Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Report of Independent Auditors and Consolidated Financial Statements December 31, 2008 and 2007
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Contents December 31, 2008 and 2007 Page(s) Report of Independent Auditors .......................................................................................................... 1 Consolidated Financial Statements Consolidated Balance Sheets .................................................................................................................. 2 Consolidated Statements of Operations .................................................................................................. 3 Consolidated Statements of Changes in Shareholders’ Equity ............................................................... 4 Consolidated Statements of Cash Flows ............................................................................................. 5-6 Notes to Consolidated Financial Statements ..................................................................................... 7-27
PricewaterhouseCoopers Ave. John F. Kennedy Edificio Banco Nova Scotia, 3er Piso Apartado Postal 1286 Santo Domingo, Rep. Dom. Telephone 809 567 7741 Facsimile 809 541 1210
Report of Independent Auditors
To the Board of Directors and Shareholders of Empresa Generadora de Electricidad Haina, S. A. and Subsidiary We have audited the accompanying consolidated balance sheets of Empresa Generadora de Electricidad Haina, S. A. and its subsidiary (collectively “the Company”) at December 31, 2008 and 2007, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the years then ended, expressed in United States Dollars (U.S. Dollars). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, expressed in U.S. Dollars, present fairly, in all material respects, the financial position of Empresa Generadora de Electricidad Haina, S. A. and its subsidiary at December 31, 2008 and 2007, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The electricity sector in the Dominican Republic continues to be affected by the financial difficulties experienced by the local distribution companies. The Dominican government owns a controlling interest in two major energy distributors and, as mentioned in Note 3, 98% of the Company's revenues correspond to generation sold to distribution companies associated with the Dominican government.
March 31, 2009
1
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Consolidated Balance Sheets December 31, 2008 and 2007 2008
2007
US$ 22,339,774
US$ 47,053,306
3,014,000 200,544,467 25,105,185 9,602,523 4,901,359
20,000,000 110,757,535 16,872,450 4,105,925 5,176,585
Total current assets
265,507,308
203,965,801
Deposits in banks, restricted (Note 12) Long-term receivables (Note 5) Property, plant and equipment, net (Note 8) Deferred charges (Note 9) Other assets (Note 10)
8,312,500 32,473,301 262,636,734 10,653,608 6,450,449
8,312,500 44,380,129 260,256,288 11,965,104 2,614,822
US$586,033,900
US$531,494,644
US$1,703,313 59,441,348 2,186,389 17,205,496
US$ 11,439,630 1,001,720 29,234,098 1,013,753 7,277,424
80,536,546
49,966,625
175,000,000 11,659,504 350,848
175,000,000 6,273,112 341,222
267,546,898
231,580,959
144,500,000
144,500,000
144,500,000
144,500,000
289,000,000 10,626,844 49,892,153 (31,031,995)
289,000,000 8,698,178 33,247,502 (31,031,995)
318,487,002
299,913,685
US$586,033,900
US$531,494,644
Assets Current assets Cash and cash equivalents (Note 4) Investment in certificate of deposit at annual interest rate of 5% maturing more than 90 days Restricted cash (Note 3 and 23) Accounts receivable (Note 5) Inventories (Note 6) Prepaid expenses (Note 7) Deferred income tax (Note 16)
Total assets Liabilities and Shareholders’ Equity Current liabilities Short-term debt (Note 11) Current portion of long-term debt (Note 12) Accounts payable (Note 13) Payable to related parties (Note 22) Other current liabilities (Note 14) Total current liabilities Long-term debt (Note 12) Deferred income tax (Note 16) Other non-current liabilities Shareholders’ equity (Note 15) Common stock, RD$100 par value (US$6.29) Class A – 22,975,500 shares authorized, issued and outstanding Class B – 22,975,500 shares authorized, issued and outstanding Legal reserve Retained earnings Accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements 2
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Consolidated Statements of Operations Years Ended December 31, 2008 and 2007 2008
2007
US$421,784,955 37,382,606 1,399,117
US$310,338,588 34,006,110 174,726
460,566,678
344,519,424
(158,105,438) (12,833,949) (144,341,238) (1,666,942) (31,085,193) (38,719,644) (15,304,240)
(128,107,726) (15,263,392) (63,415,774) (1,707,092) (30,765,676) (34,724,506) (15,324,294)
(402,056,644)
(289,308,460)
58,510,034
55,210,964
Financial expenses, net (Note 21) Foreign exchange gain Other (expenses) income, net
(9,855,647) 442,844 (736,808)
(22,818,371) 273,516 1,322,890
Income before income tax
48,360,423
33,988,999
Revenues Energy (Note 17) Capacity (Note 17) Others
Operating costs Fuel (Note 18) Transmission Purchased power (Note 18) Compensation for frequency regulation Operating and maintenance (Note 19) Administrative and general expenses (Note 20) Depreciation and amortization (Note 8)
Operating income
Income tax (Note 16) Current Deferred
(4,125,488) (5,661,618) US$ 38,573,317
Net income
3,983,019 US$ 37,972,018
The accompanying notes are an integral part of these consolidated financial statements 3
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Consolidated Statements of Changes in Shareholders’ Equity Years Ended December 31, 2008 and 2007
Common Stock US$
(Accumulated Deficit) Retained Earnings US$
Legal Reserve US$
Accumulated Other Comprehensive Loss US$
Total US$
Balance at December 31, 2006 Net income Transfer to legal reserve
289,000,000 -
6,799,577 1,898,601
(2,825,915) 37,972,018 (1,898,601)
(31,031,995) -
261,941,667 37,972,018 -
Balance at December 31, 2007
289,000,000
8,698,178
33,247,502
(31,031,995)
299,913,685
-
1,928,666
38,573,317 (20,000,000) (1,928,666)
289,000,000
10,626,844
49,892,153
Net income Dividends (Note 15) Transfer to legal reserve Balance at December 31, 2008
(31,031,995)
The accompanying notes are an integral part of these consolidated financial statements 4
38,573,317 (20,000,000) 318,487,002
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Consolidated Statements of Cash Flows Years Ended December 31, 2008 and 2007
Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Gain on settlement on interest on tax assessment Gain on sale of fixed asset Deferred income tax Depreciation and amortization Provision for doubtful accounts Financial expenses Change in assets and liabilities: Accounts receivable Inventories Prepaid expenses Other assets Accounts payable Payable to related parties Other liabilities Other non-current liabilities Net cash provided by operating activities Cash flows from investing activities Net changes in deposits in banks – restricted Net changes in restricted cash Sale of property, plant and equipment Additions to property, plant and equipment Short-term investments Net cash used in investing activities
2008
2007
US$38,573,317
US$37,972,018
5,661,617 15,304,240 3,300,000 4,276,735
(1,056,025) (325,000) (3,983,019) 15,324,294 10,738,962
(143,597,895) (8,232,735) (5,496,598) (3,835,623) 92,620,981 589,834 6,962,832 9,626
(61,196,269) (2,014,410) (2,270,900) (2,316,596) 33,544,469 (19,392,656) (3,565,491) (237,160)
6,136,331
1,222,217
(3,014,000) (17,097,825) 20,000,000
