empresa generadora de electricidad itabo, s. a. (an...

Empresa Generadora de Electricidad Itabo, S. A. (An Indirectly Owned Subsidiary of The AES Corporation)

Financial Statements as of and for the years ended December 31, 2017

and 2016 with Report of Independent Auditors


Financial Statements

(Amounts expressed in thousands of US dollars)

CONTENTS Pages

Report of Independent Auditors............................................................................................ 1 - 2

Financial Statements

Balance Sheets..................................................................................................................... 3 - 4

Statements of Comprehensive Income................................................................................ 5

Statements of Changes in Shareholder's Equity.................................................................. 6

Statements of Cash Flows .................................................................................................. 7 - 8

Notes to the Financial Statements ...................................................................................... 9 - 35


BALANCE SHEETS

As of December 31, 2017 and 2016


3

Notes 2017 2016

ASSETS

CURRENT ASSETS:

Cash and cash equivalents 1d, 2 $ 43,743 $ 62,802

Accounts receivable – net 3 8,769 4,015

Accounts receivable – related parties 4 49,882 29,868

Inventories, net 1e, 5 20,490 23,077

Prepaid expenses and other assets 8 723 631

Total current assets 123,607 120,393

PROPERTY, PLANT AND EQUIPMENT, NET:

Land 7,389 7,389

Plant and electricity generating equipment 407,437 402,105

Accumulated depreciation (196,374) (182,731)

Construction in progress 2,609 4,990

Property, plant and equipment, net 1g, 6 221,061 231,753

OTHER ASSETS:

Intangible assets, net 1h, 7 280 408

Prepayments 562 348

Total other assets 842 756

TOTAL $ 345,510 $ 352,902


BALANCE SHEETS (CONTINUED)

As of December 31, 2017 and 2016


4

Notes 2017 2016

LIABILITIES AND

SHAREHOLDER'S EQUITY

CURRENT LIABILITIES:

Accounts payable and accrued liabilities 9 $ 12,455 $ 12,961

Accounts payable - related parties 4 1,969 1,653

Deferred income - related parties 4 — 114

Income tax payable 12 3,941 4,338

Total current liabilities 18,365 19,066

LONG TERM LIABILITIES:

Financial debt - net 10, 17 95,896 95,609

Deferred income tax 1j, 12 11,003 11,733

Long - term compensation 23 19

Total long - term liabilities 106,922 107,361

SHAREHOLDER'S EQUITY:

Common stock RD$100 par value (56,355,556shares issued, authorized and outstanding) 355,556 355,556

Additional paid-in-capital 355 334

Accumulated deficit (135,688) (129,415)

Total shareholder's equity 220,223 226,475

TOTAL $ 345,510 $ 352,902

The accompanying notes are an integral part of these financial statements.

Empresa Generadora de Electricidad Itabo, S. A.(An Indirectly Owned Subsidiary of The AES Corporation)

STATEMENTS OF COMPREHENSIVE INCOME

For the years ended December 31, 2017 and 2016


5

Notes 2017 2016

REVENUES:

Electricity sales 1k, 4 $ 196,332 $ 182,470

Other revenues 11,208 2,004

Total revenues 207,540 184,474

OPERATING COSTS AND EXPENSES:

Cost of electricity sales 4, 13 (93,410) (71,242)

Operating, general and maintenance expenses 4, 14 (35,391) (34,229)

Depreciation and amortization 1g, 6 (18,694) (17,230)

Amortization of contracts — (275)

Total operating costs and expenses (147,495) (122,976)

OPERATING INCOME 60,045 61,498

OTHER INCOME (EXPENSE):

Interest expense - net 1i, 15 (4,225) (5,896)

Debt discount amortization 10 (127) (136)

Other income - net 16 74 21

Exchange (loss) gain, net (227) 174

Total other expense - net (4,505) (5,837)

Income before income tax expense 55,540 55,661

Income tax expense 1j, 12 14,881 13,941

NET COMPREHENSIVE INCOME $ 40,659 $ 41,720



STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY



6

Additional

NotesNumber of

SharesCommon

SharesPaid–in– Capital

AccumulatedDeficit Total

Balance as of January 1, 2016 56,355,556 $ 355,556 $ 312 $ (130,535) $ 225,333

Stock-based compensation 1l — — 22 — 22

Dividends paid — — — (40,600) (40,600)

Net comprehensive income — — — 41,720 41,720

Balance as of December 31, 2016 56,355,556 355,556 334 (129,415) 226,475

Stock-based compensation 1l — — 21 — 21

Dividends paid — — — (46,932) (46,932)

Net comprehensive income — — — 40,659 40,659

Balance as of December 31, 2017 56,355,556 $ 355,556 $ 355 $ (135,688) $ 220,223



STATEMENTS OF CASH FLOWS



7

2017 2016

OPERATING ACTIVITIES:

Net comprehensive income $ 40,659 $ 41,720

Adjustments to reconcile net comprehensive income to net cash

provided by operating activities:

Depreciation 18,560 17,134

Amortization of intangible assets 134 96

Amortization of contracts — 275

Deferred financing costs amortization 153 142

Debt discount amortization 127 136

Deferred income tax (352) 1,121

Loss on sale of asset 7 —

Long term compensation 21 22

Exchange loss (gain), net 227 (174)

Changes in assets and liabilities:

Increase in accounts receivable – trade (4,754) (2,580)

(Increase) decrease in accounts receivable – related companies (20,014) 5,678

Decrease (increase) in inventories 2,586 (2,858)

(Decrease) increase in income tax payable (397) 4,338

(Increase) decrease in prepaid expense and other assets (92) 3,738

Decrease in accounts payable and accrued liabilities (2,156) (1,032)

Increase in accounts payable - related parties 316 480

(Decrease) increase in deferred income - related parties (114) 2

Net cash provided by operating activities 34,911 68,238

INVESTING ACTIVITIES:

Additions to property, plant and equipment (6,470) (16,117)

Advance payments for the acquisition of property, plant and equipment (562) (348)

Additions to intangible assets (6) (214)

Net cash used in investing activities (7,038) (16,679)


STATEMENTS OF CASH FLOWS (CONTINUED)



8

2017 2016

FINANCING ACTIVITIES:

Proceeds from issuance of financial debt $ — $ 99,900

Payment of financial debt — (70,000)

Payments for financing and debt discount costs — (4,200)

Dividends paid (46,932) (40,600)

Net cash (used in) provided by financing activities (46,932) (14,900)

Net (decrease) increase in cash and cash equivalents (19,059) 36,659

Cash and cash equivalents at the beginning of the year 62,802 26,143

Cash and cash equivalents at the end of the year $ 43,743 $ 62,802

Supplemental disclosures of cash flow information:

Cash payments for income taxes $ (16,696) $ (6,426)

Interest paid $ (7,942) $ (5,577)

Supplemental schedule of non-cash activities:

Additions to property, plant and equipment not paid $ 1,133 $ 76



NOTES TO THE FINANCIAL STATEMENTS

December 31, 2017 and 2016


1. Nature of business, basis of presentation and significant accounting policies

9

Nature of business - Empresa Generadora de Electricidad Itabo, S. A. (“Itabo” or the

“Company”), was incorporated in accordance with the laws of the Dominican Republic and

in paticular with the Law 141-97 General Law of Reform of Public Companies of June 24,

1997, which stipulated the reform of some companies of the Dominican Government,

including the Corporación Dominicana de Electricidad (“CDE”), later converted to

Corporación Dominicana de Empresas Eléctricas Estatales (“CDEEE”). By virtue of this

Law, the Comisión de Reforma de la Empresa Pública (“CREP”), the entity responsible for

leading and conducting the process of reform and transformation of government companies,

organized a bidding process to choose a partner for the Dominican Government for

ownership of the shares of the new company that would be constituted with certain electricity

generation assets of CDE.

On August 26, 1999, the first General and Constitutional Board was held and the Share

Subscription Contract signed on August 13, 1999 between CDE and Gener, S.A. and Coastal

Itabo Ltd. was constituted, where these latter two companies acquired 50% of the shares of

Itabo.

On September 8, 1999, the winning consortium took possession of Itabo, thus beginning

the operations of this new corporation.

As of December 31, 2017, the Company’s share capital is owned 50% by Coastal Itabo, Ltd.

(subsidiary of The AES Corporation, Inc.), 49.97% by Fondo Patrimonial Empresas

Reformadas (FONPER) and 0.03% by CDE’s former employees.

On October 27, 2010, Itabo acquired 100% of the shares of Itabo Dominicana, Ltd. (“Itabo

Dominicana”), which is a company constituted in the Cayman Islands. Itabo Dominicana

was constituted only as a special purpose vehicle for the issuance of bonds for $116.4 million.

This company was formally dissolved in February 2017.

The Company owns energy generation units in the Dominican Republic, which together

have a capacity of 294.5 MW. The main generation assets are two steam turbines, Itabo I

and Itabo II, designed to operate with coal, petcoke and fuel oil.

The Company sells capacity and associated energy to the three electricity distribution

companies in the country, EDE-Norte, EDE-Sur and EDE-Este, and a non-regulated user,

under the terms established in the power purchase agreements (PPAs), as well as the

Interconnected Electric System of the Dominican Republic (spot market for electricity) in

conformity with the regulations established in the Dominican electricity sector. The contract

with EDE-Norte ended in July 2016.






(continued)

10

The Company built a private port used to unload coal directly at the Itabo plant. This port

is the only one in the Dominican Republic with the capacity to unload Panamax ships (large

volume vessels).

The Company’s administrative office is located at Winston Churchill Avenue, Acropolis

Tower, Floor 23rd, in Santo Domingo, Dominican Republic.

Basis of presentation - The Company maintains its books in U.S. dollars and prepares its

financial statements in accordance with accounting principles generally accepted in the

United States of America (“U.S. GAAP”).

Significant Accounting Policies – A summary of the significant accounting policies used

in the preparation of the accompanying financial statements are as follows:

a. Use of Estimates – The preparation of financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the

reported amounts of assets and liabilities and disclosure of contingent assets and

liabilities at the date of the financial statements and the reported amounts of revenues

and expenses during the reporting period. Although management believes the

estimates and assumptions used in the preparation of these financial statements were

appropriate in the circumstances, actual results could differ from those estimates and

assumptions.

b. Transactions in foreign currency – The functional and reporting currency of the

Company is the U.S. dollar, because the majority of its cash flows are currently, and

are expected in the future to be, denominated in U.S. dollars. Transactions

denominated in other currencies (mainly Dominican Pesos, RD$, local currency of

the Dominican Republic) are recorded at the rate of exchange in effect at the date

of the transactions. Monetary assets and liabilities denominated in foreign currencies

are converted into the Company’s functional currency at the rate of exchange in

effect at the balance sheets dates; the effect of changes in exchange rates is recognized

in the statements of comprehensive income.

c. Cash and Cash Equivalents – The Company considers all highly-liquid instruments

purchased with an original maturity of three months or less to be cash equivalents.

Part of the cash and cash equivalents include certificates of deposit used as collateral

for employees financing, on which there is no restriction and are granted according

to the established benefit policy.






(continued)

11

d. Inventories – Inventories consist of fuel, spare parts, supplies and materials and are

stated at the lower of cost or market value and are classified in the balance sheets in

accordance with the period in which the inventories are expected to be consumed.

Costs are determined using the weighted average cost method.

e. Concentration of Credit Risk – Electricity distribution companies, EDE-Norte,

EDE-Sur and EDE-Este are Itabo’s main customers. Accordingly, the Company’s

accounts receivable are exposed to potential credit losses of those entities. On a

combined basis, these customers represented 85% and 96% of outstanding account

receivable - related parties as of December 31, 2017 and 2016, respectively. In

addition, these customers accounted for 90% and 98% of total revenues in 2017 and

2016, respectively. Management monitors accounts receivable for collectability on

a monthly basis and records an allowance for doubtful accounts when necesary.

f. Property, Plant and Equipment – Property, plant and equipment is stated at historical

cost, except for the generation assets initially contributed by CDEEE, which were

recorded at the fair values as of the date of the contribution. Cost includes major

expenditures for improvements and replacements, which extend useful lives or

increase capacity.

Interest costs directly attributable to the acquisition, construction or production of

qualifying assets, which are assets that necessarily take a substantial period of time

to get ready for their intended use, are added to the cost of those assets, until such

time as the assets are substantially ready for their intended use.

