Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Report of Independent Auditors and Consolidated Financial Statements December 31, 2009 and 2008
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Contents December 31, 2009 and 2008 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 ..................................................................................... 7-31
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, 2009 and 2008, 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, 2009 and 2008, 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 the three major energy distributors and, as mentioned in Note 3, 85% of the Company's revenues correspond to generation sold to distribution companies associated with the Dominican government. As described in Note 29, the Company has restated its 2008 consolidated financial statements.
March 17, 2010
1
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Consolidated Balance Sheets December 31, 2009 and 2008 2009
2008 Restated
US$ 39,547,781 12,328,168 163,498,250 30,450,552 19,432,080 3,032,592
US$ 22,339,774 3,014,000 200,544,467 23,305,484 9,602,523 4,901,359
Total current assets
268,289,423
263,707,607
Deposits in banks, restricted (Notes 3 and 14) Long-term receivables (Note 5) Long-term investment (Notes 3 and 9) Property, plant and equipment, net (Notes 3 and 10) Deferred charges (Notes 3 and 11) Other assets (Note 12)
7,831,183 10,480,335 251,702,540 9,130,288 6,873,922
8,312,500 32,473,301 262,636,734 10,653,608 6,450,449
US$554,307,691
US$584,234,199
Assets Current assets Cash and cash equivalents (Notes 3 and 4) Short-term investment (Notes 3 and 9) Restricted cash (Notes 3 and 26) Accounts receivable (Note 5) Inventories (Notes 3 and 6) Prepaid expenses (Note 7) Deferred income tax (Notes 3 and 18)
Total assets Liabilities and Shareholders’ Equity Current liabilities Short-term debt (Note 13) Current portion of long-term debt (Note 14) Accounts payable (Note 15) Payable to related parties (Note 24) Derivative financial liability (Notes 3, 8 and 9) Other current liabilities (Note 16)
US$
Total current liabilities Long-term debt (Note 14) Deferred income tax (Notes 3 and 18) Other non-current liabilities Shareholders’ equity (Note 17) 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
6,000,000 32,069,465 1,008,966 358,862 10,563,248
US$1,703,313 59,441,348 2,186,389 17,205,496
50,000,541
80,536,546
196,367,000 16,123,285 13,000
175,000,000 11,659,504 350,848
262,503,826
267,546,898
144,500,000
144,500,000
144,500,000
144,500,000
289,000,000 11,364,940 22,383,794 (30,944,869)
289,000,000 10,644,816 48,074,480 (31,031,995)
291,803,865
316,687,301
Total liabilities and shareholders’ equity US$554,307,691 US$584,234,199 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, 2009 and 2008
Revenues Energy (Note 19) Capacity (Note 19) Others
Operating costs Fuel (Note 20) Transmission Purchased power (Note 20) Compensation for frequency regulation Operating and maintenance (Note 21) Administrative and general expenses (Note 22) Depreciation (Note 10)
Operating income Financial expenses, net (Note 23) Foreign exchange (loss) gain Other income (expenses), net (Note 25) Loss on sale of available for sale securities (Note 3) Income before income tax Income tax (Note 18) Current Deferred Net income
2009
2008 Restated
US$262,786,739 42,634,966 1,776,116
US$421,784,955 37,382,606 1,399,117
307,197,821
460,566,678
(124,367,666) (10,531,154) (66,034,729) (2,799,338) (31,180,881) (27,728,765) (15,540,338)
(158,105,438) (12,833,949) (144,341,238) (1,666,942) (30,725,749) (38,719,644) (15,304,240)
(278,182,871)
(401,697,200)
29,014,950
58,869,478
(10,590,844) (196,581) 2,570,865 (63,362)
(9,855,647) 442,844 (736,808) -
20,735,028
48,719,867
(6,332,548)
(4,125,488) (5,661,618)
US$ 14,402,480
US$ 38,932,761
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, 2009 and 2008
Common Stock US$ Balance at December 31, 2007 as restated (Note 29) Net income as restated (Note 29) Dividends (Note 17) Transfer to legal reserve Balance at December 31, 2008 as restated Net income Dividends (Note 17) Transfer to legal reserve Gain on available-forsale investments Balance at December 31, 2009
289,000,000 -
Accumulated Other Comprehensive Loss US$
Legal Reserve US$
Retained Earnings US$
8,698,178
31,088,357
-
(31,031,995)
38,932,761 (20,000,000)
-
(1,946,638)
-
-
1,946,638
289,000,000
10,644,816
48,074,480
-
-
14,402,480 (39,373,042)
-
(720,124)
-
-
720,124
-
-
289,000,000
11,364,940
22,383,794
(31,031,995)
87,126 (30,944,869)
Total US$
297,754,540 38,932,761 (20,000,000) -
38,932,761 -
316,687,301
38,932,761
14,402,480 (39,373,042)
14,402,480 -
-
-
87,126
87,126
291,803,865
14,489,606
The accompanying notes are an integral part of these consolidated financial statements 4
Comprehensive Income US$
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Consolidated Statements of Cash Flows Years Ended December 31, 2009 and 2008
Cash flows from operating activities Net income Adjustments to reconcile net income to net cash (used in) provided by operating activities: Loss on asset disposal Gain on sale of fixed asset Gain on early liability extinguishment, net Deferred income tax Depreciation Provision for doubtful accounts Gain on liability extinguishment Loss on sale of available-for-sale financial assets Financial expenses Forward contract 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 (used in) provided by operating activities Cash flows from investing activities Net changes in restricted cash Sale of property, plant and equipment Additions to property, plant and equipment Payments received on long-term investments Short-term investments, net Net cash provided by (used in) investing activities
2009
Restated 2008
US$14,402,480
US$38,932,761
167,060 (664,914) (1,850,712) 6,332,548 15,540,338 290,375 (300,000) 63,362 4,505,911 358,862
5,661,618 15,304,240 3,300,000 4,276,735 -
(80,234,640) (7,273,288) (9,829,557) (423,471) 52,362,339 (1,177,423) (9,533,469) (37,850)
(143,597,895) (8,592,179) (5,496,598) (3,835,623) 92,620,981 589,834 6,962,832 9,625
(17,302,049)
6,136,331
3,495,317 2,892,879 (5,881,121) 27,595,103 (1,005,168)
(3,014,000) (17,097,825) 20,000,000
27,097,010
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 Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year
17,015,179 (18,723,492) (8,054,375) 37,500,000 (20,002,600) (321,666)
16,703,011 (26,439,329) (1,001,720) (20,000,000) -
7,413,046
(30,738,038)
17,208,007 22,339,774
(24,713,532) 47,053,306
US$39,547,781
5
(111,825)
US$22,339,774
