AES Panamá, S. A. EF AES... · Financial Statements (Translation of financial statements...

Financial Statements

(Translation of financial statements originally issued in Spanish)

AES Panamá, S. A.

For the Years ended December 31, 2013 and 2012 with the Independent Auditor’s Report

(Translation of f inancial statements orig inally issued in Spanish)AES Panamá, S. A.Annual Financial Statements

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CONTENTS

Report of Independent Auditors ..................................................................................................... 1Balance Sheets ................................................................................................................................. 2Income Statements ........................................................................................................................... 4Statements of Changes in Shareholders’ Equity ............................................................................ 5Cash Flow Statements ..................................................................................................................... 6Notes to the Financial Statements............................................................................................ 8 - 36

(Translation of f inancial statements orig inally issued in Spanish)AES Panamá, S. A.Balance SheetsDecember 31, 2013 and 2012(Amounts stated in thousands of US dollars)

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Notes 2013 2012ASSETSShort term assetsCash 26,853$ 40,202$Accounts receivable:Trades 3,373 7,028

4 Related parties 34,479 45,8964 Affiliates 11,556 39,2759 Other 220 368

Inventories, net 2,400 2,303Income tax paid in advance 1,736 1,531

6 Prepaid expenses 2,148 2,22613 Deferred income tax 2,054 1,259

Total short term assets 84,819 140,088

Long term assetsProperty, plant and equipment, netLand 5,702 5,702Buildings 234,947 231,569Electricity generation facilities 438,253 443,744Office furniture and equipment 6,895 6,719Transportation equipment 1,744 1,723Less accumulated depreciation (287,941) (266,894)Constructions in progress 5,326 6,129

5 Total property, plant and equipment, net 404,926 428,692

Other assets7 & 9 Restricted cash 9,840 9,838

8 Investment in affiliate 38,366 -9 Deferred borrowing cost, net 1,840 2,384

Others 762 761

Total other long term assets 50,808 12,983

TOTAL ASSETS 540,553$ 581,763$

Annual Financial S tatements

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

Notes 2013 2012

LIABILITIES AND SHAREHOLDERS ́ EQUITYShort term liabilitiesLoans payable -$ 237$Finance lease obligations - 9Accounts payable:

4 Suppliers 13,941 11,9944 Related parties 8,744 3,416

Affiliates 31,172 32,445Interests payable 529 533Accrued expenses and other liabilities 6,553 14,592Total short term liabilities 60,939 63,226

Long term liabilitiesSeniority premium 577 608Loans payable - 1,246Accounts payable 267 -

9 & 14 Bonds payable, net 299,099 298,832Finance lease obligations - 1

13 Deferred income tax 46,340 40,499Total long term liabilities 346,283 341,186

SHAREHOLDERS ́EQUITYCommon stock with no par value: authorized

215,007,525 shares; outstanding 214,717,428shares in 2013 and 2012 141,402 141,402

Treasury stocks, 290,097 in 2013 and 2012 (263) (263)Additional paid in capital (7,370) 14,124Retained earnings 1,030 25,645Deemed tax (1,468) (3,557)Total shareholders ́equity 133,331 177,351

TOTAL LIABILITIES AND SHAREHOLDERS´EQUITY 540,553$ 581,763$

(Translation of f inancial statements orig inally issued in Spanish)AES Panamá, S. A.Income StatementsFor the years ended December 31 , 2013 and 2012(Amounts stated in thousands of US dollars)

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iNotes 2013 2012

4 Elelectricity sale 301,579$ 305,844$

Operating costs and expenses4 Electricity purchases 196,151 186,6184 Transmission costs 11,207 9,932

Operating and maintenance expenses 31,868 27,1865 Depreciation 23,567 18,0664 Management fee 5,642 4,858

Total operating costs and expenses 268,435 246,660

Operating income 33,144 59,184

Other (expenses) income4 Interest income 2,268 3,701

Borrowing costs (19,137) (18,215)Amortization of deferred financing cost (544) (653)