Interest cost capitalized for the years ended December 31, 2017 and 2016 amounted

to $0.2 million and $0.4 million, respectively.

The Company incurred maintenance expense of $8.4 million and $7.6 million for

the years ended December 31, 2017 and 2016, respectively, presented in the

statements of comprehensive income in the section operating, general and

maintenance expenses. All major maintenance disbursements represent the

reconditioning of the plants and other assets. These costs, which are not included

in the amounts above, are capitalized and then depreciated over the useful life of

each asset.

Capital spare parts, including rotable spare parts, are included in electric generation

assets and are depreciated over their useful life after the part is placed in service.






(continued)

12

f. Property, Plant and Equipment (continued)

Depreciation is computed using the straight-line method over the estimated useful

lives of the assets, which are determined on a composite basis.

Following are the estimated useful lives of the Company’s assets:

Estimated

Useful Life

Buildings 40 to 60 years

Generating equipment 6 to 40 years

Spare parts 6 to 40 years

Vehicles 6 to 10 years

Office equipment 3 to 5 years

The Company evaluates the impairment of long lived assets whenever events or

changes in circumstances indicate that the carrying amount of an asset may not be

recoverable. Recoverability of assets to be held and used is measured by a comparison

of the carrying amount of an asset to estimated undiscounted future cash flows

expected to be generated by the asset. If the carrying amount of an asset exceeds its

estimated future cash flows, an impairment charge is recognized in the amount by

which the carrying amount of the asset exceeds the fair value of the asset.

Itabo’s initial capitalization was recorded at the estimated fair value of the electric

generation assets as of the date of the contribution. Such accounting treatment is

not in accordance with U.S. GAAP, which requires that transfers of assets from a

parent company to a subsidiary be recognized at historical cost. Itabo does not have

access to the information needed to quantify the effects of this departure from U.S.

GAAP on the financial position, results of operations, and cash flows of the Company.

g. Intangible Assets – Intangible assets acquired separately are initially recorded at

cost. Subsequent to its initial recognition, intangible assets are accounted for at cost

less accumulated amortization and the accumulated amount of any impairment loss

as applicable.






(continued)

13

h. Deferred financing costs – Financing costs related to international bonds are

deferred and amortized using the effective interest method, over the term of such

financings. The total net balance of deferred financing cost is presented as a direct

reduction from the face amount of the related debt. The Company recorded

amortization expense of $153 and $142, net of capitalization, for the years ended

December 31, 2017 and 2016, respectively.

i. Income Taxes – Itabo recognizes deferred income tax assets and liabilities for the

future tax consequences of temporary differences between the financial statement

carrying amounts of assets and liabilities and their respective income tax bases,

measured using enacted rates. The effects of changes in the statutory rates are

accounted for in the period that includes the enactment date. Deferred income tax

assets are also recognized for the estimated future effects of tax loss carryforwards.

Deferred income tax assets are reduced to the extent it’s more likely than not that

future benefits will not be realized.

j. Revenue Recognition and Unbilled Revenues – Revenues from the sale of electricity

are recorded based on physical and contractual delivery of energy and capacity at

the rates specified in the respective contracts or at prevailing market rates. Revenues

include income from energy and capacity supplied but not billed at each period end,

which is accounted for at the contractual rates or estimated spot market prices existing

at each respective period end. These unbilled revenues are included in current assets

as accounts receivable. The related cost of this energy has been included in operating

costs. As of December 31, 2017 and 2016, accounts receivable included unbilled

revenues of $20.2 million and $17.3 million, respectively. The actual amounts

subsequently billed approximated estimates reported at December 31, 2017 and

2016.

k. 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 not practicable to estimate due to the related

party nature.

The financial debt as of December 31, 2017 and 2016 is stated at a fixed interest

rate. Management estimates the fair value of the Company’s borrowings by

discounting their future cash flows at market rates and is classified at Level 2 in the

hierarchy of fair value (Note 17).






(continued)

14

l. Stock Plans – Certain of the Company’s employees were granted stock options under

option plans created by The AES Corporation (“the AES Plans”). The AES Plans

allow issuance of options to purchase common stock of The AES Corporation at a

price equal to 100% of the market price at the date the option is granted. Generally,

stock options issued under these plans become exercisable by employees one year

from the grant dates (100% in one year), and other stock options vest over three

years from the date of grant (33% each year). During 2017 and 2016, the Parent

Company did not issue stock options to any Company employees. The weighted-

average exercise prices of the options were $11.93 and $9.41 as of December 31,

2017 and 2016, respectively.

Cost is measured at the time the option is granted based on the fair value of the option

or liability recorded by the Corporation and an expense is recorded on a straight line

basis during the period the employee’s service is required to earn the right to exercise

the option, which is recognized as a capital contribution in additional paid-in-capital.

During the years ended December 31, 2017 and 2016, the Company recorded stock–

based compensation expenses of $21 and $22, respectively.

m. Severance benefits – The Dominican Republic Labor Code requires severance

benefits be paid to employees terminated without justified cause. The Company

recognizes the expense for these severance benefits as incurred.

n. New Accounting Standards – The following accounting standards have been issued

but are not yet effective and have not been adopted by the Company.

ASU No. 2014-09/2015-14/2016-08/2016-10/2016-12/2016-20, Revenue from

Contracts with Customers (Topic 606)

ASU 2014-09 and its subsequent corresponding updates provide the principles an

entity must apply to measure and recognize revenue. The core principle is that an

entity shall recognize revenue to depict the transfer of promised goods or services

to customers in an amount that reflects the consideration to which the entity expects

to be entitled in exchange for those goods or services. Amendments to the standard

were issued that provide further clarification of the principle and to provide certain

transition guidance. The standard will replace most existing revenue recognition

guidance in GAAP, including the guidance on recognizing other income upon the

sale or transfer of nonfinancial assets.






(continued)

15

n. New Accounting Standards (continued)

ASU No. 2014-09/2015-14/2016-08/2016-10/2016-12/2016-20, Revenue from

Contracts with Customers (Topic 606) (continued)

The standard requires retrospective application and allows either a full retrospective

adoption in which all of the periods are presented under the new standard or a

modified retrospective approach in which the cumulative effect of initially applying

the guidance is recognized at the date of initial application. We are currently working

towards adopting the standard using the full retrospective method. The standard is

effective beginning January 1, 2018 (as deferred by ASU No. 2015-14). Early

adoption is permitted only as of January 1, 2017. The Company is currently

evaluating the impact of adopting the standard on its financial statements and intends

to adopt the standard as of January 1, 2019.