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Consolidated Statements of Cash Flows Years Ended December 31, 2009 and 2008 2009 Supplemental cash flow information Interest paid during the year Income tax paid Non-cash activities of: Operating activities Decrease in accounts receivable through the offset with accounts payable Reclassification of accounts receivable from non-current to current Decrease in accounts receivable in exchange for investment securities Investing activities Decrease in accounts payable settled by exchanging financial securities Unpaid additions of property, plant and equipment Financing activities Dividends paid with investment securities Other
2008
US$18,339,550 18,324,962
US$17,247,961 3,331,257
US$73,732,061
US$62,417,791
32,473,301
11,906,828
74,300,000
-
6,232,676 230,235
-
19,370,442 -
-
The accompanying notes are an integral part of these consolidated financial statements 6
582,802
4,060
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 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 81% (2008: 96%) 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 described further in Note14. 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, 2009 and 2008, exchanges rates were Dominican Peso RD$36.16:US$1.00 and RD$35.57: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, 2009 and 2008 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 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 26). 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 14. These deposits are restricted and thus, classified as non-current assets. 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. 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, 2009 three customers accounted for 92% (2008: 97%) of gross accounts receivable and 85% of total revenues (2008:98%). At December 31, 2008, the Company had a long-term receivable from one of its major customers (Edeeste) amounting to US$32.5 million. On July 14, 2009, EGE Haina sent a letter to the latter, declaring it in default under the rescheduling agreement signed in August 2006 (Note 19). In 2009 the Company partially collected in cash the receivable and at the end of 2009, the remaining balance amounting to US$0.7 million is presented as short-term. On January 11, 2010, the Company fully collected the outstanding amount of such receivable. Property, Plant and Equipment, Net Property, plant and equipment 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:
8
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 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. 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. 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. 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 debt described in Note 14. These deferred costs are amortized under the interest method over the term of the related financings.
9
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 Investments Corresponds to investments in Dominican Sovereign Bonds. The Company classifies investments as trading, held-to-maturity, or available-for-sale at the time of purchase. Investments held by the Company that are categorized as available-for-sale are reported at fair value with any related unrealized gains and losses reported net of tax, as a component of Accumulated other comprehensive loss in the Consolidated Balance Sheet. Investments held by the Company that are categorized as trading securities are reported at fair value with any unrealized gains and losses included in other investment income on the Consolidated Statement of Earnings. Investments that are categorized as held to maturity are recorded at amortized cost, which is adjusted for amortization. All of the Company's investments in marketable securities were reported at fair value at December 31, 2009. Fair value is determined based on observable market quotes or valuation models using assessments of counterparty credit worthiness, credit default risk or underlying security and overall capital market liquidity. Declines in fair value that are considered other than temporary are charged to earnings and those that are considered temporary are reported as a component of accumulated other comprehensive income (OCI) in stockholders’ equity. The Company used the average cost method of determining the cost basis in computing realized losses of US$63,362 on the sale of its available for sale securities. Realized gains of US$512,446 and losses of US$575,808 are presented net in the consolidated statements of operations within the caption sale of available for sale securities. Premiums and discounts are amortized or accreted into earnings over the life of the available-for-sale security. As of December 31, 2009 and 2008, the Company had US$21.8 million and US$0, respectively, that corresponds to fair market value of Dominican Sovereign Bonds (Note 9), including US$11.3 million that is presented as short-term; and US$10.5 million as long-term investment which has been given as collateral under the loans payable to Banco de Reservas and Banco Hipotecario Dominicano (Note 14). 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.
10
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 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 14). Fair Value Measurement The Company adopted the methods of fair value as described in SFAS No. 157 to value its financial assets and liabilities. As defined in SFAS No. 157, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below: •
• •
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. The Company chose not to elect the fair value option as prescribed by SFAS No. 159 for its financial assets and liabilities that had not been previously carried at fair value. Therefore, material financial assets and liabilities not carried at fair value, such as short- and long-term debt obligations and trade accounts receivable and payable, are still reported at their carrying values. Derivative financial instruments The Company records all derivative financial instruments on the balance sheet at fair value, regardless of the purpose or intent for holding them. The accounting for changes in fair value of the derivative financial instruments varies, depending on whether the derivative is considered to be a hedge for accounting purposes, and whether the hedging instrument is a fair value or a cash flow hedge. The Company uses forward exchange contracts to manage its exposure to fluctuations in foreign currency exchange rates. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various derivative transactions. It is the Company’s policy not to enter into derivative financial instruments for speculative purposes. These forward contracts are not designated as hedges and therefore, the changes in the fair values of derivatives are recognized in the consolidated statement of operations and classified in other income (expenses).