4 & 12 Other income, net 68 37,8518 Share of loss in affiliate (3,341) -

(20,686) 22,684

Income before income tax 12,458 81,868

13 Income tax 8,573 22,144

Net income 3,885$ 59,724$


(Translation of f inancial statements orig inally issued in Spanish)AES Panamá, S. A.Statement of Changes in Shareholders’ EquityFor the years ended December 31 , 2013 and 2012(Amounts stated in thousands of US dollars)

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Additional TotalCommon Treasury Paid in Retained Deemed Shareholders´

Stock Stock Capital Earnings Tax Equity

Balances as January 1, 2012 141,402$ (263)$ 14,069$ 10,421$ (1,307)$ 164,322$Net income - - - 59,724 - 59,724Deemed tax - - - - (2,250) (2,250)Dividends paid (Note 4) - - - (44,500) - (44,500)Share based compensation - - 55 - - 55

Balances as of December 31, 2012 141,402$ (263)$ 14,124$ 25,645$ (3,557)$ 177,351$

Balances as December 31, 2012 141,402$ (263)$ 14,124$ 25,645$ (3,557)$ 177,351$Net income - - - 3,885 - 3,885Deemed tax - - - - 2,089 2,089Dividends paid (Note 4) - - - (28,500) - (28,500)Investment in Affiliate (Note 8) - - (21,520) - - (21,520)Share based compensation - - 26 - - 26

Balances as of December 31, 2013 141,402$ (263)$ (7,370)$ 1,030$ (1,468)$ 133,331$

(Translation of f inancial statements orig inally issued in Spanish)AES Panamá, S. A.Cash Flows StatementsFor the years ended December 31, 2013 and 2012(Amounts stated in thousands of US dollars)

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2013 2012

Cahs flows from operating activitiesNet income 3,885$ 59,724$Adjustments to reconcile net income to net

cash provided by operating activities:Depreciation 23,567 18,066Loss (gain) on sale of fixed assets 554 -725Income from insurance claim - (36,943)Deferred income tax 5,047 18,931Amortization of deferred borrowing costs 544 653Share of loss in affiliate 3,341 -Amortization of bond discount 267 251Share based compensation 26 55Cash flow before changes in working capital 37,231 60,012

Changes in operating assets and liabilities:(Increase) decrease in accounts receivable (20,302) 49,595(Increase) in inventory (97) (270)(Increase) in advances on income tax (205) (1,531)Decrease (increase) in prepaid expenses 2,167 (2,281)Increase (decrease) in accounts payables 13,063 (11,080)(Decrease) in income tax payable - (23,897)(Decrease) increase in interest payable (4) 4(Decrease) increase in accrued expenses and other liabilities (8,039) 7,596

(31) 39Net cash used in operating activities 23,783 78,187

Cash flows from investing activitiesAcquistion of fixed assets (260) (1,512)Constructions in progress (3,673) (65,460)Income from insurance claim - 36,943Proceeds from the sale of fixed assets 3,592 730Restricted cash (2) -Other long term assets (1) (93)Net cash used in investing activities (344) -

Carried forward… 23,439$ (93)$

(Decrease) increase in seniority premium net from payments

(Translation of f inancial statements orig inally issued in Spanish)AES Panamá, S. A.Cash Flows Statements (continued)For the years ended December 31, 2013 and 2012(Amounts stated in thousands of US dollars)

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2013 2012

Brought forward… 23,439$ (93)$Cash flows from financing activitiesLoan payments (1,483) (251)Payments for the acquisition of fixed assets (6,795) -Payments of deferred financing costs - (14)Lease obligation payments (10) (10)Dividends paid (28,500) (44,500)Net cash used in financing activities (36,788) (44,775)