ASU No. 2016-02, Leases (Topic 842)

The standard creates Topic 842, Leases, which supersedes Topic 840, Leases, and

introduces a lessee model that brings substantially all leases onto the balance sheet

while retaining most of the principles of the existing lessor model in U.S. GAAP

and aligning many of those principles with ASC 606, Revenue from Contracts with

Customers. Transition method: modified retrospective approach with certain

practical expedients. The standard is effective beginning January 1, 2019. Early

adoption is permitted. The Company is currently evaluating the impact of adopting

the standard on its financial statements and intends to adopt the standard as of January

1, 2019.

ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurements

of Credit Losses on Financial Instruments

The standard updates the impairment model for financial assets measured at

amortized cost to an expected loss model rather than an incurred loss model. It also

allows for the presentation of credit losses available-for-sale debt securities as an

allowance rather than a write down. Transaction method: various. The standard is

effective January 1, 2020. Early adoption is permitted only as of January 1, 2019.

The company is currently evaluating the impact of adopting the standard.





16

2. Cash and cash equivalents

Cash and cash equivalents as of December 31, 2017 and 2016 are detailed as follows:

2017 2016

Cash in US dollars $ 12,958 $ 36,900

Cash in Dominican pesos 5,321 22,698

Cash Equivalents:

Term deposits in Dominican Pesos, average annual rateof 6.13% and 7.08% as of December 31, 2017 and2016, respectively. 464 3,204

Term deposits in US dollars, average annual rate of2.05% as of December 31, 2017. 25,000 —

Total $ 43,743 $ 62,802

Cash equivalents represent financial certificates maturing in less than three months from

the original maturity, of which $0.5 million are used as collateral for loans to employees

as of December 31, 2017 and 2016, respectively, over which there is no restriction.

3. Accounts Receivable - net

The breakdown of accounts receivable - net as of December 31, 2017 and 2016 is as follows:

2017 2016

Agents of the electric spot market: $ 6,826 $ 2,578

Other clients:

San Pedro Bio Energy, S.R.L $ 1,023 $ —

Metales Generales Tineo, C. por A. 26 28

Cemex Dominicana S.A. 17 296

Other 947 1,127

Allowance for bad debts (70) (14)

Total $ 8,769 $ 4,015

Accounts receivable generates interest according to regulations in the electric sector and

according to the terms established in the energy sales contracts.





17

4. Accounts and transactions with related parties

PPAs

In October 2001, Itabo signed contracts with EDE-Este, EDE-Norte and EDE-Sur (the

“distribution companies”). The Dominican Government owns 100% of the distribution

companies, and also holds an interest in FONPER, therefore, these distribution companies

are considered related companies.

The three PPAs have a term of 15 years and expired in July 2016. Under these sale contracts,

EDE-Este, EDE-Norte and EDE-Sur had agreed to purchase capacity and associated energy

from Itabo under a scheme of energy blocks.

Under this scheme, EDE-Este, EDE-Norte and EDE-Sur were committed to purchase 100

MW, 91 MW and 109 MW monthly, respectively, during the period between August 1, 2001

and July 31, 2016.

In December 2008, effective as of January 1, 2009, Itabo and EDE-Este made a second

amendment to the PPA, whereby both parties agreed on the reduction of contracted capacity

to 50 MW for the remainder of the useful life of the contract. This capacity may be revised

by Itabo every three months.

On June 6, 2016, Itabo signed a short term contract for the supply of capacity and 100MW

of associated energy with EDE-Este during the period between August 1, 2016 and December

31, 2017.

On July 28, 2016, Itabo signed a short term contract for the supply of capacity and 100MW

of associated energy with EDE-Sur during the period between August 1, 2016 and December

31, 2016.

In conformity with the stipulations of each energy contract maintained until July 2016, Itabo

was compensated for the contracted capacity and energy supplied, which is subject to the

demand of EDE-Este, EDE-Norte and EDE-Sur. In the three contracts, the price of contracted

capacity was calculated using (i) a base price that is adjusted by changes in the US Consumer

Price Index (“US CPI”) and (ii) the costs to transport energy. The price of contracted energy

was calculated, for the three contracts, using the base price of energy which is adjusted (i)

by 40% of the average cost of coal for the semester prior to the month in which the price of

energy was calculated, and (ii) 60% by the US CPI.





4. Accounts and transactions with related parties (continued)

18

PPAs (continued)

In accordance with the provisions of the new energy contracts, as of August 2016, Itabo is

remunerated for the contracted capacity and the energy supplied, which is subject to the

demand of EDE Este and EDE-Sur. In both contracts, the price of the contracted capacity

is calculated using (i) as the reference base price the capacity price of the wholesale market,

and (ii) the costs to transport energy. In the contract with EDE Este, the contracted energy

price is calculated using a base energy price which is adjusted by (i) 23.6% of the average

coal cost of the month in which the energy price is being calculated ( ii) 76.4% by US CPI.

In the contract with EDE-Sur, the price of the contracted energy is a base price of $ 83/MWh

for the months of August to October 2016 and a base price of $ 82/MWh for the months of

November and December 2016.

In February 2017, as a result of the bidding process carried out by CDEEE, Itabo signed 6

PPAs that entered into force as of April 2017 for a period of 5 years. These contracts were

signed with the three electricity distribution companies in the country, EDE-Norte, EDE-

Sur and EDE-Este. With EDE-Norte it signed two contracts for 33MW and 25.93MW, with

EDE-Sur two contracts for 44MW and 34.57MW and with EDE-Este two contracts for

33MW and 25.93MW. Itabo will be remunerated for the contracted capacity and the energy

supplied, which is subject to the demand of EDE-Norte, EDE-Sur and EDE-Este. The price

of the contracted capacity is calculated using (i) as reference the capacity of wholesale

market prices, and (ii) the energy transportation costs. The price of contracted energy is

calculated using (i) the average coal costs for the month in which the price of energy is

calculated. (ii) margin of $ 54 / MWh adjusted monthly by US CPI.