11
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 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. 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, 2009 and 2008, the balance in “Accumulated Other Comprehensive Loss” of US$30,944,869 and US$31,031,995, respectively, corresponds to accumulated foreign currency translation adjustments carried forward from when the Company's functional currency was the Dominican Republic Peso and unrealized gains on investments held as available for sale. Reclassifications Certain amounts in the consolidated financial statements as of the year ended December 31, 2008 have been reclassified in order to conform to the presentation of the consolidated financial statements as of and for the year ended December 31, 2009. New Accounting Standards In June 2009, the FASB issued "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles," which establishes the FASB Accounting Standards Codification ('ASC') as the source of authoritative US GAAP recognized by the FASB to be applied to nongovernmental entities. The Codification was effective for financial statements issued for interim and annual periods ending after September 15, 2009. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the Consolidated Financial Statements. ASC 320 ' Investments -Debt and Equity Securities' (previously FSP FAS 115-2 and FAS 124-2 On April 9, 2009 the FASB issued Staff Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments”. The new guidance changes the recognition threshold of an other-than-temporary impairment (“OTTI”) for debt securities and provides some income statement relief by permitting the non-credit portion of the OTTI loss to be excluded from earnings and reported in other comprehensive income. The Company adopted FAS 115-2 and FAS 124-2 as of April, 2009, as required. The adoption this standard was not material to the Company’s consolidated financial position, results of operations or cash flows. ASC 820 ' Fair Value Measurement and Disclosures' (previously FSP FAS 157-4) On April 9, 2009 the FASB issued Staff Position No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” , which provides a framework on how to determine fair value measurements when the level of market activity for an asset or liability has significantly decreased. The new guidance addresses concerns that measurements of securities that have become inactive are often based on stale, distressed, or one-time transactions that may not be representative of fair value. The Company adopted FAS 157-4 as of April, 2009, as required. The adoption this standard was not material to the Company’s consolidated financial position, results of operations or cash flows. 12
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 ASC 825 ' Financial Instruments' (previously FSP FAS 107-1 and APB 28-1 On April 9, 2009 the FASB issued Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures of Financial Instruments”, which enhances transparency through financial statement disclosure. This FSP shall be effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The guidance requires the FAS 107 disclosures to be made each quarter by publicly-traded companies, regardless of how these instruments are recognized in the financial. The Company adopted FAS 107-1 and APB 281 as of June, 2009, as required. The adoption this standard was not material to the Company’s consolidated financial position, results of operations or cash flows. ASC 810 'Consolidation' (previously SFAS 167) In June, 2009, the FASB issued FAS 167 – “Amendments to FASB Interpretation No. 46(R) (FAS 167)” – which significantly changes the consolidation rules as they relate to variable interest entities (VIEs). The new standard modifies the model for determining who should consolidate a VIE and also addresses how often this assessment should be performed. It comes in response to recent market events and practice concerns that companies can structure transactions to avoid consolidation and concerns about the lack of transparency in the financial statements about a company's involvement in a VIE. The standard will not be effective until 2010 for calendar-year companies. The Company is currently evaluating the potential impact of the adoption of this standard. ASC 855 'Subsequent Events' (previously SFAS 165) The FASB issued FAS 165, Subsequent Events (FAS 165). Effective June, 2009 for calendar year-end companies, the new guidance is modeled after the same principles as the subsequent event guidance in the auditing literature (AU 560) with some terminology changes and additional disclosures. For example, the terminology of Type I and Type II has been replaced with "recognized" and "unrecognized" subsequent events. The standard also includes a required disclosure of the date through which the entity has evaluated subsequent events and whether that evaluation date is the date of issuance or the date the financial statements were available to be issued. The Company adopted FAS 165 as of June, 2009, as required. The impact of adopting this standard was not material to the Company’s consolidated financial position, results of operations or cash flows. ASC 805 ' Business Combinations' (previously 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 adoption if this standard did not have impact in the Company’s consolidated financial position, results of operations or cash flows.
13
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 4.
Cash and Cash Equivalents Cash and cash equivalents consist of: Cash and cash at banks Cash equivalents- certificate of deposit: At 3.35% annual interest rate At 12.25% annual interest rate, denominated in Dominican Pesos At 2008: 3% annual interest rate
5.
2009
2008
US$24,547,781
US$20,932,097
15,000,000
-
US$39,547,781
907,677 500,000 US$22,339,774
Accounts Receivable Accounts receivable consist of: Related parties - Trade, including current portion of long-term receivable to Edeeste of US$684,903 and US$7,681,856 at December 31, 2009 and 2008, respectively (Note 24) Other related parties (Note 24) Other, including trade Provision for doubtful accounts Non-current receivables: Trade (Edeeste) (Note 19)
2009
2008
US$154,784,921 5,222,148 3,691,181
US$222,144,948 5,683,045 8,489,775
163,698,250 (200,000)
236,317,768 (3,300,000)
163,498,250
233,017,768
-
Total current accounts receivable
US$163,498,250
(32,473,301) US$200,544,467
Compensation Agreements – Corporación Dominicana de Empresas Eléctricas Estatales (“CDEEE”) Agreements dated February, March, October, November and December 2009 During 2009, CDEEE and the Company agreed to offset US$73.7 million of the Company’s accounts payable to CDEEE, Empresa de Transmisión Eléctrica Dominicana (“ETED”) and Empresa de Generación Hidroeléctrica Dominicana (“HIDRO”) against the same amount of accounts receivable from Edenorte, Edesur and Edeeste. 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, ETED and HIDRO against the same amount of accounts receivable from Edenorte, Edesur and Edeeste.
