measurement, classification and derecognition of financial liabilities and in November 2013 to include new requirements for general hedges accounting. Another revised version of IFRS 9 was issued in July 2014 mainly to include a) requirements for financial asset impairment, b) limited amendments to measurement and classification by introducing the measuring category At fair value through other comprehensive income, for certain simple debt instruments. Main requirements under IFRS 9: For all financial assets recognized within the scope of IAS 39 Financial Instruments: Recognition and Measurement, their subsequent measurement is required at amortized cost or at fair value. Financial instruments maintained within a business model in which the purpose is to obtain contractual cash flows as well as cash flows associated with the sale of financial assets, and that have contractual terms that provide cash flows on specific dates which are solely payment of principal and interests on outstanding capital, are generally measured at fair value through other comprehensive income. All other debt and equity investment instruments are measured at fair value at the end of the period and subsequent periods. Additionally, under IFRS 9, an entity may make an irrevocable decision to present subsequent changes in the fair value of an equity instrument (not maintained for trading purposes) in other comprehensive income and only recognize income from dividends under income. With respect to financial obligations designated at fair value through profit and loss, IFRS 9 requires that value of the change in the fair value of the financial instrument attributed to changes in liability credit risk, be presented under other comprehensive income, unless said recognition may give rise to an accounting distortion of income. Changes in fair value attributed to the credit risk of the financial obligation are not subsequently reclassified in income. Under IAS 39, the total amount of change in the fair value of the financial obligation designated at fair value through profit and loss is presented in the statement of earnings. With respect to financial asset impairment, the standard requires a model of future credit losses as opposed to the model of credit losses incurred under IAS 39. The model of expected credit losses and the changes in such losses on each reporting date to reflect changes in credit risks since the initial recognition. In other words, it is no longer necessary for a credit default to occur before loss recognition. 5

7 The new general hedge accounting keeps the three types of mechanisms for hedge accounting available under IAS 39. Under IFRS 9, greater flexibility was introduced to the types of transactions eligible for hedge accounting, specifically, increasing the types of instruments classified as hedging instruments and the types of risk components of non-financial items eligible for hedge accounting. Additionally, the effectiveness test has been revised and replaced by the principle of economic relationship. The retroactive evaluation of hedge effectiveness is no longer required. Improvements were included to the requirements of disclosure of an entity s risk management activities. The effective date of application of this standard is scheduled for January 1, 2018, the Company has evaluated the impact of the implementation and has concluded that the current classification and measurement models comply with the requirements of the standard, in addition to the company has the necessary guarantees and supports for the transactions, which allow us to continue with the deterioration model that is currently in compliance with current regulations. The effect on hedge accounting is prospective and therefore will have no effect on the Company for the current period. IFRS 15 Revenue from Contracts with Customers This standard was issued in May 2014, and modified in April 2016 by the IASB, which establishes a single model to be used by entities when accounting for income resulting from contracts with customers. IFRS 15 will replace the current income recognition guidelines included in IAS 18 "Revenue", IAS 11 "Construction Contracts" and the related interpretations when it becomes effective. This norm was included in Decree 2496 of 2015 and its amendment was included in Decree 2131 of The basic principle of IFRS 15 is that an entity will recognize income from regular activities in a manner which represents the transfer of goods or services committed to clients in exchange for a price reflecting the consideration at which the entity expects to have the right to change such goods or services. An entity recognizes revenue from regular activities in accordance with this basic principle by way of applying the following stages: Stage 1: Identify the contract (or contracts) with the client Stage 2: Identify performance obligations in the contract Stage 3: Determine the price of the transaction Stage 4: Allocate the price of the transaction among contract performance obligations Stage 5: Recognize revenue from regular activities when (or to the extent of) the entity satisfies the performance obligation Under IFRS 15, an entity will recognize revenue when the obligation is satisfied, for example, when the control of the goods or assets underlying the performance of the obligation in particular are transferred to the client. More specific guidelines have 6