Sales related to these contracts were presented in the statements of comprehensive income

as electricity sales for a total of $136 million and $166 million for the years ended

December 31, 2017 and 2016, respectively.

The Company purchased from AES Andres DR, S. A., energy in the spot market for a total

of $0.1 million and $0.5 million for the years ended December 31, 2017 and 2016,

respectively; and sold to them $0.9 million and $0.04 million for years ended December 31,


Energy purchases and the regulation of frequency transacted in the spot market with related

party Dominican Power Partners (DPP), amounted to $0.1 million and $0.5 million for the

the years ended December 31, 2017 and 2016, respectively; and sold to them $2.2 million

and $0.4 million for years ended December 31, 2017 and 2016, respectively.






19

Coal Purchase Agreement

In September 2014, Itabo signed a contract for the supply of coal with La Fabril, C. por A..

After this contract, four amendments have been signed modifying the validity and the agreed

price of said contract. For the years 2017 and 2016, the agreed prices were $ 107.65 and

$ 95.62 per metric ton, respectively. The last amendment to this contract was signed on

January 11, 2018 with a term of one year counted from the signing of the contract. This

amendment establishes that the supply of coal will be made through written purchase

notifications with a minimum of 30 days in advance and the price will be agreed and

scheduled when negotiating the terms of the purchase notification. For the years ended

December 31, 2017 and 2016, sales associated with this contract amounted to $0.5 million

in both years.

In May 2017, Itabo signed a coal supply contract with Consorcio Minero Dominicano,

S.R.L., for a minimum monthly supply of 8,000 Metric Tons. For deliveries made from May

16 to July 31, 2017, which correspond to 20,185 MT, the applicable price was $ 85.50 / Ton

plus taxes. For the year ended December 31, 2017, sales associated with this contract

amounted to $5.1 million.

Lease contract

Itabo signed a contract with DPP on September 10, 2014 for the lease of land, buildings and

structures located in the former energy complex Los Mina, effective from October 1, 2014

and automatically renewed under the same conditions. This agreement will remain in effect

until DPP exercises its purchase option right as established in the Option Agreement. The

contract states an annual lease payment of $148.2, to be adjusted annually according to US

CPI. In October 2016, DPP prepaid the one-year lease of $152, for the the years ended

December 31, 2017 and 2016, the Company recognized revenue for this contract of $114

and $38, respectively, which are presented in the statements of comprehensive income as

other revenues. As of December 31, 2016, the prepaid amount balance of $114 was presented

as deferred income - related parties in the balance sheets. This prepaid amount was paid off

in September 2017.

Management Agreement

Itabo signed a Management Agreement (the “Management Agreement”) with New

Caribbean Investments, S.R.L. (“NCI”), a related company owned by The AES Corporation.

According to this contract, NCI is responsible for providing technical assistance and

transferring the necessary technology to ensure Itabo’s competitiveness in the Dominican

energy market. The contract expires in 2020 and the cost of the contract is equal to 2.95%






20

Management Agreement (continued)

of Itabo’s gross sales. Expenses for fees related to this contract are presented in the statements

of comprehensive income in operating, general and maintenance expenses totaling of $7.2

million and $6.4 million for the the years ended December 31, 2017 and 2016, respectively.

On December 22, 2009, the Company signed a new management contract with AES

Solutions LLC, a related company owned by The AES Corporation, for services rendered

in the Financial Hub CA&C. This agreement has a term of three years renewable

automatically. Fees incurred related to this contract are presented in the statements of

comprehensive income under operating, general and maintenance expenses, included in

contracted services totaling $1.9 million and $1.8 million for the years ended December 31,


Sector Agreements

On October 5, 2017, the Company entered into a sales and credit assignment agreement

with CDEEE, the distribution companies owned by the Government of the Dominican

Republic (distros) and the Banco de Reservas, in which the Bank committed and paid $51.4

million for 100% of the accounts receivable that the Company had with the distribution

companies. This transaction was a sale without recourse for the Company.

Dividends

The Company paid dividends of $46.9 million in 2017 and $40.6 million in 2016. The

distribution of dividends is based on fiscal accounting.

Other

The Company has comprehensive risk insurance contracted with AES Global Insurance

Corporation (AGIC), an affiliate subsidiary of The AES Corporation, which covers any

operating risk including damage to machinery and business interruption. For this contract,

the Company has recognized in operating, general and maintenance expenses in the

statements of comprehensive income, insurance cost of $3.5 million for the years ended

December 31, 2017 and 2016.






21

Due to aforementioned operations and contracts, and other less significant transactions, the

balances as of December 31, 2017 and 2016 between related parties are presented below:

2017 2016

Accounts receivable - related parties

Distribution companies $ 42,583 $ 28,838

AES Gener, S.A. 4,204 —

AES Andres DR, S.A. 195 156

Dominican Power Partners 35 607

New Caribbean Investment, S. R. L. 180 182

Consorcio Minero Dominicano 2,536 —

La Fabril, C. por A. 143 57

Other 6 28

Total accounts receivable - related parties $ 49,882 $ 29,868

Accounts payable - related parties

New Caribbean Investment, S. R. L. $ 1,841 $ 1,405

AES Andres DR, S.A. 38 114

AES Solutions, LLC 79 103

Dominican Power Partners 7 10

Other 4 21

Total accounts payable - related parties $ 1,969 $ 1,653

5. Inventories, net

The inventories, net balance as of December 31, 2017 and 2016, consist of the following:

2017 2016

Fuel $ 6,065 $ 8,502

Parts and other materials 14,529 14,764

Allowance for obsolescence (104) (189)

Total $ 20,490 $ 23,077

The cost associated with the consumption of fuel was $79,353 and $47,799 for the years

ended December 31, 2017 and 2016, respectively, which is included in cost of electricity

sales in the statements of comprehensive income.





22

5. Inventories (continued)

For the years ended December 31, 2017 and 2016, there were adjustments for impairment

of inventories of $148 and $85, respectively, which are shown under operating, general and

maintenance expenses in the statements of comprehensive income.

6. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consist of the following:

2016 Additions Retirements Transfers 2017

Original value:

Buildings $ 38,089 $ 1 $ (714) $ 49 $ 37,425

Generating equipment 348,670 408 (4,102) 9,744 354,720

Spare parts 7,624 372 (65) (465) 7,466

Vehicles 336 — — — 336

Office equipment 7,386 — (43) 147 7,490

Subtotal 402,105 781 (4,924) 9,475 407,437

Accumulated depreciation:

Buildings (17,089) (728) 714 — (17,103)

Generating equipment (159,928) (17,097) 4,168 — (172,857)

Spare parts (144) (508) — — (652)

Vehicles (224) (28) — — (252)

Office equipment (5,346) (199) 35 — (5,510)

Subtotal (182,731) (18,560) 4,917 — (196,374)

Construction in progress 4,990 7,094 — (9,475) 2,609

Land 7,389 — — — 7,389

Subtotal 12,379 7,094 — (9,475) 9,998

Total, net $ 231,753 $ (10,685) $ (7) $ — $ 221,061

During the years ended December 31, 2017 and 2016, the Company recorded depreciation

expense of $18,560 and $17,134, respectively.





23

7. Intangible assets - net

The following table summarizes the balances comprising intangible assets in the

accompanying balance sheet as of December 31, 2017 and 2016:

2017 2016

OriginalValue

AccumulatedAmortization

NetBalance

OriginalValue

AccumulatedAmortization

NetBalance

Internal useSoftware $ 1,096 $ (816) $ 280 $ 1,090 $ (682) $ 408

Total $ 1,096 $ (816) $ 280 $ 1,090 $ (682) $ 408

The movements of intangible assets is shown below:

Internal usesoftware

Balance as of January 1, 2016 $ 290

Additions 214

Amortization (96)

Balance as of December 31, 2016 $ 408

Additions 6

Amortization (134)

Balance as of December 31, 2017 $ 280

The following table summarizes the estimated amortization expense for 2018 through

2021:

2018 $ 98

2019 78

2020 65

2021 39

Total $ 280

Intangible asset amortization expense was $134 and $96 for the years ended December 31,






24

8. Prepaid expenses and other assets

The prepaid expenses and other assets balances as of December 31, 2017 and 2016, consist

of the following:

2017 2016

Prepaid taxes $ — $ 456

Third party liability insurance 25 18

Prepayments to vendors 698 157

Total prepaid expenses and other assets $ 723 $ 631

$ —

9. Accounts payable and accrued liabilities

The accounts payable and accrued liabilities balances as of December 31, 2017 and 2016,

consist of the following:

Energy and fuel suppliers $ 7,379 $ 8,695

International suppliers 179 65

Local suppliers 1,543 902

Client deposits 286 —

Accrued interest 1,081 1,081

Taxes payable other than income tax 599 689

Incentive compensation payable 1,331 1,452

Other accrued liabilities 57 77

$ 12,455 $ 12,961

Accounts payable to local and international suppliers are due for up to 45 days from the date

of issue of the respective documents or invoices, are not subject to any discount for prompt

payment, do not generate interest and most of them are payable in the currency of issue of

the invoice.





25

10. Financial debt, net

The financial debt balance as of December 31, 2017 and 2016 amounted to $95.9 million

and $95.6 million, respectively, net of deferred financial costs and unamortized discount,

which are amortized under the effective interest method over the term of the debt, as detailed

below:

2017 2016

Long - term

International bonds $ 99,900 $ 99,900

Deferred financial costs, net (2,191) $ (2,348)

Unamortized discount (1,813) (1,943)

$ 95,896 $ 95,609

International bonds

On May 11, 2016, the Company issued $99.9 million in bonds in international markets under

Rule 144A and Regulation S of SEC, with a single and definitive payment due in May 2026

at an interest rate of 7.95% per annum. Interest payments are semi-annual from November

2016. The total debt issuance costs amounted to $4.4 million.

The deferred financing costs - net as of December 31, 2017 and 2016 consists of:

2017 2016

Deferred financing costs at the beginning of the year $ 2,348 $ 642

Write off - of deferred financing cost — (330)

Payment of financing costs - international bonds — 2,186

Capitalized financing costs (4) (8)

Amortization of financing costs during the year (153) (142)

Total deferred financing cost at the end of the year $ 2,191 $ 2,348

Empresa Generadora de Electricidad Itabo, S. A. and Subsidiary(An Indirectly Owned Subsidiary of The AES Corporation)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



10. Financial debt, net (continued)

26

The unamortized discount as of December 31, 2017 and 2016 consists of:

2017 2016

Unamortized discount at the beginning of year $ 1,943 $ 452

Write off - of unamortized discount — (377)

International bonds discount — 2,014

Capitalized debt discount (3) (10)

Amortization of discount (127) (136)

Total unamortized discount at the end of the year $ 1,813 $ 1,943

As a consequence of the aforementioned issuance of international bonds, the Company must

comply with certain obligations and limitations in order to carry out certain transactions,

such as, the incurrence of additional debt or to declare and pay dividends. Before executing

the aforementioned transactions, the Company must validate and verify that all contract

covenants are being complied with including:

• Financial Ratios to Incur Additional Debt: refers to ratios that the Company must comply

with in order to incur in additional debt, except for the exceptions stipulated in the

relevant financing agreement.

• Financial Ratios to Pay Dividends: refers to ratios that the Company must comply with

in order to make a dividend payment, except for the exceptions stipulated in the relevant

financing agreement.

• Debt Service Coverage Ratio (DSCR): has to be greater than 2.5x and Debt to EBITDA

ratio has to be less than 3.5x.

As of December 31, 2017, the Company is in compliance with all of its commitments and

restrictions.

Empresa Generadora de Electricidad Itabo, S. A. and Subsidiaries(An Indirectly Owned Subsidiary of The AES Corporation)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



11. Commitments and contingencies

27

Commitments

Power Purchase Agreements – See note 4

Operating lease contract

The Company has an operating lease contract in US dollars for its corporate offices. The

lease expense for this contract is presented in the statements of comprehensive income in

the section of operating, maintenance and general expenses for a total expense of $149 and

$159 for the years ended December 31, 2017 and 2016, respectively. On May 12, 2015, the

Company signed the sixth amendment in which the term of the contract was extended until

June 2016. On May 25, 2016, the Company signed a new amendment in which the contract

term was extended until June 1, 2021.