3,632,324 325,000 (3,329,374) (20,000,000)
(111,825)
Cash flows from financing activities Proceeds from short-term debt Repayment of short-term debt Repayment of long-term debt Proceeds from long-term debt Dividends paid Debt issuance costs paid Repayment of related party debt Net cash (used in) provided by financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year
16,703,011 (26,439,329) (1,001,720) (20,000,000) -
48,625,481 (51,090,913) (95,106,980) 175,000,000 (5,675,030) (13,972,674)
(30,738,038)
57,779,884
(24,713,532) 47,053,306
39,630,051 7,423,255
US$22,339,774
5
(19,372,050)
US$47,053,306
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Consolidated Statements of Cash Flows Years Ended December 31, 2008 and 2007 2008 Supplemental cash flow information Interest paid during the year Prepayment penalty for early extinguishment of debt Income tax paid Non-cash activities Decrease in accounts receivable through the offset in accounts payable Reclassification of accounts receivable from non-current to current Unpaid additions of leasehold improvements (PP&E) Other
2007
US$17,247,961 3,331,257
US$12,485,191 5,129,474 2,791,001
US$62,417,791
US$21,799,574
11,906,828 582,802 4,060
1,741,876 -
The accompanying notes are an integral part of these consolidated financial statements 6
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 1.
Description of the Entity and Nature of Operations Empresa Generadora de Electricidad Haina, S. A. ("EGE Haina") was established on August 17, 1999 and incorporated on October 28, 1999 pursuant to the laws of the Dominican Republic, as part of the capitalization process of the Dominican electricity sector undertaken in 1999. EGE Haina is the largest generator of electricity in the country, when measured by installed capacity, currently operating 11 electric power generator units at six plants, consisting of San Pedro, Sultana del Este – barge, Haina and Barahona in the southern part of the country, Puerto Plata in the northern and Pedernales in the western part of the country. EGE Haina had contracted approximately 96% (2007: 98%) of its power generation to the three Dominican Republic distributors ("the distribution companies"). In connection with the capitalization of EGE Haina, the former shareholder Corporación Dominicana de Electricidad (CDE), transferred plant assets, inventory and certain liabilities to EGE Haina for its equity interest (49.994%). CDE’s shares were formally transferred, on November 20th, 2007, to the current shareholder Fondo Patrimonial de las Empresas Reformadas (“FONPER”), a state-owned company, as a result of Law No. 124-01, dated July 24th, 2001, which states that FONPER is in charge of the preservation and custody of the State's shares at the capitalized companies. The shareholder Haina Investment Co., Ltd. (HIC), a private company located in Cayman Islands, contributed cash by US$144.5 million for its equity interest (50%). Other shareholders hold the remaining 0.006%.
2.
Basis of Presentation and Foreign Currency Financial Statements The present consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These consolidated financial statements include the accounts of EGE Haina and as from 2007 those of its wholly owned subsidiary EGE Haina Finance Company (collectively the “Company”). This subsidiary was formed in 2007 under the laws of the Cayman Islands, for the purpose of issuing a fixed rate bond which is more disclosed in Note 12. Significant intercompany items have been eliminated in consolidation. Foreign Currency Transactions and Translation The Company’s operations are conducted primarily in U.S. dollar which is therefore its functional currency. Foreign exchange gains and losses arising from transactions denominated in a currency other than the U.S. dollar are included in net income. Assets and liabilities denominated in currencies other than U.S. dollar are translated at year end exchange rates. At December 31, 2008 and 2007, exchanges rates were Dominican Peso RD$35.57:US$1.00 and RD$34.42:US$1.00, respectively.
3.
Significant Accounting Policies A summary of significant accounting policies followed by the Company in the preparation of these consolidated financial statements are as follows: Use of Estimates The preparation of consolidated financial statements and related disclosures 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used when accounting for the provision for bad debts or bad debt expense, depreciation and impairment of long-lived assets, income taxes and contingencies. Actual results could differ from those estimates. 7
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 Revenue Recognition and Concentration of Credit Risk Revenues from energy sales, both contracted and spot, are recognized based on the energy produced and energy demanded from clients during each calendar month. Each company in the Dominican Republic Interconnected System reports the end of month metering reading to the Organismo Coordinador (OC), the entity in charge of reporting the system transactions. The OC determines the amounts of energy sales made by contract and the amounts of energy sales made in the spot market. The energy sales made under contract are priced according to the respective contract and those sales made in the spot market are priced according to the market price. The electricity sector in the Dominican Republic continues to be affected by the financial difficulties experienced by the local distribution companies and the increase in oil prices. Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of accounts receivable and deposits in banks. At December 31, 2008 three customers accounted for 97% (2007: 89%) of gross accounts receivable and 98% of total revenues (2007:98%). The Company has a long-term receivable from one of its major customers amounting to US$40.2 million (2007: US$41.9 million). The current portion of such receivable amounts to US$7.7 million (2007: US$1.7 million). EGE Haina believes this balance is fully collectible since this company is one of the three main distribution companies in the country and is partially owned by the Dominican Republic government. Deterioration in the economic situation of this company, however, could cause possible losses, which would affect operating results adversely. Inventories Inventories consist of bulk fuel and spare parts. Bulk fuel is recorded at weighted average cost, which does not exceed market since fuel generally has a very short turnover period. Spare parts are recorded at historical cost and written down when it is determined that there are obsolete parts. These spare parts comprise a large number of individual items of small value each. Management believes book values do not exceed market. Property, Plant and Equipment, Net Property, plant and equipment from initial capitalization was accounted for as a business combination and recorded at estimated fair market value, less allocated excess of the fair market value of assets purchased and liabilities assumed over the purchase price. Subsequent additions are recorded at cost. Depreciation expense has been determined using the straight-line method over the estimated useful lives of the related assets as specified below: Estimated Useful Life (Years)
Asset Buildings Generation plants Transportation equipment Furniture and office equipment Other equipment Leasehold improvements
50 25 5 4-5 4-5 5
Exchange parts are items that can be repaired and reused. Therefore, their expected useful life does not exceed that of the generation plants they support.