14
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 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 and Edesur accounts receivable generated during 2008 as a result of energy and power sales with Dominican Sovereign bonds maturing in June 2010, 2011 and 2012 with a face value of US$77.0 million; with interest at 8.0% fixed rate tax free 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 estimated the fair value of the bonds received to be approximately US$74.3 million at the time of initial recognition. As a consequence, the Company recorded a $2.3 million provision for doubtful accounts at December 31, 2008 to reflect the estimated loss arising out of the exchange of the US$77.0 million of accounts receivable by the sovereign bonds. During 2009, through a series of transactions, the Company monetized the Dominican sovereign bonds as follows: Face Value Bonds at inception Given as dividend in kind Given as payment of commercial payables Sold in the market As of December 31, 2009 6.
Dominican Sovereign Bonds Maturing 2010 2011
2012
US$77,000,000
US$22,400,000
US$ 27,000,000
US$27,600,000
(19,997,000)
(6,600,000)
(6,600,000)
(6,797,000)
(6,277,000) (28,870,000)
(4,477,000) -
(1,800,000) (8,067,000)
(20,803,000)
US$21,856,000
US$11,323,000
US$ 10,533,000
US$
Inventories Inventories consist of:
Fuel Parts Inventories in transit
2009
Restated 2008
US$11,452,709 16,957,603 2,040,240
US$11,512,641 11,769,630 23,213
US$30,450,552
US$23,305,484
At December 31, 2009 and 2008, the Company has in its custody third party fuel oil inventory amounting to US$0.3 million and US$1.8 million, respectively. Such amount is not included in the Company’s consolidated balance sheet. 7.
Prepaid Expenses Prepaid expenses consist of: 2009 Prepaid taxes and tax advances, net Insurance Other 15
2008
US$17,605,661 1,812,683 13,736
US$8,119,398 1,481,334 1,791
US$19,432,080
US$9,602,523
-
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 8.
Derivative Financial Instruments The following summarizes the Company’s derivative financial instrument contracts at December 31, 2009 and 2008: Foreign exchange risk management – The Company uses foreign currency forward exchange contracts (“Forward Contracts”) to reduce its cash flow volatility associated with foreign exchange rate changes. The Forward Contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates. Changes in the fair value of the Forward Contracts not identified as cash flow hedges resulted in a charge of US$358,862 (2008: US$0) recorded in the Consolidated Statements of Operations as a component of other income (expenses), net during the year ended December 31, 2009 (Note 25). As of December 31, 2009, the Company’s forward contracts are comprised as follows: Commencement Date
Termination Date
Not classified as hedges: 12-9-2009 2-16-2010
9.
Contract Currency Euro
Notional Amount
Fair Value
€10,000,000
US$ 358,862
Fair Value of Financial Instruments The estimated fair value amounts presented below have been determined by the Company using available market information or other appropriate valuation methodologies that require considerable judgment in developing and interpreting the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in an actual market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, accounts payable and current notes payable approximate fair value because they have relatively short-term maturities and bear interest at rates tied to market indicators, as appropriate. The Company’s long-term debt consists of debt instruments that bear interest at fixed rates tied to market indicators. The carrying amount and estimated fair values of the Company’s financial instruments as of December 31 are as follows: 2009
Assets: Cash and cash equivalents Restricted cash Accounts receivable (including long-term) Investments (short and long-term)
2008
Carrying
Estimated
Carrying
Estimated
Amount
Fair Value
Amount
Fair Value
US$ 39,547,781 -
US$ 39,547,781 -
US$ 22,339,774 3,014,000
US$ 22,339,774 3,014,000
163,498,250
163,498,250
233,017,768
233,017,768
22,808,503
22,808,503
US$ 225,854,534
US$ 225,854,534
16
-
-
US$ 258,371,542
US$258,371,542
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 2009
Liabilities: Accounts payable, related parties and other current liabilities Debt (short and long-term) Forward contract
2008
Carrying
Estimated
Carrying
Estimated
Amount
Fair Value
Amount
Fair Value
US$ 43,641,679 202,367,000 358,862
US$ 43,641,679 172,738,704 358,862
US$ 78,833,233 176,703,313 -
US$ 78,833,233 71,452,460 -
US$246,367,541
US$216,739,245
US$255,536,546
US$150,285,693
Assets and liabilities that are measured at fair value on a recurring basis are as follows: Fair Value Measurements at Reporting Date Using
Description
Quoted Prices in
Significant
Active markets
Other
Significant
For identical
Observable
Unobservable
12/31/2009
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
Assets: Available-for-sale securities
US$ 21,803,335
US$
-
US$21,803,335
US$
-
US$
US$
-
US$
US$358,862
Liabilities: Derivatives
10.