The payment commitment for the next years in relation to this contract is the following:

YearOperating

Leases

2018 $ 123

2019 123

2020 123

2021 49

Total $ 418

Coal Supply Agreement

On November 25, 2016 the company signed a new Agreement for the supply of coal with

Trafigura PTE, LTD. This contract will remain valid for up to five years or until one of the

parties requests its termination thirty (30) days in advance.

Contingencies

Lawsuit with BLC: BLC, a former contractor of Itabo, filed two lawsuits claiming breach

of contract and unilateral termination. The first is a civil liability lawsuit, and the second is

a collections lawsuit before the Chamber of First Instance. The claims amount to $2.0 million

and $1.9 million, respectively. The Court of First Instance of Santo Domingo and the Court

of Appeals of Santo Domingo declared their lack of jurisdiction to hear the claims filed by

BLC, and it was ordered to file the claims before the competent jurisdiction. On December

28, 2005, BLC appealed the decision before the Supreme Court of Justice.


NOTES TO THEFINANCIAL STATEMENTS



11. Commitments and contingencies (continued)

28

Contingencies (continued)

The Supreme Court of Justice ruled in favor of Itabo. We are waiting for the procedural

deadlines of the appeal case to be concluded. The Company considers that this case will not

have a material impact on its financial position, the results of operations, or cash flows.

Tax reviews

The Company income tax returns are subject to review by the tax authorities for the past

three years including the year ended December 31, 2017, according to the current tax

regulations.

Lines of credit

• As of December 31, 2017, the Company has an authorized credit line (not used)

with Banco de Reservas for $15 million to cover working capital needs. The interest

rate of this loan is negotiated at the time of disbursement and the maximum repayment

term of each payment is 180 days.

• As of December 31, 2017, the Company has an authorized credit line (not used)

with BancoMultiple BHD Leon, S. A. for $10 million maturing on January 28, 2020.

The interest rate of this loan is negotiated at the time of disbursement and the

maximum repayment term of each payment is 180 days.

• The Company maintains on its favor a credit facility pre-approved, for an amount

of up to $ 25 million with Scotiabank. To date the total amount of the line is available

for use.

12. Income taxes

Itabo is a Company constituted in the Dominican Republic, therefore it is subject to the

Dominican tax regime applicable to its business activities, as established in the Tax Code

of the Dominican Republic, Law 11-92 of May 31, 1992 and modifications.





12. Income taxes (continued)

29

Current income tax

Current income tax is calculated based on that established in Law 11-92 of the Tax Code of

the Dominican Republic, its regulations and modifications. The tax rate used to determine

the income tax for the years ended December 31, 2017 and 2016 was 27% of net taxable

income.

Tax on assets

The tax on assets corresponds to 1% of the taxable assets. For electricity companies, taxable

assets correspond to the total fixed assets, net of accumulated depreciation. This tax must

be used as a credit against the income tax as follows: if the income tax is greater than the

tax on assets, there is no obligation to pay the latter; otherwise, the difference between the

income tax paid and the tax on assets must be paid.

The Company recorded tax on assets expense in the statements of comprehensive income

in operating, general and maintenance expenses.

Dividends

A dividends tax of 10% is established to the branches and permanent establishments when

they remit their profits to their Head Office or Main Offices.

The income tax and other tax (payable) receivable balance as of December 31, 2017 and

2016 consists of:

2017 2016

Income tax and other tax (payable) receivable at beginning of the year $ (4,338) $ 4,042

Income tax payments 16,696 6,426

Current income tax expense (15,233) (12,820)

Tax on assets (1,248) (1,336)

Exchange effect 182 (650)Total income tax and other tax payable, net $ (3,941) $ (4,338)





12. Income taxes (continued)

30

Deferred income tax is comprised as follows:

2017 2016

Assets:

Provisions and other temporary differences $ 2,937 $ 3,045Total deferred income tax asset 2,937 3,045

Liabilities:

Accelerated tax depreciation (12,855) (13,641)

Other temporary differences (1,085) (1,137)

Total deferred tax liability (13,940) (14,778)

Net long - term deferred income tax liability $ (11,003) $ (11,733)

In compliance with the current transfer pricing regulations, the Company reviewed the

transactions with related parties and estimates that the operations carried out during the

years ended December 31, 2017 and 2016 have no significant impact on the provision of

income tax.

The income tax expense is comprised as follows:

2017 2016

Current $ 15,233 $ 12,820

Deferred (352) 1,121Total income tax expense $ 14,881 $ 13,941

For the years ended December 31, 2017 and 2016, the Company’s effective income tax rate

for financial reporting purposes was 27.0% and 25%, respectively. The primary difference

between the statutory income tax rates and the effective income tax rates relates to the

amortization for income tax of non-monetary assets indexation. Other less significant

differences also existed in both years.

In accordance with ASC 740, “Incomes Taxes”, tax positions are recognized in financial

statements if that position is more likely than not to be sustained by the taxing authority.

Any interest and penalties related to income tax exposures would be recognized within

interest expense and other income (expense), respectively, in the statements of

comprehensive income. The Company has not recorded any liabilities for uncertain tax

positions as of December 31, 2017 and 2016.





31

13. Cost of electricity sales

The cost of electricity sales for the years ended December 31, 2017 and 2016, consist of the

following:

2017 2016

Fuel and generation related costs $ 79,353 $ 47,799

Electricity purchases 6,546 14,304

Transmission charges 7,511 9,139

Total $ 93,410 $ 71,242

14. Operating, general and maintenance expenses

Operating, general and maintenance expenses for the years ended December 31, 2017 and

2016, consist of the following:

2017 2016

Maintenance expenses $ 8,367 $ 7,600

Management contract 7,246 6,408

Salaries and other benefits 6,475 6,771

Insurance 3,561 3,590

Contracted services 1,993 1,896

Consulting and legal fees 1,762 1,524

Tax on assets 1,248 1,336

Property rental 149 159

Professional services 143 88

Other operating and administrative expenses 4,447 4,857

Total $ 35,391 $ 34,229





32

15. Interest expense, net

Net interest expense for the years ended December 31, 2017 and 2016, consists of the

following:

Interest expense - financial $ (8,712) $ (6,644)

Interest expense - commercial and others (14) (77)

Total (8,726) (6,721)

Deferred financing costs amortization (153) (142)

Write off of deferred financing costs and debtdiscount due to early debt payment — (707)

Interest income - commercial 3,703 1,203

Interest income - financial 951 471

Subtotal 4,654 1,674

Total $ (4,225) $ (5,896)

Commercial interest is determined in accordance with the Dominican electricity sector

regulation and the terms established in the power purchase agreements. Accounts receivable

and accounts payable with the electricity sector spot market, denominated in Dominican

Pesos, are subject to the local active interest rate for domestic currency plus a penalty of

eighteen percent (18%) as established in Article 355 of the General Law of Electricity Sector.