8 been added to the standard for specific scenario management. Additionally, more disclosure is required. The presentation and disclosure requirements of the new standard are more detailed than those contained in the previous standard. The filing requirements represent a significant change in current practice and significantly increase the amount of disclosures in the financial statements. Many of the disclosure requirements of IFRS 15 are new and the Company has concluded that the impact of some of these requirements will not be significant. In addition, as required by IFRS 15, the Company will disaggregate the income recognized by contracts with customers between the categories that represent how the nature, amount, opportunity and uncertainty of income and cash flows are affected by economic factors. The application of IFRS 15 is expected to January 1, The Administration has concluded through its analysis that the implementation of this standard has no significant impact on the Company, mainly based on the fact that the measurement of income depends on the agreements with pre-established sale prices and sales on the energy market that are regulated by the market. Regarding the definition of agent and principal, ISAGEN acts as principal in its sales contracts. On the other hand, a series of modifications and issuance of the following standards published by IASB: IFRS 2 Classification and Measurement of Share-based Payment Transactions Amendments to IFRS 2 The IASB issued amendments to IFRS 2 Share-based Payment that address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash settled to equity settled. For its adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria are met. The amendments are effective for annual periods beginning on or after 1 January 2018, with early application permitted. These amendments will not have any impact on ISAGEN s financial statements. IFRS 16 leases IFRS 16 replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the legal form of a lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases 7

9 and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognitions exemptions for lessees: a) leases of low-value assets (e.g., personal computers) and; b) short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments, etc.). The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. Lessors will continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases. IFRS 16 also requires to lessees and lessors to make more extensive disclosures than under IAS 17. IFRS 16 is effective for annual periods beginning on or after 1 January Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard s transition provisions permit certain reliefs. During 2018, the Company plans to assess the potential effect of IFRS 16 on its financial statements. Amendments to IFRS 15 Income from Contracts with Customers On April 12, 2016, the IASB published the following clarifications to its revenue standard: Identification performance obligations Considerations of the principal against the agent's consideration Licensing Collectability, and Measurement of non-cash consideration 8

10 Amendments are effective for annual periods beginning on or after January 1, 2018, which is the same effective date as IFRS 15. Early adoption is permitted. The Company does not anticipate any impacts from these amendments. Amendments to IAS 40 Investment Property The amendment mentions the transfer of assets to, or from investment properties. Specifically, the amendments revise paragraph 57 of IAS 40 to establish that an entity will transfer ownership to, or from investment property when, and only when, there is a change in use. The amendments clarify that a change in use occurs when the property complies with or fails to comply with the definition of investment property and that a change in management's intentions for the use of a property does not provide evidence of a change in the ownership use. Amendments are effective for periods beginning on or after January 1, Advance adoption is permitted. Currently the Company does not have investment properties and therefore does not expect any impact. Publication of IFRIC 22 Foreign Currency Transactions and Advance Consideration: The standard was developed to clarify the accounting of transactions that include the receipt or payment of anticipated consideration in a foreign currency. Interpretation is applies when reporting transactions that are denominated in a foreign currency in accordance with IAS 21 in circumstances where the consideration is received or paid before the related asset, expense or income is recognized. The amendment is effective for periods beginning after January 1, 2018; early adoption is allowed. The Company does not have material advances in foreign currency and therefore does not foresee a potential impact. IFRIC 23 Uncertainty Faced with Income Tax Treatments The interpretation deals with income tax accounting in cases where the tax treatments include uncertainties that affect the application of IAS 12 and does not apply to taxes that are outside the scope of this standard, does not it include specific requirements related to interest and penalties associated with uncertain tax treatments. The interpretation mainly includes: When the entity considers uncertain tax treatments separately The assumptions made by the entity about the examination of tax treatments by the corresponding authorities 9

11 The manner in which the entity determines the fiscal profit (or fiscal loss), tax bases, unused tax losses or credits, and tax rates The manner in which the entity considers changes in events and circumstances The Company must determine if it evaluates each uncertain treatment separately or in groups, using the approach that best predicts the resolution of uncertainties. This interpretation has not been regulated under Colombian accounting regulations. The Company does not have complex transactions that require a tax analysis different from the provisions of IAS 12 and therefore does not foresee any impact. Publication of IFRS 17 Insurance Contracts This standard establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts. Its objective is to ensure that an entity provides relevant information that faithfully represents insurance contracts. This information provides a basis for users of financial statements to evaluate the effect that insurance contracts have on the financial position, financial performance and cash flows of the entity. The standard is applicable effective January This standard does not apply to the Company and, therefore, no impacts are foreseen. Note: The application of some of the rules previously mentioned are subject to the legal definitions adopted by the National Government as to their applicability and validity. 3.4 Conversion of Foreign Currency (a) Functional currency and presentation currency The items included in financial statements are expressed in the currency of the primary economic environment where the entity operates Colombian pesos, which are the functional currency of the Company and the presentation currency. (b) Transactions and balances in foreign currency Transactions in foreign currency are initially recorded in the functional currency using the exchange rates at the dates on which the transactions meet the conditions for recognition. Monetary assets and liabilities denominated in foreign currencies are converted at the functional currency exchange rates of at the reporting date. Differences arising on settlement or translation of monetary items at the end of the period are recognized in income. 10