8
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 The cost of routine maintenance, repairs and replacements is charged to expense as incurred. The cost of significant overhauls, renewals and improvements, that increase the plants’ capacity and/or increase efficiency and/or extend their useful lives, are added to the carrying amount of the respective assets. When assets are withdrawn or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the results of the period. Deferred charges, net Deferred charges correspond to: (a) Costs in connection with the renegotiation of power contracts. These amounts are amortized on a straight-line basis over the term of the corresponding contracts. (b) Debt issuance costs are related to the issuance of senior fixed rate bonds described in Note 11. These deferred costs are amortized under the interest method over the term of the related financings. Deferred Income Taxes Deferred income taxes are accounted for under the assets and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company adjusts the valuation allowance when changes in circumstances cause a change in judgment about the future realization of the related deferred tax assets. Provision for doubtful accounts and Contingencies The Company establishes a provision for doubtful accounts to provide for accounts receivable where, in management's judgment, it is not probable that such receivable will be fully collected. The level of the provision for doubtful accounts is based on management’s evaluation of various factors, including the credit risk of customers, historical trends, and other information. While management uses the information available to make evaluations, adjustments to the allowance may be necessary should future economic conditions differ substantially from the assumptions used in making the evaluations. Pension Information The Company does not maintain any pension plans. Dominican laws provide for pension benefits to be paid to retired employees from government pension plans and/or privately managed funds plans to which employers and employees make contributions. Dismissal Indemnity Dismissal indemnity that only should be paid in certain circumstances as required by the Dominican labor code is charged to expense when employees are dismissed. 9
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 Impairment of Long-Lived Assets The Company evaluates the carrying value of its long-lived assets for impairment when events or circumstances indicate that the Company may not recover the carrying amounts of the assets. The carrying value of a long-lived asset, or group of assets, is considered impaired when the expected undiscounted cash flows from the use and eventual disposition of such asset, or group of assets is less than its carrying value. In that event, an impairment loss would be recognized generally based on the amount by which the carrying value of the asset or group of assets exceeds its fair market value. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved or based on independent appraisals. Fair Value of Financial Instruments The fair value of the current financial assets and current financial liabilities are estimated to be equal to their reported carrying amounts due to the short-term maturities of these instruments. The fair value of affiliate receivables and payables is estimated based on interest rate and repayments terms. The financial debt is arranged at fixed interest rate and exposes the Company to fair value interest rate risk. Management estimates the fair value of the Company’s borrowings by discounting their future cash flows at market rate (Note 12). Cash and Cash Equivalents For cash flow purposes, the Company considers cash and cash at banks, as well as certificates of deposits and other highly liquid temporary investments with original maturities of three months or less, to be cash equivalents. Restricted Cash Restricted Cash of US$3,014,000 at December 31, 2008, includes cash equivalents that are restricted as to withdrawal or usage. The nature of restriction includes the deposit used as cash collateral for the Stand by Letter of Credit entered into by the Company and Citibank, N.A. (Note 23). Deposits in Banks, Restricted Correspond to deposits in an Interest Reserve Account (or letters of credit or certain temporary cash investments having an aggregate face amount) equal to the interest payable on the Notes described in the Note 12. These deposits are restricted and thus, classified as non-current assets. Comprehensive Income SFAS No. 130, “Reporting Comprehensive Income,” requires a full set of general purpose financial statements to be expanded to include the reporting of “comprehensive income”. Comprehensive income is comprised of two components, net income and other comprehensive income. At December 31, 2008 and 2007, the balance in “Accumulated Other Comprehensive Loss” of US$31,031,995 corresponds to accumulated foreign currency translation adjustments carried forward from when the Company's functional currency was the Dominican Republic Peso. The Company occasionally may enter into derivative financial instruments to manage its exposure to interest rate risk. The Company recognizes derivative financial instruments in the balance sheet at fair value. In 2008 and 2007 the Company did not enter into any derivative financial instruments.
10
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 Reclassifications Certain amounts in the consolidated financial statements as of the year ended December 31, 2007 have been reclassified in order to conform to the presentation of the consolidated financial statements as of and for the year ended December 31, 2008.