358,862
-
Property, Plant and Equipment, Net Property, plant and equipment, net consist of: 2009 Land
5,059,923
US$ 5,059,923
1,008,716 344,984,094 1,648,478 1,967,522 7,082,202 929,493 3,422,157
1,008,716 348,879,641 1,718,535 1,353,364 4,718,151 758,366 1,377,946
361,042,662 132,189,848
359,814,719 118,227,473
228,852,814
241,587,246
17,789,803
15,989,565
US$251,702,540
US$262,636,734
US$
Buildings Generation plants Transportation equipment Furniture and office equipment Other equipment Leasehold improvements Exchange parts Less: Accumulated depreciation Construction in progress (a)
2008
During 2009 and 2008, depreciation of property, plant and equipment was US$15,540,338 and US$15,304,240, respectively. 17
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 (a)
Construction in progress consists primarily of the project known as “Los Cocos” located in Los Cocos, municipality of Oviedo. The Company paid EUR 10,642,558 (equivalent to US$15,123,075) (the "Deposit") to Vestas Argentina, S. A. as a down payment for the purchase of 25 Vestas V80 – 2.000 KW 60 Hz Wind Turbine Generators (“Turbines”) under a letter agreement dated September 12, 2008. The Turbines 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. As a result of the global financial crisis, that unfolded a few weeks after the Company sent the Reservation Letter to Vestas, the Company decided to reduce the number of turbines to 14, down from the original 25, and to change the model to V90 turbines. The rationale behind these changes were to reduce the size of the project so that the Company could execute it in the absence of debt financing and to obtain machines that were determined to be more suitable for the project. The Supply and Installation Agreement ("SIA") and Service and Availability Agreement ("SAA") with Vestas were executed on December 23, 2009. The total contract value for the SIA was reduced to EUR 32,026,000. The commercial operation date is estimated to be on the 19th week of 2011.
11.
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 14 Debt issuance costs - US$30 million fixed rate bond issued during 2009 as described in Note 14
2009
2008
US$11,811,229
US$11,811,229
5,346,430
5,675,030
321,666
-
17,479,325
17,486,259
8,349,037
6,832,651
US$ 9,130,288
US$10,653,608
Less: Accumulated amortization
During 2009 and 2008, the amortization charges of the deferred charges amounted to US$1,617,073 and US$1,311,498, respectively. The estimated future amortization through the end of its useful life is expected to be: Year
US$
2010 2011 2012 2013 - 2017
1,648,325 1,499,645 1,272,861 4,709,457 9,130,288
18
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 As a result of the partial debt repurchases described in Note 14, the Company recorded a US$227,913 expense, related to the portion of costs of issuance applicable to the repurchases. 12.
Other Assets Other Assets consists of:
Transmission Line for Los Cocos project (a) Deposits for local rent Other deposits
(a)
13.
2009
2008
US$6,750,967 21,811 101,144
US$6,288,067 50,782 111,600
US$6,873,922
US$6,450,449
In 2007 the Company signed a contract with Elecnor, S. A. (the constructor) for the construction of a transmission line that will interconnect the Los Cocos project to the interconnected electric system. During 2009, the Company made payments for US$0.5 million, US$3.8 million in 2008 and an initial cash advance of US$2.5 million in 2007. The total estimated cost of this project is approximately US$17 million. The Company expects that this transmission line will be sold to the Dominican Republic government once completed in accordance with the electricity law.
Short-Term Debt Short-term debt consists of US$1,703,313 at December 31, 2008. This debt accrued interest at annual rates ranging between 5% and 10% for U.S. dollar borrowing. The weighted average interest rate was 7.1%.
14.
Long-Term Debt Long-term debt consists of: 2009 9.5% Senior Notes (fixed rate bond maturing in April 2017 with balloon payment). Interest is payable in 20 semi-annual installments (a) US$30 million local bond, five tranches of US$6 million each. Interest is payable on a monthly basis at annual interest rates range from 7.75% to 8.75% (b) Loan payable to Banco BHD, S. A. at 7.5% annual rate Maturity, June 2011 (c) Loan payable to Banco de Reservas de la RepĂşblica Dominicana at 8.5% annual rate. Maturity, June 2011 (d) Less: Current portion
19
US$164,867,000
2008
US$175,000,000
30,000,000
-
5,000,000
-
2,500,000
-
202,367,000 (6,000,000)
175,000,000 -
US$196,367,000
US$175,000,000
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 Management estimates the fair value of the Company’s Senior Notes and corporate bonds, by discounting their future cash flows at the market rate, to be as follows:
Senior Notes Corporate Bonds
2009
2008
US$135,604,769 29,633,935
US$69,749,147 -
US$165,238,704
US$69,749,147
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 Island 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 are in effect whenever an event of default occurs or is continuing. Such covenants include 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, 2009 and 2008, this interest account balance amounted to US$7.8 million and US$8.3 million, respectively. During 2009, Haina Finance repurchased US$10.1 million of the Senior Notes at an average price of US$0.7949/US$1.00. As a result, the Company recorded a gain from extinguishment of debt of US$2,078,625, which is presented net of US$227,913 of costs of issuance applicable to the repurchase and included in the Consolidated Statement of Operations within the other income (expenses), net caption.
20
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 b. In March 2009, the Company obtained the approval of the Dominican Security Exchange Commission (Superintendencia de Valores) for the issuance of a local bond amounting up to US$30 million. This bond was fully placed in five tranches of US$6 million each, as follows: Tranche
Size (US$)
Rate
Issuance Date
Maturity
Repayment Schedule
1 2 3 4 5
6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 30,000,000
8.00% 8.50% 8.50% 8.75% 7.75%
4-22-2009 5-26-2009 7-22-2009 10-22-2009 12-18-2009
10-22-2010 5-26-2011 7-22-2011 4-10-2012 12-18-2012
Balloon payment Balloon payment Balloon payment Balloon payment Balloon payment
c. On June 19, 2009, the Company entered into a US$5 million loan with Banco BHD, S. A. (“BHD”) at a variable interest rate1, with interest payable on a monthly basis. The loan is guaranteed by US$7.2 million in Dominican Sovereign Bonds and has a two-year term. d. On June 4, 2009, the Company entered into a US$10 million loan with Banco de Reservas de la República Dominicana at a variable interest rate1, with interest payable on a monthly basis. The loan is guaranteed by US$3.3 million in Dominican Sovereign Bonds. In November 2009, the Company made a US$7.5 million payment, therefore as of December 31, 2009, the outstanding amount is US$2.5 million due on June 30, 2011. 1.