12 The cost of a foreign currency non-monetary items are converted using the exchange rates current at transaction date. 3.5 Property, plant and equipment Property, plant and equipment are recognized at their acquisition cost, less accumulated depreciation and accumulated impairment losses, if any. Historical cost includes disbursements directly attributed to the acquisition of these items. Cost also includes costs for loans incurred during construction stages of projects requiring substantial time before starting operation. Properties undergoing construction for production, supply or administrative purposes are recognized at cost, less any recognized impairment loss. Cost includes, for suitable assets, the cost of loans capitalized by the effective interest method. These assets are classified under the appropriate categories of properties, plant and equipment when be completed and ready for their intended use. Suitable assets are those assets requiring a substantial period of time to be ready to operate as expected by Management. For ISAGEN, the minimum period of construction or adapting of an asset is between 6 months and 1 year, depending on the type of asset. Expenditures that increase the useful life or the ability to use assets supported on a technical concept are capitalized. Other expenditures for maintenance and repairs are charged to costs and expenses when they are incurred, excluding major maintenance, which are recorded as a separate component of the asset. It includes as at investments directly related to the construction or acquisition of an asset that requires a substantial period of time to put it in conditions of use are included as an investment. Among others, costs of personnel directly related to the construction of projects, interest costs of the debt destined to finance projects and costs of major maintenance that increase the useful life of existing assets, among others, are capitalized as ongoing constructions. Depreciation of these assets begins when the assets are ready for their intended use by the administration. Asset depreciation, is calculated using the straight line method. The depreciable basis of an asset includes its acquisition cost less its residual value. Depreciation is recognized in the income of the period and in other comprehensive income during its estimated useful life. Asset residual values and useful life are revised and adjusted, when necessary, on the date of each statement of financial position. 11

13 Impairment exists when the net book value of an asset exceeds its recoverable amount. The book value of an asset is written down immediately to its recoverable value. (Note 3.8) An element of property, plant and equipment is derecognized due to its disposal or when no future economic benefits are expected from continuing asset use. Gains or losses from asset sales correspond to the difference between the income received from the transaction and the book value of the asset. The same are included in the statement of profit or loss. Properties, plant and equipment subject to financial leases are depreciated in the same way as own assets. If there is reasonable certainty of obtaining ownership at the end of the lease period, the asset is depreciated throughout its expected useful life, otherwise it is depreciated at the end of the lease period, whichever is lower. 3.6 Intangible Assets Intangible assets acquired separately are initially measured at their cost. Following the initial recognition, the intangible assets are accounted for at their cost less any accumulated amortization and any accumulated loss for the impairment of the value that exist. The estimated useful life and the amortization method of intangibles are revised at the end of each period. An intangible asset will be derecognized upon disposal or when future economic benefits are not expected from its use or disposal. Gains or losses derived from the disposal of an intangible asset are measured as the difference between asset net income from sale and the book value and recognized in profit or loss. (a) Licenses Licenses have a stablished useful life and are recognized at cost less accumulated amoritzation. Such amortization is estimated using the straight line method and costs are recognized and charged to profit or loss over the expected useful life. (b) Software Costs associated with software maintenance are recognized as expense when incurred. Amortization is calculated using the straight line method and costs are recognized and charged to profit or loss over the expected useful life. (c) Easements 12

14 Easements are acquired rights for the development of productive projects. These assets are considered as finite life assets and are amortized over the time of the duration of the associated project using the straight line method. (d) Research and Development Expenses The amounts incurred in research activities are recognized as expenses during the period in which they were incurred. When the technical and financial feasibility is demonstrated for a project, it is considered at the development stage and begins to capitalize costs as an intangible asset. An asset internally generated (derived from the development phase of an internal project) is recognized as asset, if all the following is evidenced: Technical feasibility of completing the asset in a manner such that it will be ready for its intended use or sales. The intention to complete an asset for use or sales. The capacity to use or sell the asset. The manner in which the asset will generate probable future economic benefits. Availability of appropriate technical, financial and other resources to complete development and to use or sell the asset. Capacity to measure in a reliable manner the disbursement attributable to the asset during its development. The amount initially recognized at the assets is the sum of expenses incurred from the date that the element complies with the above-mentioned recognition criteria. Where an asset internally generated is not recognized, development expenses are recognized and charged in profit or loss in the period when incurred. After the initial recognition, assets internally generated are recorded at cost less accumulated amortization and accumulated impairment losses, if any, on the same conditions as assets acquired separately. (e) Goodwill Goodwill is the excess of the sum of the counter-consideration transferred and the net value of the assets acquired and the liabilities assumed at fair value. After initial recognition, goodwill is recorded at cost less any accumulated impairment loss. The impairment test is assigned to each cash generating unit of the Company. 3.7 Leases There are explicit lease agreements (lease) or implicit (through a service agreement). 13