Net (decrease) increase in cash (13,349) 33,412

Cash at the begining of the year 40,202 36,182

Cash at the end of the period 26,853$ 69,594$

Suplementary disclosure

Interests paid 19,050$ 19,270$

Income tax paid 3,626$ 28,642$

Compensation of commercial accounts with AES Changuinola, S.A. 2,492$ 67,573$

Compensation due debt capitalization 63,227$ -$

Unpaid PP&E adquisitions at the end of the year -$ 8,654$


(Translation of f inancial statements orig inally issued in Spanish)AES Panamá, S. A.Notes to the Financia l StatementsDecember 31, 2013 and 2012(Amounts stated in thousands of US dollars)

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Explanation Added for Translation into English

The accompanying financial statements have been translated from Spanish to English forinternational use. These financial statements are presented in accordance with U.S. generallyaccepted accounting principles. Certain accounting practices applied by AES Panamá, S. A.,which are in conformity with U.S. generally accepted accounting principles, may differ fromaccounting principles generally accepted in some countries where the financial statements may beused.

1. Corporate Information

AES Panamá, S. A. (the Company) was incorporated on October 26, 1999 as a result of the mergerof Empresa de Generación Eléctrica Chiriquí, S. A. (Chiriquí) and Empresa de Generación EléctricaBayano, S. A. (Bayano). Chiriquí and Bayano were incorporated as companies on January 19, 1998in connection with the privatization and restructuring of the Panamanian energy industry. At thetime of its incorporation, the Company operated a hydroelectric power plant with an installedcapacity of 150 megawatts in Bayano, a thermal power plant with a capacity of 42.8 megawattslocated in Panama City (which was shut down in 2005 and transferred to Empresa de Generación, S.A. (EGESA) who assumed all the obligations and responsibilities of the plant on October 18, 2006as established in the transfer agreement), and the hydroelectric power plants of La Estrella and LosValles with installed capacities of 42 and 48 megawatts, respectively, located in the Province ofChiriquí. The Bayano plant completed the expansion of two existing units increasing its totalcapacity from 75 to 87 megawatts for both units and also the construction of a third unit of 86megawatts was finished in February 2004, for a total of 260 megawatts of installed capacity for theBayano plant. The Company built the Estí hydroelectric plant with an installed capacity of 120megawatts, which is located in the Province of Chiriquí and initiated its commercial operation onNovember 20, 2003. Additionally, in March 2006 the Company began a project to increase capacityof generating units at La Estrella and Los Valles power plants to 45 and 51 megawatts, respectively.In 2007 their capacity was increased again to 48 an 54 megawatts, respectively. Since that date, thetotal capacity of the plants is 482 megawatts.

As of December 31, 2013 AES Panamá Energy, S. A., 100% subsidiary of The AES Corporation(The Corporation), owns 105,353,687 (49.0%) of the Company’s shares, the Republic of Panamaowns 108,347,536 (50.39%) shares, the Company employees and former employees own 1,016,205(0.47%) of the shares and 290,097 (0.14%) shares remains as treasury stock.

On September 25, 2013, the Company agreed to capitalize the receivable account it had with itsaffiliate AES Changuinola, S.A. for $63,227 generated on the power supply contract that bothcompanies maintain. Through this transaction, AES Panama, S.A. becomes the owner of 20% ofAES Changuinola, S.A. On November 25, 2013 the transaction was completed upon the transfer andissuance of the corresponding shares.


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1. Corporate Information (continued)

The Company generates and sells electricity in the Panamanian electric market and the RegionalElectric Market (MER), where the Panamanian electric market is regulated by the NationalAuthority of Public Services (formerly Regulator of Public Services). As of December 31, 2013,94% of the energy capacity of the plants in operation are contracted to date under several energypurchases agreements to purchase-sell electrical power and energy or only electrical power withdistribution companies, large-scale customers in the Republic of Panama and the generationcompany AES Changuinola, S. A. These agreements have average terms of one to ten years. Excessenergy is sold in part under contract to distribution companies and the rest in the spot market at theprevailing rates (spot prices).

2. Basis for the Preparation of Financial Statements

These financial statements are presented based on generally accepted accounting principles in theUnited States of America (US GAAP).