The banks have the right, under contract, to change the interest rates from time to time in accordance with local market conditions. 15.
Accounts Payable Accounts payable consist of:
Power vendors International vendors Local vendors
16.
2009
2008
US$30,738,833 691,012 639,620
US$53,405,666 5,142,967 892,715
US$32,069,465
US$59,441,348
2009
2008
Other Current Liabilities Other current liabilities consist of:
Withholdings taxes and other Assets tax payable (Note 18) Interests payable Other
US$
21
621,717 1,373,558 2,888,837 5,679,136
US$ 7,713,902 1,455,754 2,965,239 5,070,601
US$10,563,248
US$17,205,496
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 17.
Shareholders’ Equity Common Stock At December 31, 2009 and 2008, 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, 2009 and 2008
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 February 24, 2009, the Board of Directors of the Company approved a dividend payment amounting to US$40 million, corresponding partially to the remaining retained earnings as of December 2007 and partially to 2008 net income. The portion of dividends that corresponded to HIC was paid in cash in March 2009, while the portion of dividends that belonged to FONPER was made by transferring US$20 million in Dominican Sovereign Bonds under Law 490 with a market fair value of US$19.4 million. On December 4, 2008, the Board of Directors of the Company approved the declaration of a US$20 million dividend, corresponding to a portion of retained earnings as of December, 2007. This dividend was paid during the same month that it was declared. As a result, the Company reduced its retained earnings by US$20 million. 18.
Income Tax Dominican Republic Tax Law (the Tax Law) establishes a corporate income tax at a rate of 25% on the net taxable income; and a 1% tax on assets (Asset Tax) as an alternative minimum tax. The taxable base of the Asset Tax in case of power generation, transmission and distribution companies defined in the General Electric Law 125-01, dated July 26, 2001, is the total fixed assets, net of depreciation, as they are shown in the balance sheet at year end.
22
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 The Tax Law requires tax payers to file the corporate income tax returns denominated in Dominican peso (local currency). Those who use a functional currency other than the Dominican peso are required to keep their tax accounting records and official filings in local currency. In addition, Article 293 of the Tax Law establishes the recognition of the foreign exchange difference as deductible expense/taxable income in the determination of taxable base. The Tax Authorities annually indicate the exchange rate to be used for the valuation of monetary items originated in foreign currencies. For the purpose of determining the current income tax, the reconciliation of income before tax and the tax due, at the statutory rate, is: 2009 Tax effect of: Income before income tax
2008
US$ 5,183,757
Permanent differences Nondeductible expenses Inflation adjustment of nonmonetary assets Taxes nondeductible Unallowed donations Other nontaxable income Exchange differences Participation in subsidiary’s loss Other adjustments
41,374 (2,685,889) 1,360,057 20,582 2,323,597 157,181 1,216,902
Temporary differences Depreciation Income on sale of fixed assets Exchange rate differences Non-capitalized assets Other Current tax expense before income tax loss carry forward Utilization of tax loss carry forward
US$12,179,967 848,386 (2,769,444) 463,580 (4,602) 2,132,503 (71,780) 598,643
3,347 (319,167) 14,308 19,941 146,037
(340,082) 39,606 (27,248)
(135,534)
(327,724)
6,265,125
12,450,886
(5,012,100)
(6,869,644)
Current income tax before asset tax credit
US$ 1,253,025
US$ 5,581,242
Asset tax
US$(1,373,558)
US$ (1,455,754)
Current income tax
US$
US$ 4,125,488
-
In 2009, the current 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 the General and Administrative Expenses in the Consolidated Statements of Operations.
23
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 The Company has income tax loss carry forwards of US$28 million (adjusted by inflation) as of December 31, 2009, which can be used to offset future taxable income, subject to the limitations expressed below. These losses will expire as follows: Total Adjusted Unadjusted Tax Loss Tax Loss Carry Carry Inflation Forward Forward Adjustment (Expressed in US$ million)
Period
2009 2010
Less: Utilized/expired in 2009
27.5 27.5
0.5 0.5
28.0 28.0
55.0
1.0
56.0
(27.5)
(0.5)
(28.0)
27.5
0.5
28.0
The components of the deferred income tax asset / liability consist of the following: Balance at December 31, 2008 US$ Current deferred income tax Foreign currency Bad debts reserve Vacation accruals Bonus for objective allowance Tax loss carry forward Valuation allowance
(19,575)
Fixed assets
Deferred income tax - net
Balance at December 31, 2009 US$
226 230,224 6,184,575 (1,494,091)
13,379 46,447 (226) 67,513 321,950 (2,317,830)
297,737 6,506,525 (3,811,921)
4,901,359
(1,868,767)
3,032,592
-
Noncurrent deferred income tax Tax loss carry forward Valuation allowance
Effect in Results for the Period US$
(6,196) 46,447 -
6,184,575 (1,494,090) 4,690,485 (16,349,989)
(6,184,575) 1,494,090 (4,690,485) 226,704
(16,123,285)
(11,659,504)
(4,463,781)
(16,123,285)
(6,758,145)
(6,332,548)
(13,090,693)
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.