New Accounting Standards FIN 48 In July2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in a company’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes (“SFAS No. 109”). FIN 48 requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will not be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement. Any difference between the tax position taken in the tax return and the tax position recognized in the financial statements using the criteria above results in the recognition of a liability in the financial statements for the unrecognized benefit. Similarly, if a tax position fails to meet the more-likelythan-not recognition threshold, the benefit taken in the tax return will also result in the recognition of a liability in the financial statements for the full amount of the unrecognized benefit. FIN 48 became effective for fiscal years beginning after December 15, 2006 for public entities and their subsidiaries. The Company adopted FIN 48 as of January 1, 2008. The provisions of FIN 48 were applied to all tax positions under SFAS No. 109 upon initial adoption. The impact of adopting this interpretation was not material to the Company’s consolidated financial position, results of operations or cash flows. SFAS 157 In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 clarifies the definition of exchange price as the price between market participants in an orderly transaction to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The changes to current practice resulting from the application of this statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years for financial assets and liabilities such as derivatives measured at fair value under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, an irrevocable election to measure hybrid financial instruments at fair value under SFAS No. 155 Accounting for Certain Hybrid Financial Instruments, servicing assets and liabilities measured at fair value under SFAS No. 156, Accounting for Servicing of Financial Assets, etc. SFAS No. 157 was deferred until fiscal years beginning after November 15, 2008 for nonfinancial assets and liabilities such as asset retirement obligations measured at fair value at initial recognition under SFAS No. 143, Accounting for Asset Retirement Obligations, long-lived asset groups measured at fair value under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, liabilities for exit or disposal activities measured at fair value under SFAS No. 146, Accounting for Costs Associated With Exit or Disposal Activities, etc. The Company adopted FAS 157 as of November 15, 2008, as required. The impact of adopting this interpretation was not material to the Company’s consolidated financial position, results of operations or cash flows. 11
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 SFAS 159 In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115. SFAS No. 159 permits an entity to choose to measure many financial instruments and certain other items at fair value. The objective is to expand the use of fair value measurements in accounting for financial instruments. The fair value option permits a company to choose to measure eligible items at fair value at specified election dates. A company will report unrealized gains and losses on items for which the fair value option has been elected in earnings after adoption. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. There was no impact to the Company’s financial statements of adopting this standard because the Company did not elect the fair value option for applicable financial assets and financial liabilities. SFAS 141 R In December 2007, the FASB issued SFAS 141R “Business Combinations (revised)” which replaces FASB Statement 141 “Business Combination.” This Statement retains the fundamental requirements in Statement 141 that the purchase method is used for all business combinations. This Statement applies to all business combinations for which the acquisition date is on or after the first annual reporting period starting as of or after December 15, 2008. The effective date of this Statement is the same as that of FASB Statement 160, “Noncontrolling Interests in Consolidated Financial Statements.” The Company believes there will be no impact on the Company’s financial statements upon the adoption of this standard. SFAS 160 In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB 51,” which states that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity which shall be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. This Statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. This standard does not have impact on the Company’s financial statements. SFAS 161 In March 2008, the FASB issued SFAS 161, “Disclosure about Derivative Instruments and Hedging Activities”, which has the same scope as Statement 133. This Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This Statement shall be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early application is encouraged. This standard does not have impact on the Company’s financial statements.
12
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 4.
Cash and Cash Equivalents Cash and cash equivalents consist of:
Cash and cash at banks Cash equivalents: Certificates of deposit at 3.0%, 4.3% and 15% annual interest rates with maturities less than 90 days
5.
2008
2007
US$20,932,097
US$11,994,394
1,407,677
35,058,912
US$22,339,774
US$47,053,306
Accounts Receivable Accounts receivable consist of: 2008 Related parties - Trade, including current portion of long-term receivable to Edeeste of US$7,681,856 and US$1,745,964 at December 31, 2008 and 2007, respectively (Note 22) US$222,144,948 Other related parties (Note 22) 5,263,621 Other, including trade 8,909,199 Provision for doubtful accounts (Note 25) Non-current receivables: Trade (Edeeste) (Note 17) Related party – CEPM (Note 22)
Total current accounts receivable
2007
US$140,558,018 10,023,983 4,555,663
236,317,768 (3,300,000)
155,137,664 -
233,017,768
155,137,664
(32,473,301) -
(40,155,069) (4,225,060)
(32,473,301)
(44,380,129)
US$200,544,467
US$110,757,535
Compensation Agreements – CDEEE Agreements dated February, April, June, August and September 2008 During 2008, CDEEE and the Company agreed to offset US$62.4 million of the Company’s accounts payable to CDEEE against the same amount of accounts receivable from Edenorte, Edesur and Edeeste. Agreements dated January and September 2007 CDEEE and the Company agreed to offset the Company’s accounts payable to CDEEE against the same amount of accounts receivable from Edenorte and Edesur for US$21.8 million in January 2007 and US$3.8 million in September 2007.
13
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 6.
Inventories Inventories consist of:
Fuel Parts Inventories in transit
2008
2007
US$11,512,641 13,569,331 23,213
US$ 4,268,093 12,531,453 72,904
US$25,105,185
US$16,872,450
At December 31, 2008, the Company has in its custody third party fuel oil inventory amounting to US$1.8 million. Such amount is not included in the Company’s consolidated balance sheet.
7.
Prepaid Expenses Prepaid expenses consist of:
Insurance Prepaid taxes and tax advances, net Other
8.
2008
2007
US$1,481,334 8,119,398 1,791
US$ 775,567 3,321,599 8,759
US$9,602,523
US$4,105,925
Property, Plant and Equipment, Net Property, plant and equipment, net consist of: 2008 Land
US$
Buildings Generation plants Transportation equipment Furniture and office equipment Other equipment Leasehold improvements Exchange parts Less: Accumulated depreciation Construction in progress (a)
5,059,923
US$ 5,059,923
1,008,716 348,879,641 1,718,535 1,353,364 4,718,151 758,366 1,377,946
1,008,716 348,892,648 1,569,562 1,198,426 3,900,733 171,564 1,377,946
359,814,719 118,227,473
358,119,595 102,923,230
241,587,246
255,196,365
15,989,565 US$262,636,734
14
2007
US$260,256,288
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 During 2008 and 2007, depreciation of property, plant and equipment was US$15,304,240 and US$15,324,294, respectively. (a)
9.
At December 31, 2008 the company had US$15,989,565 as construction in progress that corresponds to a deposit paid to Vestas Argentina, S.A. as a down payment for the purchase of 25 Wind Turbine Generators for the project known as “Juancho Los Cocos” located in Los Cocos, municipality of Oviedo. The payment was made under a letter agreement dated September 12, 2008 via which the Company made a deposit to purchase 25 Vestas V80 – 2.000 KW 60 Hz Wind Turbine Generartors (“Turbines”) which are composed of rotor, nacelle, tower (shaft), embedment and total provision of auxiliary systems within the WTG. Such down payment is equal to the 20% of the total purchase price of EUR 53,212,791 for the Turbines and shall be applied to the purchase price of the Turbines under a Supply Agreement that a Vestas affiliate would enter into with EGE Haina which will be negotiated in good faith.