15 The determination of whether an agreement constitutes or contains a lease is based on the essence of the agreement at the date that the lease is signed. ISAGEN as lessee classifies leases as financial leases provided that the terms of the lease significantly transfer to ISAGEN all risks and benefits of the property to the lessee. Other leases are classified as operating leases. Assets under financial lease are only reported as assets at their fair value at the beginning of the lease agreement or, if lower, at the present value of minimum payments. The present obligation of lease payments and the purchase option are recognized in the statement of financial position as a financial lease obligation. The assets held under finance leases are depreciated over their expected useful life. However, when there is no reasonable certainty that ISAGEN will obtain ownership by the end of the lease term, the assets are depreciated over the shorter of the lease term and their useful lifes. Lease payments are distributed between financial expenses and reduction of the liability. Financial expenses are recognized immediately in the statement of profit or loss, unless they are directly attributable to suitable assets, in which case they are capitalized, according to the general policy on loan costs. Operating lease payments are reported as expenses under the straight-line method throughout the term of the lease, unless another systematic basis is more representative of the temporary pattern of economic benefits consumption of the leased asset. 3.8 Impairment of Non-Financial Assets At the end of each reporting date, ISAGEN assesses whether there is any indication that a non-financial asset has suffered an impairment loss. If there is any indication, or when annual impairment tests are required for an asset, the Company estimates the recoverable amount of that asset or the cash-generating unit. Assets subject to depreciation or amortization are tested for impairment when events or circumstances occur that indicate that its book value may not be recovered. Impairment losses correspond to the amount in which the book value of the asset exceeds its recoverable value. Asset recoverable value is the higher value between the net amount obtained from its sales or its use value. For purposes of impairment assessment, assets are grouped at the smallest levels in which they generate identifiable cash flows (cash generating units). Non-financial asset book values that were subject to impairment are reviewed at the end of every reporting period to verify any possible impairment reversals. The cash generating unit is power generation activity. 14

16 Impairment of goodwill: The impairment tests are carried out annually, in the same period each year. When value deterioration occurs, it is initially assigned to the goodwill and subsequently to the assets that make up the cash generating unit. The Company bases its impairment value calculation on detailed estimates and projection for the cash-generating unit to which the individual assets are assigned. Generally, budgeting and projection calculations cover a period of five years. For the longer periods, a long-term growth rate is calculated and applied to the future cash flows of projections from the fifth year. Where an impairment loss is later reversed, the book value of the asset (or of a cash generating unit) is increased to the revised recoverable amount estimate, but in a manner in which the increased book value will not exceed the book value to be determined if no impairment loss had been recognized for the asset (or the cash generating unit) in previous periods. Reversal of an impairment loss is immediately recognized in profit or loss Financial assets Classification 3.9 Financial instruments The Company classifies its financial assets into the following categories: Financial assets at fair value through profit and loss and amortized cost. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets on the date of initial recognition. All financial assets are initially recognized at their fair value plus, the transaction costs attributable to the acquisition of the financial asset. This is in the case of financial assets not recorded at fair value through profit or loss. (a) Financial assets at fair value through profit and loss Financial assets at fair value through profit and loss are assets held for trading. A financial asset is classified in this category if is acquired mainly for the purpose of sales in the short term. Gains and losses arising from changes in the fair value of financial assets at fair value through profit or loss are included in the statement of comprehensive income 15