24
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 The Company's deferred tax asset reflects the tax benefit of US$2.7 million (2008: US$9.4 million) in tax loss carry forward net of a valuation allowance of US$3.8 million (2008: US$3.0 million). The tax loss carry forwards expire in 2010 and realization is dependent on generating sufficient taxable income prior to its expiration date. Although realization is not assured, management believes it is more likely than not that US$2.7 million (2008: US$9.6 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. Manager considers projected future taxable income in making this assessment. At December 31, 2009 management increased the valuation allowance by US$0.8 million after updating their future taxable income projections, based on current market conditions and performance of the entity in 2009. 19.
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 equal to a minimum amount of US$5.5 million per month. 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 May, 2010. As per conditions of the agreement, EGE Haina continued to receive the payments of pledged customers and credit card collections until the full extinguishment of the account receivable.
25
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 On July 14, 2009, the Company sent a letter to Edeeste, declaring the latter in default under the rescheduling agreement signed in August 2006. Specifically, Edeeste failed to comply with the minimum monthly payment of US$5.5 million during April, 2009. The outstanding balance of the account receivable from the Edeeste at December 31, 2009 and 2008 was US$1.0 million and US$86.3 million, respectively, from which US$0.7 million and US$7.7 million were classified as current portion as of December 31, 2009 and 2008, respectively. On January 11, 2010, the Company fully collected the outstanding amount. c. On July 23, 2008, the Company entered into a power purchase agreement (PPA) with CEPM under which EGE Haina would supply a minimum of 50MW of capacity and associated energy to CEPM. This began upon CEPM´s completion of the 138KV transmission line that connects its distribution system with one of EGE Haina’s generation plants, La Sultana del Este. The PPA establishes a term of 18 years. The price for capacity is adjusted monthly by the U.S. CPI. The price for electricity delivered under the PPA is equal to the cost of the fuel used by EGE Haina to generate the electricity plus a variable operating and maintenance margin. The prices and the amounts due are stated in U.S. Dollars. Originally, the non-fuel variable component was adjusted monthly by the U.S. CPI and for fluctuations in the exchange rate between the US Dollar and Euro. In May, 2009, the Company and CEPM entered into the first amendment to the Power Purchase Agreement. The amendment eliminated the Euro indexation contained in the energy price and established a new minimum capacity of 48.1 MW. d. As of July 1, 2009, the Company and Centros del Caribe, S. A., by mutual agreement, decided to terminate the Power Sales Contract signed in April 2002. As a part of this agreement, EGE Haina sold to Megacentro the generation engines located at Megacentro Mall at a sales price of approximately US$ 3.3 million. Additionaly, Centros del Caribe S. A. paid to EGE Haina US$0.3 million as fine for the anticipated termination of the contract. 20.
Fuel Oil, Coal and Power Supply •
During 2009 and 2008, 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 2009 the Company purchased 1.8 million barrels at a cost of US$108.4 million (2008: 1.7 million barrels at a cost of US$133.6 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 (“Glencore”), in which Glencore 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).
26
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 During 2009, EGE Haina reached an agreement with Glencore for the delivery of the following coal cargoes in 2009: - 2 cargoes in the first half of 2009 with a FOB spot price of US$94.00/MT - 2 cargoes in the third quarter of 2009 with FOB spot price of US$66.00/MT - 2 cargoes in the fourth quarter of 2009 with FOB price of US$72.00/MT.
21.
•
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 2009 the Company purchased the equivalent of US$66.0 million (2008: US$144.3 million). The Company purchased 495 GWH in 2009 (2008: 694 GWH).
Operating and Maintenance Expenses Operating and maintenance expenses consist of: 2009 Maintenance expenses (a) Labor costs Technical advisory fees Lubricants Professional services Security services Other
2008
US$10,127,709 8,685,764 5,132,571 3,508,283 1,622,559 566,596 1,537,399
US$10,429,009 8,381,632 4,453,656 3,165,633 1,137,631 730,641 2,427,547
US$31,180,881
US$30,725,749
(a) Sultana Operation and Maintenance Contracts On April 27, 2007 the Company signed a maintenance contract with ABB S. A. (“ABB”), by which this supplier will manage and execute the maintenance, including service and installation of delivered spare parts of all turbochargers, and the daily inspections at La Sultana del Este Plant. In consideration of the management and execution of the maintenance agreement, the Company will pay to ABB a fixed hourly rate calculated on the basis of the agreed hours and number/type of turbochargers of CHF 8.80 (Swiss franc). This contract came into force on November 11, 2006 and it will end automatically once the last turbocharger has reached the agreed hours (total of 844,200 hours, distributed by 46,900 per 18 turbochargers), but not later than December 31, 2013. The Company has however the option to unilaterally extend the hours by another 50,000 running hours (from 50,000 to 100,000 running hours). This option can only be exercised together with the option of the respective operating performance package agreed for the delivery of spare parts between customer and ABB Turbo Systems Ltd, Switzerland. 27
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 The party, which terminates this operating performance package before the end of the contract term for other reasons than communication of failure, bankruptcy, force majeure or change in law, shall pay the following amounts to the other party: Within the first contractual year Within the second contractual year Within the third contractual year Within the fourth contractual year Within the fifth contractual year
US$ 1,000,000 800,000 600,000 400,000 200,000
The Company’s contract with ABB continued in full force and effect throughout the whole of 2009. As of December 31, 2009, none of the eighteen (18) turbochargers exceeded the contractually agreed hours of 46,900. 22.
Administrative and General Expenses Administrative and general expenses consist of: 2009 Labor costs and office operation costs Management fees (Note 24) Withholding taxes on management fees Technical advisory fees Insurance Regulatory payments Provision for doubtful accounts Asset tax
23.