Deferred Charges Deferred charges consist of:
Deferred costs Debt issuance costs - US$175 million fixed rate bond issued in April 2007 as described in Note 12
2008
2007
US$11,811,229
US$11,811,229
5,675,030
5,675,030
17,486,259
17,486,259
6,832,651
5,521,155
US$10,653,608
US$11,965,104
Less: Accumulated amortization
During 2008 and 2007, the amortization charges of the deferred charges amounted to US$1,311,498 and US$1,272,611, respectively. The estimated future amortization through the end of its useful life is expected to be: Year
US$
2009 2010 2011 2012 - 2017
1,523,736 1,523,736 1,523,736 6,082,400 10,653,608
15
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 10.
Other Assets Other Assets consists of:
Transmission Line for Juancho Los Cocos (a) Deposits for local rent Other deposits
(a)
11.
2008
2007
US$6,288,067 50,782 111,600
US$2,480,620 50,782 83,420
US$6,450,449
US$2,614,822
In 2007 the Company signed a contract with Elecnor, S. A. (the constructor) for the construction of a transmission line that will interconnect Juancho Los Cocos to the interconnected electric system. At December 31, 2007, the Company paid an initial cash advance of US$2.5 million to the constructor and during 2008 an additional amount of US$3.8 million. The total estimated cost of this project is approximately US$17 million. The Company expects that this transmission line will either be purchased by the Dominican Republic government or the Company would be allowed to own and use the transmission line.
Short-Term Debt Short-term debt consists of US$1,703,313 and US$11,439,630 at December 31, 2008 and 2007, respectively. This debt accrues interest at annual rates ranging between 5% and 10% for U.S. dollar borrowings at December 31, 2008 (2007: ranging between 8.5% and 10%). The weighted average interest rates were 7.1% in 2008 and 8.76% in 2007.
12.
Long-Term Debt Long-term debt consists of:
US$175 million of a 9.5% senior unsecured fixed rate bond maturing in April 2017. Interest is payable in 20 semi-annual installments of US$8,312,500 each and one balloon payment of US$175 million (a) Kreditanstalt für Wiederaufbau, Frankfurt am Main (“KfW”), payable in 12 semi-annual installments of principal and interest, maturing November 30, 2008 (b) Less: Current portion
2008
2007
US$175,000,000
US$175,000,000
-
1,001,720
175,000,000 -
176,001,720 1,001,720
US$175,000,000
US$175,000,000
Management estimates the fair value of the Company’s Senior Notes, by discounting their future cash flows at the market rate, to be approximately US$71 million and US$168 million at December 31, 2008 and 2007, respectively.
16
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 a. The US$175 million fixed rate bond was issued by Haina Finance, the wholly owned subsidiary of EGE Haina and a tax-exempted Cayman company formed solely to issue this bond. Under the term of the issuance, Haina Finance must not engage in any business activity other than complying with its obligations under the bond. EGE Haina unconditionally and irrevocably guarantees the bond. Pursuant to a Participation Agreement between Haina Finance and Barclays Bank PLC, the gross proceeds from the bond were used by Haina Finance to purchase a participation in a loan made by Barclays Bank PLC to EGE Haina for US$175 million under a term loan agreement entered by EGE Haina and Barclays Bank PLC. Pursuant to the loan agreement EGE Haina is required to make payments on the same terms and conditions and at the same rate of interest as the payments required to be made by Haina Finance under the bond. The bond is secured by a first priority security interest on 100% of the outstanding capital of Haina Finance, all rights, title and interest in the Participation Agreement entered into by Haina Finance and Barclays Bank PLC. In addition, there are restrictive covenants that include for EGE Haina limitations on: indebtedness, restricted payments, sale of assets, liens, affiliate transactions, mergers, dividends and other payment restrictions affecting subsidiaries, among others. According to the terms of the bond, Haina Finance established an Interest Reserve Account at Deutsche Bank Trust Company Americas, the bond’s trustee, as a security for the bond. Haina Finance is required to maintain at all times an amount on deposit in this interest reserve account (or letters of credit or certain temporary cash investments having an aggregate face amount) equal to the interest payable on the bond on the immediately following interest payment date. At December 31, 2008 and 2007, this interest account balance amounted US$8.3 million, respectively. b. The Company had a loan obtained from KfW for partially financing the supply of an integrated package of parts, shop repairs and field services for the purpose of the major inspection of Haina TG unit, as per a contract signed between the Company and Siemens WestingHouse Service Company Ltd. This loan was paid in-full at maturity. 13.
Accounts Payable Accounts payable consist of:
Power vendors International vendors Local vendors
14.
2008
2007
US$53,405,666 5,142,967 892,715
US$23,505,411 4,376,255 1,352,432
US$59,441,348
US$29,234,098
2008
2007
Other Current Liabilities Other current liabilities consist of:
Withholdings taxes and other Assets tax payable (Note 16) Interests payable Other
17
US$7,713,902 1,455,754 2,965,239 5,070,601
US$1,082,493 1,407,966 3,223,072 1,563,893
US$17,205,496
US$7,277,424
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 15.
Shareholders’ Equity Common Stock At December 31, 2008 and 2007, the common stock consisted of 45,951,000 common shares issued and outstanding with par value of US$6.29. The following is a detail of the Company's shares: Common Stock Shares Issued Par Value FONPER HIC Shares issued for cash Other shareholders
22,972,500
US$144,481,132
22,975,500 3,000
144,500,000 18,868
Balance at December 31, 2008 and 2007
45,951,000
US$289,000,000
Legal Reserve The Dominican Commercial Code establishes that at least 5% of the annual net earnings be appropriated as a legal reserve of the Company until such appropriation equals 10% of the outstanding capital. This reserve may not be capitalized, returned to inappropriate retained earnings or used for payment of dividends. Remittance of Profits The Dominican Foreign Investment Law allows the repatriation of capital and remittance of profits in freely convertible currency. Dividends may be declared during each fiscal period up to the total amount of net profits, subject to a withholding tax of 25%, which can be offset with the income tax due by the Company. Dividends On December 4th, 2008, the Board of Directors of the Company approved the declaration of a US$20 million dividend, corresponding to a portion of retained earnings from year 2007. This dividend was paid during the same month that it was declared. As a result, the Company reduced its retained earnings by US$20 million. 16.