17 under financial income/expenses item, in the period in which the changes in fair value occur. (b) Financial assets at amortized cost After the initial valuation, financial assets are valued at amortized cost using the effective interest rate method, less impairment. The amortized cost is calculated taking into account any discount or acquisition premium and the fees or costs that are an integral part of the effective interest. The interest accrued in accordance with that effective interest rate is included as "financial income" in the income statement. The effective interest rate method is a mechanism for calculating the amortized cost of a financial instrument assets and the allocation of interest income during the relevant period. The effective interest rate is the rate that accurately discounts future cash flows (including all fees and points paid or received that are an integral part of the rate, transaction costs and other premiums or discounts) through the expected life of the instrument Recognition and measurement Regular sales and purchases of financial assets are recognized on the date of liquidation, date on which the sales or purchase of the asset is affected. Investments are initially recognized at fair value plus the cost of transaction in the case of financial assets not reported a fair value through profit and loss. Financial assets recognized at fair value through profit and loss are initially recognized at fair value and transaction costs are recognized as expense in the statement of profit or loss and other comprehensive income. Investments cease to be recognized when the rights to receive cash flows from investments expire or all risks and benefits derived from their ownership have been substantially transferred. Financial assets available for sale at fair value through profit or loss are later recognized at fair value. Loans and accounts receivable are recognized at their amortized cost based on the effective interest rate method. Commercial receivables are initially recognized at fair value and subsequently are valuated at amortized cost, using the effective interest method, less impairment. Gains and losses arising from changes in the fair value of financial assets at fair value through profit and loss are included in the statement of profit or loss and other comprehensive under the item other income /other expenses, in the period in which the changes in fair value take place. Financial assets are classified in current assets unless there is an obligation to defer the right for more than 12 months from the date of the statement of financial position Financial asset impairment 16

18 On each date of the statement of financial position or when an indication is identified, evaluation is made on whether there is objective evidence of impairment of the financial asset or a group of financial assets. A financial asset or group of financial assets is impaired only if there is objective evidence of impairment as a result of one or more events occurring after the initial recognition of the asset (an event of loss) and the event of loss, (or events), have an impact on estimated future cash flows of the financial asset or group of financial assets which may be estimated in a reliable manner. Criteria used to determine whether there is objective evidence of a loss due to impairment are: Significant financial difficulties of the issuer or obliged party. Breach of contract such as non-payment or delay in the payment of interests or principal. The Company, for economic or legal reasons associated with financial difficulties of the borrower, provides the borrower a concession that otherwise would not have been considered. It is probable that the borrower will go bankrupt or will undergo financial cleanup. The disappearance of an active market for the financial asset due to financial difficulties, or Observable data indicates that there is a significant reduction in estimated future cash flows based on a portfolio of financial assets from the initial recognition of such assets, despite the reduction not being yet identified with individual financial assets in the portfolio, including: (i) Adverse changes in the status of portfolio borrower payments, and (ii) Local or national economic conditions correlated to non-payment in portfolio assets. The Company first evaluates whether individual objective evidence of impairment exists, otherwise a general or overall assessment is made to determine the impairment. For loans and accounts receivable, the amount of loss is measured as the difference between the book value of the asset and the present value of future cash flows (excluding future credit losses that have not been incurred) discounted at the original effective interest rate of the financial asset or at a reference rate if the original rate of 17

19 the asset is below market rates. The book value of the asset is reduced and the size of the loss is recognized in profit and loss. If a loan or investment kept until maturity has a variable interest rate, the discount rate to valuate any impairment loss is the current effective interest determined under the contract. If in a later period, the amount of the impairment loss is decreased and the decrease may be objectively associated with an event occurring after the impairment was recognized (for example, an improvement in debtor credit rating), the reversal of the impairment loss is recognized in profit and loss. When an account receivable is deemed uncollectible, it is derecognized under the respective impairment account. Later recovery of previously derecognized amounts is recognized as credit in the account recoveries in the income statement Financial liability Classification Financial liabilities are classified as financial liabilities at fair value through profit or loss or other financial liabilities (including Commercial accounts payable and other accounts payable and Loans and borrowings). Financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial liabilities at amortized cost are added to or deducted from the fair value of the financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial liabilities at fair value through profit or loss are recognized immediately in profit or loss Recognition and measurement The subsequent measurement of financial liabilities depends on their classification, as described below: (a) 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 in this group if they are incurred in order to buy it back in the near term. Gains or losses on these financial liabilities are recognized in the profit and loss account. The financial liabilities designated in their initial recognition at fair value through profit or loss are designated at the initial recognition date, and only if the criteria of IFRS 9 are satisfied. 18