2008
US$ 7,726,673 9,062,612 2,451,845 2,129,934 3,279,364 1,414,404 290,375 1,373,558
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$27,728,765
US$38,719,644
Financial Expenses, Net Financial expenses, net consist of: 2009 Financial expenses: Interest on senior notes Interest on local bond Interest on short-term debt Interest on payables to power vendors Withholding taxes on interests Amortization of deferred charges (Note 11) Other financial expenses Financial income: Interest on trade accounts receivable Interest on sovereign bonds Interest on short-term investments Other financial income Total financial expenses, net
US$ (16,815,437) (901,614) (923,578) (3,685,680) (1,783,034) (1,617,073) (111,035)
US$(16,024,188) (154,341) (3,723,471) (1,873,714) (1,311,498) (705,069)
(25,837,451)
(23,792,281)
US$ 10,986,243 4,172,924 41,196 46,244
US$12,008,396 1,768,068 160,170
15,246,607
13,936,634
US$(10,590,844) 28
2008
US$ (9,855,647)
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 24.
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 Energético Punta Cana-Macao, S. A. (CEPM) – Note 19 c)
Other accounts receivable: HIC Compañía de Electricidad de San Pedro de Macorís S. A. (CESPM) Consorcio Energético Punta Cana-Macao, S. A. (CEPM) - Current CEPM Energy, Ltd. – current (e) Pedregal Power Company S. de R.L. - current Jamaica Power Energy – Current Caribe Energy, Ltd. Energía del Sur Accounts payable: HIC CEPM
Transactions HIC – management fee (a) Sales of energy and interest charges (b) Edenorte Edesur Edeeste TCC Air Services, Inc. (c) CEPM – PPA sales, fees for storage of fuel and other transactions (d) Pedregal Power Company S. de R.L. Jamaica Power Energy Caribe Energy, Ltd.
29
2009
2008
US$ 82,434,688 67,216,728 1,018,141
US$ 75,971,825 56,031,284 86,300,588
4,115,364
3,841,251
US$154,784,921
US$222,144,948
US$
US$
-
98,704 54,707
212,490 4,534,732 474,926
495,640 4,534,732 46,766 31,474 1,598 419,424
US$
5,222,148
US$
5,683,045
US$
962,191 46,775
US$
1,376,893 809,496
US$ 1,008,966
US$
2,186,389
2009
2008
US$ 9,062,612
US$13,591,742
105,968,279 147,742,349 7,808,385
146,096,312 182,379,168 126,056,237
39,140,183 13,479 3,887 -
132,483 22,647,164 41,680 102,540 1,677
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 a) Management Fee - HIC As part of the capitalization process, HIC maintains an administration contract with the Company, expiring in 2020, to its day-to-day operations under the direction of the Company’ Board of Directors. HIC charges the Company 2.95% of annual net sales that represented US$9.1 million and US$13.6 million for 2009 and 2008, respectively. At December 31, 2009 and 2008, the Company had accounts payable balances to HIC of US$1.0 million and US$1.4 million, respectively. b) Sales Agreements with Distribution Companies The distribution companies Edesur, Edenorte and Edeeste are related parties. Such distribution companies are wholly-owned by the Dominican State through FONPER. Sales made by the Company to these distribution companies are based primarily on existing agreements which are more detailed in Note 19. 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) 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 48MW capacity and related energy to CEPM. See Note 19(c) for further detail. e) CEPM Energy, Ltd The Company expects to fully recover such outstanding amount in 2010. 25.
Other Income (Expense), Net Other income (expense), net consists of: 2009 Gain from early extinguishment of debt Gain on sale of fixed assets (Note 19 d) Loss on asset disposal Gain on liability extinguishment (Note 19 d) Fair value loss on forward contract Fines and penalties Other
26.
2008
US$1,850,712 664,914 (167,060) 300,000 (358,862) 281,161
US$ (333,481) (403,327)
US$2,570,865
US$(736,808)
Commitments Letter of Credit – On November 24, 2008, the Company entered into a Standby Letter of Credit with Citibank in order to guarantee its coal purchases. The aforementioned agreement ended on January 9, 2009.
30
Empresa Generadora de Electricidad Haina, S. A. and Subsidiary Notes to Consolidated Financial Statements December 31, 2009 and 2008 27.
Contingencies The Company is involved in certain legal proceedings from time to time that are incidental to the normal conduct of its business. Although the final outcomes cannot be predicted with certainty, the company, based upon a thorough review of the facts and advice of counsel, believe that the ultimate disposition of these issues will not have a materially adverse effect on the company’s financial position or result of operations.
28.
Subsequent Events Euro Forward On February 16, 2010, the euro forward contract (Note 8) was settled. In accordance with this agreement, the Company received €10,000,000 at a rate of US$1.4764/EUR. Compensation Agreement On February 26, 2010, HIDRO and the Company agreed to offset US$13.1 million of the Company’s accounts payable to HIDRO against the same amount of accounts receivable from Edesur.
29.
Restatement of Previously issued 2008 Financial Statements The Company has restated its annual financial statements from amounts previously reported for periods ended through December 31, 2008. During 2009, the Company identified certain inventory adjustments that resulted from the translation of spare parts inventory from Dominican Pesos into US Dollars. The effect of these adjustments is a decrease in the Company's equity at January 1, 2008 in the amount of $2,159,145. In addition, this correction resulted in an increase in net income in 2008 in the amount of $359,444 and a decrease in inventories in the amount of $1,799,701.
31