Income Tax Dominican Republic Tax Law (the Tax Law) establishes a corporate income tax at a rate of 25% on the net taxable income; and a 1% tax on assets (Asset Tax) as an alternative minimum tax. The taxable base of the Asset Tax in case of power generation, transmission and distribution companies defined in the General Electric Law 125-01, dated July 26, 2001, is the total fixed assets, net of depreciation, as they are shown in the balance sheet at year end. The Tax Law requires tax payers to file the corporate income tax returns denominated in Dominican peso (local currency). Those who use a functional currency other than the Dominican peso are required to keep their tax accounting records and official filings in local currency. In addition, Article 293 of the Tax Law establishes the recognition of the foreign exchange difference as deductible expense/taxable income in the determination of taxable base. The Tax Authorities annually indicate the exchange rate to be used for the valuation of monetary items originated in foreign currencies.
18
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 For the purpose of determining the current income tax, the reconciliation of income before tax and the tax due, at the statutory rate, is: 2008 Tax effect of: Income before income tax
US$12,090,106
Permanent differences Release of provisions previously considered nondeductible Nondeductible expenses Inflation adjustment of nonmonetary assets Taxes nondeductible Other nontaxable income Exchange differences Other adjustments
Temporary differences Depreciation Exchange rate differences Other
2007
US$8,497,250
-
(94,471) (3,186,036) 372,558 (158,664) 2,118,833 -
848,386 (2,769,444) 463,580 (4,602) 2,222,364 (71,780) 688,504
(947,780)
(340,082) 39,606 (27,248)
(720,598) (64,157) 209,067
(327,724)
(575,688)
Current tax expense before income tax loss carry forward
12,450,886
6,973,782
Utilization of tax loss carry forward
(6,869,644)
(6,873,307)
Current income tax before Asset Tax Credit Asset tax (1)
100,475
(1,455,754)
(100,475)
US$ 4,125,488
Current income tax (1)
5,581,242 US$
-
Recorded under the Administrative and general expenses caption within the Consolidated Statement of Operations.
In 2007 income tax on the Company’s taxable income did not exceed the asset tax; therefore, the Company’s obligation was to pay the latter, amounting to approximately US$1.4 million. The Asset Tax is reflected within General and Administrative Expenses in the Statements of Operations. The Company has income tax loss carry forwards of US$55 million (adjusted by inflation) as of December 31, 2008, which can be used to offset future taxable income, subject to the limitations expressed below. These losses will expire as follows:
19
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 Total Unadjusted Adjusted Tax Loss Tax Loss Carry Carry Inflation Forward Forward Adjustment (Expressed in US$ million) 26.6 0.9 27.5 26.6 0.9 27.5 26.6 0.9 27.5
Period 2008 2009 2010
Less: Utilized/expired in 2008
79.8
2.7
82.5
(26.6)
(0.9)
(27.5)
53.2
1.8
55.0
The components of the deferred income tax asset / liability consist of the following: Balance at December 31, 2007 US$ Current deferred income tax Foreign currency Vacation accruals Bonus for objective allowance Tax loss carry forward Valuation allowance
Noncurrent deferred income tax Tax loss carry forward Valuation allowance Fixed assets
Deferred income tax - net
Effect in Results for the Period US$
Balance at December 31, 2008 US$
6,189,959 (1,013,374)
(19,575) 226 230,224 (5,384) (480,717)
(19,575) 226 230,224 6,184,575 (1,494,091)
5,176,585
(275,226)
4,901,359
12,379,918 (2,026,748) 10,353,170 (16,626,282)
(6,195,343) 532,658 (5,662,685) 276,293
6,184,575 (1,494,090) 4,690,485 (16,349,989)
(6,273,112)
(5,386,392)
(11,659,504)
(1,096,527)
(5,661,618)
(6,758,145)
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable earnings during the periods in which the temporary differences become deductible. The Company's deferred tax asset reflects the tax benefit of US$9.4 million (2007: US$15.6 million) in tax loss carry forward net of a valuation allowance of US$3.0 million (2007: US$3.0 million). The tax loss carry forwards expire between 2009 and 2010 and realization is dependent on generating sufficient taxable income prior to the expiration dates. Although realization is not assured, management believes it is more likely than not that US$9.6 million (2007: US$15.6 million) of benefits from the tax loss carry forward will be realized. The amounts of the deferred tax asset considered realizable, however, could vary in the near term if estimates of future taxable income during the carry forward period change.
20
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 Management considers projected future taxable income in making this assessment. At December 31, 2008 management reduced the valuation allowance by US$52 thousand after updating their future taxable income projections based on the market conditions and performance of the entity in 2008. 17.
Sale of Energy to Distribution Companies and Other Customers a. The Company invoices the distribution companies, Empresa Distribuidora del Norte, S. A. (“Edenorte”), Empresa Distribuidora del Sur, S. A. (“Edesur”) and Empresa Distribuidora del Este, S. A. (“Edeeste”), for the service of energy, capacity and transmission toll, according to the existing agreements renegotiated in August 2001 (“the Power Supply Contracts”). The terms and conditions for the sale of energy to distribution companies are as follows: Edenorte Edesur Edeeste Term of contracts Indexation
112MW 138 MW 100 MW 15 years 30% per CPI –USA 70% for fuel #6
The prices are stated in U.S dollars but can be paid in Dominican Pesos at the current exchange rate. The exchange rate index utilized tracks the market rate for the U.S. dollar based on daily foreign exchange trading by commercial banks published by the Dominican Republic Central Bank. b. On August 3, 2006, the Company and Edeeste signed a rescheduling agreement related to past-due accounts receivable. The main terms of this agreement stipulate for Edeeste the payment of the principal amount of US$41.9 million over a six-year term, with interest payable at an annual rate of 12%. The agreement provides for a two-year grace period for the principal repayment, 10% repayment in the third year and 30% repayments in the fourth, fifth and sixth year. In addition, the agreement grants the Company the direct monthly collections from Edeeste´s main customers and credit card receipts equal to a minimum amount of US$5.5 million per month. The estimated fair value of this long term receivable approximates its carrying value. The outstanding balance of this account receivable at December 31, 2008 was US$40.2 million and for 2007 US$41.9 million, from which US$7.7 million, was classified as current portion as of December 31, 2008, and US$1.7 million for 2007. On October 29, 2008, Ede Este and EGE Haina entered into a contract suspension agreement for the PPA signed in 1999 between the parties under the terms and conditions of the rescheduling agreement. The suspension was effective November 1st, 2008 and will last until EDE Este pays in full its outstanding electricity bills with EGE Haina. As per conditions of the agreement, EGE Haina will continue to receive the payments of pledged customers and credit card collections.