20 (b) Financial liabilities at amortized cost In its subsequent measurement, financial liabilities are measured at amortized cost, using the effective interest rate method. The effective interest rate method is a mechanism for calculating the amortized cost of a financial liability instrument and the allocation of interest expenses during the relevant period. The effective interest rate is the rate that accurately discounts future cash flows (including all fees and points paid or received that are an integral part of the rate) through the expected life of the instrument. Financial liabilities are classified in current liabilities unless there is an unconditional right to defer payment of the obligation for more than 12 months from the date of the statement of financial position Derecognition A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the statement of profit or loss Derivative financial instruments and hedges The Company uses derivative instruments to hedge the effects of exchange rates and interest rates on financial statements. These derivative financial instruments are initially recorded at the fair value of the date on which the derivative is contracted and are subsequently measured at fair value at each closing date. Derivatives are accounted for as financial assets when the fair value is positive and financial liabilities when the fair value is negative. Any loss or gain from changes in the fair value of the derivatives is recognized directly as a loss or gain, except for the effective part of the cash flow hedges, which is recognized in other comprehensive income, and subsequently reclassified to profit or loss when the Covered item affects losses or gains. These financial instruments are classified in one of the following categories: Fair value hedges, when they cover the exposure to changes in the fair value of a registered asset or liability or an unregistered firm commitment Cash flow hedges, when they cover the exposure to the variability of cash flows that is attributable either to a specific risk associated with a registered 19

21 asset or liability or to a highly probable forecast transaction, or to the exchange rate risk in a firm commitment not registered Inventories Inventories are reported at cost or net realizable value, whichever is lower. Cost is determined by applying the weighted average method. 20

22 3.11 Cash, cash equivalents and restricted cash Cash and cash equivalents include cash, bank deposits of free disposal, other shortterm highly liquid investments within three month or less maturities as of the date of acquisition of the financial instrument and which are subject to an insignificant risk of changes in value. Restricted cash is cash or equivalent with specific use or destination and is presented separately in the financial statements Share capital The capital includes the issued share capital, the issue premiums and all other equity reserves attributable to the owners of the Company. Common shares are classified in equity. Incremental costs directly attributable to new share issuance or options are shown in equity as a deduction from the amount received, net of taxes Reserves Appropriations authorized during the general Stockholders Meetings are registered as reserves, charged to profit and loss for the year to comply with legal provisions or to cover expansion plans or financing needs. Legal provisions contemplating reserve constitution applicable to the Company are the following: Article 130 of the Tax Statute (repealed by Law 1819 of 2016) contemplated a reserve appropriation of the net profits equivalent to 70% of the greater value of the fiscal depreciation on the accounting depreciation (see note 14 reserves). This reserve may be released at the time when the tax depreciation requested is lower than that recorded in the income statement, or the assets that generated the greater value deducted are sold. The Code of Commerce orders the Company to appropriate 10% of its annual net profits under local accounting standards as legal reserve until the balance of this reserve is equivalent to 50% of subscribed capital. Mandatory legal reserve may not be distributed prior to Company liquidation, but may be used to absorb or reduce annual net losses. Balances of the reserve exceeding 50% of subscribed capital are freely available to shareholders. 21

23 3.14 Loan costs Loan costs directly attributed to the acquisition, construction or production of suitable assets, understood as assets that necessarily take a substantial period to be ready for use or sales, are added to the cost of these assets, until such assets are substantially ready for use or sales. Loan costs include interest and other costs incurred by the entity in connection with the conclusion of the respective loan agreements. Income from the temporary investment of specific credits pending to use in suitable assets, is deducted from the costs of loans eligible for capitalization Current income tax and deferred tax Income tax expense for the period includes current income tax and deferred. Deferred income tax, in the same way as others, is recognized in profit or loss for the period, with the exception of items recognized in other comprehensive income. In this case, the tax is also recognized in other comprehensive income. The charge for current income tax is estimated based on enacted tax laws or substantially enacted prior to the date of the statement on financial position. Management frequently evaluates the position assumed in tax returns, regarding situations where tax laws are subject to interpretation. The Company, where applicable, creates provisions for the amounts expected to be paid to tax authorities. Deferred income tax is provisioned in its entirety, by the liability method, on temporary differences arising between asset and liability tax basis and their respective values shown in financial statements. Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Asset deferred income tax is only recognized to the extent that it is probable that future economic benefits will be derived against which temporary differences may be used. Asset and passive deferred income taxes are offset when an enforceable legal right exists to offset current tax assets against current tax liabilities and when active and passive deferred income taxes are related with the income tax levied by the same tax authority. 22