The average interest rate applied to spot market accounts receivable and payables in US

dollars in 2017 and 2016, was 6.39% and 6.98%, respectively, and in Dominican pesos was

11.15% and 14.46%, respectively.

For 2017 and 2016, an agreement has not been signed to eliminate the 18% penalty, thus

the Company has recognized as income, the interest from spot market accounts receivables

and expensed all interest incurred for spot market payables as of December 31, 2017 and

2016.





33

16. Other income – net

Other income – net for the years ended December 31, 2017 and 2016, consists of the

following:

2017 2016

Loss on disposal of asset $ (7) $ —

Other 81 21Total $ 74 $ 21

17. Fair value of financial instruments

The Company established a process to determine fair value of its financial instruments. The

determination of fair value takes into consideration the quoted market price of financial

instruments; however, in many cases, quoted market prices are not available for various

financial instruments of the Company. In cases where a market quote is not available, the

fair values are based on estimates using the present value or other valuation techniques.

These techniques are significantly affected by the assumptions used, including the discount

rate and the future cash flows.

Nevertheless, in many occasions no quoted market prices exist for several of the Company’s

financial instruments. In cases in which market quoted prices are not available, the fair value

is based on estimates using current value or other valuation techniques. These techniques

are affected significantly by the assumptions employed, including the discount rate and

future cash flows.

(a) Financial Instruments with Book Value Approximating to Fair Value

Due to their short term nature, the book value of certain financial assets, including cash,

and cash equivalents, accounts receivable and certain financial liabilities, including accounts

payable and accrued liabilities are considered to be equal to their fair value given their short

maturity nature. The fair value of affiliate receivables and payables is not practicable to

estimate due to the related party nature.

The Company follows FASB ASC No. 820 provision of fair value measurements. This

standard provides a consistent definition of fair value and establishes a framework for

measuring fair value in accordance with accounting principles generally accepted in the

United States and requires more extensive disclosures about fair value measurements. Prior

to the rules, the definition of fair value and guidance to apply these definitions under US

GAAP was limited. Additionally, the guidance was dispersed among the many accounting

pronouncements that require fair value measurements.





17. Fair value of financial instruments (continued)

34

This standard defines fair value as the price that would be received to sell an asset or paid

to transfer to a liability ("exit price") in the principal or most advantageous market for an

asset or liability in an orderly transaction between participants market at the measurement

date. Additionally, the rule established a hierarchical framework that prioritizes and directs

the level of observable market price used to measure investments at fair value. The

observables are affected by a number of factors, including the type of investment and the

specific characteristics to the investment. Investments with readily available quoted prices

or for which fair value can be measured based on actively quoted prices generally will have

a higher level of observable market price and a lower level of criteria to measure fair value.

To increase consistency and enhance disclosure of fair value, the fair value measurement

accounting guidance creates a fair value hierarchy to prioritize the inputs used to measure

fair value into three categories. An asset or liability’s level within the fair value hierarchy

is based on the lowest level of input significant to the fair value measurement, where Level

1 is the highest and Level 3 is the lowest. The three levels are defined as follows:

Level 1 – unadjusted quoted prices in active markets accessible by the reporting entity for

identical assets or liabilities. Active markets are those in which transactions for the asset

or liability occur with sufficient frequency and volume to provide pricing information on

an ongoing basis.

Level 2 – pricing inputs other than quoted market prices included in Level 1 which are based

on observable market data that are directly or indirectly observable for substantially the full

term of the asset or liability. These include quoted market prices for similar assets or

liabilities, quoted market prices for identical or similar assets in markets that are not active,

adjusted quoted market prices, inputs from observable data such as interest rate and yield

curves, volatilities or default rates observable at commonly quoted intervals or inputs derived

from observable market data by correlation or other means. The fair value of most over-

the-counter derivatives derived from internal valuation models using market inputs and most

investments in marketable debt securities qualify as Level 2.

Level 3 – pricing inputs that are unobservable, or less observable, from objective sources.

Unobservable inputs are only used to the extent observable inputs are not available. These

inputs maintain the concept of an exit price from the perspective of a market participant and

should reflect assumptions of other market participants. An entity should consider all market

participant assumptions that are available without unreasonable cost and effort. These are

given the lowest priority and are generally used in internally developed methodologies to

generate management’s best estimate of the fair value when no observable market data is

available.





17. Fair value of financial instruments (continued)

35

Any transfers between all levels within the fair value hierarchy levels are recognized at the

end of the reporting period. There were no transfers during 2017.

(b) International bonds

On May 11, 2016, the Company issued $99.9 million in bonds in international markets under

Rule 144A and Regulation S of SEC, with a single and definitive payment in May 2026 at

a rate of 7.95% per annum. Interest payments are semi-annual from November 2016. The

total debt issuance costs amounted to $4.4 million. With the issuance of these bonds, the

Company canceled the loan of $70 million (Credit Agreement).

The estimated fair value as of December 31, 2017 and 2016, is based on information available

as of the date of the unaudited balance sheet. For bonds payable with a fixed rate, the

Company established a process to determine fair value. The assumptions used by the

Company to calculate the fair value of bonds payable fall under Level 2 of the hierarchy as

of December 31, 2017 and 2016.

The fair values estimated for financial instruments as of December 31, 2017 and 2016 are

as follow:

Book Value Fair value

2017 2016 2017 2016

International bonds $ 99,900 $ 99,900 $101,384 $102,262

18. Subsequent events

Subsequent events were evaluated by the Administration until May 29, 2018, the date on

which these financial statements were authorized by the Administration for their issuance.

****

empresa generadora de electricidad itabo, s. a. (an...

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