21
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 c. On July 23, 2008, the Company entered into a power purchase agreement (PPA) with CEPM under which EGE Haina will supply a minimum of 50MW of capacity and associate energy to CEPM. This began upon CEPM´s completion of the 138KV transmission line that connects its distribution system with one of EGE Haina’s generation plants, La Sultana del Este. The PPA establishes a term of 18 years. The price for capacity is adjusted monthly by the U.S. CPI. The price for electricity delivered under the PPA is equal to the cost of the fuel used by EGE Haina to generate the electricity plus a variable operating and maintenance margin. The non fuel variable component is adjusted monthly by the U.S. CPI and for fluctuations in the exchange rate between the US Dollar and Euro. The prices and the amounts due are stated in U.S. Dollars.
18.
Fuel Oil, Coal and Power Supply •
During 2008 and 2007, the Company had no fuel oil supply agreement in force. During these years the Company purchased fuel oil on the spot market from diverse suppliers. During 2008 the Company purchased 1.7 million barrels at a cost of US$133.6 million (2007: 2.0 million barrels at a cost of US$113.9 million).
•
In the first quarter of 2006, EGE Haina entered into a new contract with the supplier Glencore International AG, in which Glencore International AG agreed to supply EGE Haina with coal sufficient to meet the Barahona plant’s requirements for a period of two years, from March 1, 2006 through April 30, 2008. The contract price for coal under this agreement was US$56.80 per metric ton adjusted by qualities specifications (Btu), plus a delivery fee. Both parties agreed to comply with a delivery of 294,000 metric tons within the period of the contract, except for extraordinary events or circumstances beyond the control of the parties that prevented one or both parties from fulfilling their obligations (force majeure).
•
In January, 2008, the Company entered into a coal purchase agreement with Glencore International AG, in which Glencore International AG agreed to supply EGE Haina with 84,000 metric tons of coal in a period of eight months, from March 1, 2008 through November 30, 2008. The contract price for coal under this agreement was US$93.00 per metric ton adjusted by qualities specifications (Btu).
•
On August 27, 2008, EGE Haina entered into a coal purchase agreement with AGR Mineria e Ingeniería, S.A., in which AGR Mineria e Ingeniería, S.A. agreed to supply EGE Haina with 63,000 metric tons. The contract price for coal under this agreement was US$128.00 per metric ton adjusted by qualities specifications (Btu). Due to the noncompliance by AGR Minería E Ingeniería, S.A. in the delivery of coal, on March 5th, 2009, the Company decided to terminate the contract. The termination of the contract had no impact on the Company’s consolidated financial statements, because there were no activities during the period of the contract.
•
The Company participates in the Dominican electricity spot market, as a seller or buyer. During 2008 the Company purchased the equivalent of US$144.3 million (2007: US$63.4 million). The Company purchased 694 GWH in 2008 (2007: 493 GWH).
22
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 19.
Operating and Maintenance Expenses Operating and maintenance expenses consist of: 2008 Maintenance expenses (a) Labor costs Technical advisory fees Lubricants Professional services Security services Other
2007
US$10,788,453 8,381,632 4,453,656 3,165,633 1,137,631 730,641 2,427,547
US$13,601,659 8,221,344 982,117 2,932,971 2,274,530 777,996 1,975,059
US$31,085,193
US$30,765,676
(a) Sultana Operation and Maintenance Contracts On April 27, 2007 the Company signed a maintenance contract with ABB S. A. (“ABB�), by which this supplier will manage and execute the maintenance, including service and installation of delivered spare parts of all turbochargers, and the daily inspections at La Sultana del Este Plant. In consideration of the management and execution of the maintenance agreement, the Company will pay to ABB a fixed hourly rate calculated on the basis of the agreed hours and number/type of turbochargers of CHF 8.80 (Swiss franc). This contract came into force on November 11, 2006 and it will end automatically once the last turbocharger has reached the agreed hours (total of 844,200 hours, distributed by 46,900 per 18 turbochargers), but not later than December 31, 2013. The Company has however the option to unilaterally extend the hours by another 50,000 running hours (from 50,000 to 100,000 running hours). This option can only be exercised together with the option of the respective operating performance package agreed for the delivery of spare parts between customer and ABB Turbo Systems Ltd, Switzerland. The party, which terminates this operating performance package before the end of the contract term for other reasons than communication of failure, bankruptcy, force majeure or change in law, shall pay the following amounts to the other party:
Within the first contractual year Within the second contractual year Within the third contractual year Within the fourth contractual year Within the fifth contractual year
23
US$ 1,000,000 800,000 600,000 400,000 200,000
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 20.
Administrative and General Expenses Administrative and general expenses consist of: 2008 Labor costs and office operation costs Management fees (Note 22) Withholding taxes on management fees Technical advisory fees Insurance Regulatory payments Provision for doubtful accounts Asset tax
21.
2007
US$ 7,733,003 13,591,742 4,530,581 2,365,810 3,152,050 2,590,704 3,300,000 1,455,754
US$10,362,960 10,074,018 3,901,282 4,119,303 2,964,738 1,848,826 1,453,379
US$38,719,644
US$34,724,506
Financial Expenses, Net Financial expenses, net consist of: 2008 Financial expenses: Interest on senior notes Early extinguishment of debt Interest on short-term debt Interest on payables to power vendors Withholding taxes on interests Amortization of deferred charges (Note 9) Other financial expenses
Financial income: Interest on trade accounts receivable Interest on short-term investments Other financial income Total financial expenses, net 22.
2007
US$(16,024,188) (154,341) (3,723,471) (1,873,714) (1,311,498) (705,069)
US$(11,498,958) (11,372,737) (3,858,953) (2,008,206) (1,932,739) (1,272,611) (1,190,745)
(23,792,281)
(33,134,949)
US$12,008,396 1,768,068 160,170
US$7,340,696 2,416,187 559,695
13,936,634
10,316,578
US$ (9,855,647)
US$(22,818,371)
Related Parties Transactions and Balances The Company had transactions and maintained balances with unconsolidated related companies, as described below: Balances Accounts receivable (Trade): Edesur Edenorte Edeeste - current and long-term Consorcio EnergÊtico Punta Cana-Macao, S. A. (CEPM) – Note 17 c)
24
2008
2007
US$ 75,971,825 56,031,284 86,300,588
US$ 40,644,688 31,472,460 68,440,870
3,841,251
-
US$222,144,948
US$140,558,018
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 2008 Other accounts receivable: HIC Compañía de Electricidad de San Pedro de Macorís S. A (CESPM) Consorcio Energético Punta Cana-Macao, S. A. (CEPM) - Current - Long-term (f) CEPM Energy, Ltd. - current Pedregal Power Company S. de R.L. – current Jamaica Power Energy - Current Caribe Energy Accounts payable: HIC CEPM
Transactions HIC – management fee and accrued interests (a) Sales of energy and interest charges (b) Edenorte Edesur Edeeste TCC Air Services, Inc. (c) Hispaniola Management Corporation (d) CEPM – PPA sales, fees for storage of fuel and other transactions (f) CEPM – Line of credit outstanding (e) Pedregal Power Company S. de R.L. Jamaica Power Energy Caribe Energy
US$
98,704
2007 US$
87,262
54,707
38,217
495,640 4,534,732 46,766 31,474 1,598
1,806,521 4,225,060 3,861,838 5,085 -
US$
5,263,621
US$ 10,023,983
US$
1,376,893 809,496
US$
1,013,753 -
US$
2,186,389
US$
1,013,753
2008
2007
US$ 13,591,742
US$ 10,074,018
146,096,312 182,379,168 126,056,237
104,536,426 139,009,234 95,687,629
132,483 179,342
210,863 202,406
22,647,164 41,680 102,540 1,677
3,496,822 4,286,198 5,085 -
a) Management Fee - HIC As part of the capitalization process, the Company maintains an administration contract with HIC, expiring in 2020, to manage the day-to-day operations of the Company under the direction of the Company’ Board of Directors. HIC charges the Company 2.95% of annual net sales that represented US$13.6 million and US$10.1 million for 2008 and 2007, respectively. At December 31, 2008 and 2007, the Company had accounts payable balances to HIC of US$1.4 million and US$1.0 million, respectively. Through June 2007, and for the amounts owed as from 2006, annual interests accrue at 8%. In December 2006 the Company agreed to remit quarterly payments beginning March 31, 2008. In June 2007 the Company paid the outstanding balance of US$13.7 million from the proceeds of the US$175 million senior notes issuance.
25
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 b) Sales Agreements with Distribution Companies The distribution companies Edesur, Edenorte and Edeeste are related parties. Edesur and Edenorte are wholly-owned by FONPER, while Edeeste is owned by FONPER at 50% of its equity interest. Sales made by the Company to these distribution companies are based on existing agreements which are more detailed in Note 17. c) TCC Air Services, Inc. TCC Air Services, Inc. is a related party by its ownership/management by a Board Member, which offers service of air transportation. d) Hispaniola Management Corporation Hispaniola Management Corporation is a related party due to its affiliation to a member of the Board of EGE Haina. e) Consorcio Energeético Punta Cana-Macao, S. A. (CEPM, Long-term) This balance corresponds to a credit line that accrued interests at an annual rate of 8.5% and matured in June 2009. This balance was fully collected in September 2008. f)
Other Related Party Transactions In August 2008, the Company entered into a 15 year agreement with CEPM under which EGE Haina would supply a minimum of 50MW capacity and related energy to CEPM. See note 17 for further detail.
23.
Commitments Letter of Credit – On November 24, 2008, the Company entered into a Standby Letter of Credit with the Citibank in order to guaranty its coal purchases. The aforementioned agreement ended on January 9, 2009.
24.
Contingencies The Company is involved in certain legal proceedings from time to time that are incidental to the normal conduct of its business, none of which is expected to have a material adverse effect on Company’s results of operations, financial position and cash flow. Based on the legal counsel’s advice the Company has not recorded any provision to cover possible losses because they are estimated to be remote.
26
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2008 and 2007 25.
Subsequent Events Sovereign Bonds On February 9, 2009, the Company entered into an Agreement with CDEEE in which the latter offered to exchange US$77.0 million of Edenorte, Edesur and Edeeste account receivable generated during 2008 as a result of energy and power purchases with Sovereign bonds maturing in June 2010, 2011 and 2012 with a face value of US$77.0 million; with interest at i) 8.0% fixed rate tax free, or ii) 10.6% fixed rate including taxes and interest payable in semi-annual installments. The issuance of such bonds was approved by Law No. 490-08 of the National Congress of the Dominican Republic. The Company has estimated the fair value of the bonds received to be approximately US$74.25 million. As a consequence, the Company recorded a $2.75 million provision for doubtful accounts at December 31 2008 to reflect the estimated loss arising out of the exchange of the $77 million of accounts receivable by the sovereign bonds. Dividends On February 24th, 2009, the Board of Directors of the Company approved a dividends payment amounting to US$40 million, corresponding partially to the remaining retained earnings from 2007 and partially to 2008 net income. The portion of dividends that corresponds to HIC was paid in March 2009, while the portion of dividends that belongs to FONPER will be made by transferring sovereign bonds under Law 490, at par, once that institution opens its custodial account in CEVALDOM, the local clearinghouse, which is expected to occur shortly. Compensation Agreement CDEEE and the Company agreed to offset the Company’s accounts payable to CDEEE against the same amount of accounts receivable from Edenorte, Edesur and EDEeste for US$32.2 million in February 2009, which is pending of execution by the Distribution Companies. Issuance of local bonds In March 2009 the Company obtained the approval of the Dominican Security Exchange Superintendence for the issuance a local bond amounting to US$30 million. This bond will be issued in five tranches of US$6 million each. The proceeds will be used to fund working capital needs.
27