The accounting records are maintained in Balboas, the official currency of the Republic of Panama,which is the country in which the Company operates. The Balboa is on a par and is freelyexchangeable with the US Dollar. The Republic of Panama does not issue paper currency; instead ituses the US dollar as the legal currency.

The financial statements and notes are presented in thousands of US dollars ($), except otherwiseindicated.

3. Summary of Significant Accounting Policies

The Company’s significant accounting policies are summarized as follows:

Cash and equivalents

The Company considers as cash the cash on hand, deposits in current and savings accounts, andtime deposits with initial maturity dates that are less than three (3) months.

Restricted cash

Restricted cash includes cash and cash equivalents, which have restricted availability. The natureof the restriction is due to restrictions imposed by financing arrangements, which are used ascollateral for the payment of interest on the loan described in Notes 7 and 9.


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3. Summary of Significant Accounting Policies (continued)

Accounts receivable

Accounts receivable are shown at their nominal value less an allowance for uncollectible accounts.The allowance estimated considering the customer and related parties billing records, the age ofthe balances due, as well as specific evaluations of individual balances. As of December 31, 2013and 2012, there are no allowances for uncollectible accounts.

Inventories

Inventories, which consist primarily of materials and spare parts, are valued at the lower of cost ormarket. The cost is determined by average cost method. The inventories include an allowance forobsolescence of $38 and $85 as of December 31, 2013 and 2012, respectively.

Property, plant and equipment

Property, plant and equipment are recorded at their acquisition cost, less the accumulateddepreciation. Cost includes major expenditures for improvements and replacement, includingcritical replacement parts for the turbine generator units, which extend useful lives or increasecapacity. Maintenance and repair costs are charged to expense accounts as incurred. When assetsare sold or retired, the corresponding cost and accumulated depreciation are removed, and theresulting gain or loss is reflected in the income statement.

Depreciation is calculated according to the useful life of the respective assets using the straight-line method.

The depreciation rates used are based on the estimated useful life of the assets and are describedbelow:

Useful LifeBuildings 30 to 50 yearsGenerating assets (generation equipment) 15 to 50 yearsGenerating assets (electricity equipment) 5 to 50 yearsGenerating assets (transmission equipment) 35 yearsOffice furniture and equipment 3 to 20 yearsVehicles 3 to 8 years


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Impairment valuation of long-lived assets

The Company assesses impairment of long-lived assets based on projected undiscounted cashflows whenever events or changes indicate that there are circumstances that the value of an assetmay not be recoverable. The carrying amount is not recoverable when the discounted future cashflows expected to result from the use of the asset are less than the carrying value of assets. TheCompany believes an impairment loss as the difference between the asset's carrying value and fairvalue determined based on discounted future cash flows.

Investment in affiliate

Correspond to equity securities acquired in an affiliate. Investments recorded in this category arerecognized using the equity method.

Major and minor maintenance

All disbursements recognized as major maintenance represent the reconditioning of the plant orother assets. These expenses are capitalized and then amortized based on the useful life of eachasset. Minor maintenance expenses are charged directly to the income statement.

Construction in progress

Payments for projects under construction include the costs of salaries, engineering, interest,insurance and other renewal cost and improvements which extend the useful life of the property,plant and equipment are capitalized. The balances of construction in progress are transferred toelectricity generation facilities when the assets become available for their intended use.

Share based compensation

Certain Company’s employees were granted stock options under an option plan created by theCorporation. This plan allows for the issuance of options to purchase common stock of theCorporation at a price equal to 100% of the market price on the date on which the option isgranted. Generally, the stock options issued under this plan become exercisable by employees oneyear after the grant date and vest over three years from the date of the grant (33% per year). Theexercise prices of the options were $11.17 and $13.70 for 2013 and 2012, respectively.


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The weighted average fair value of the options granted under the AES plans was estimated as ofthe grants date using the Black-Scholes option-pricing model with the following assumptions:

Assumptions 2013 2012Expected life of the option 6 years 6 yearsRisk-free interest rate 1.13% 1.08%Expected volatility 23% 26%Dividend yield 1% 1%Date fair value $2.23 $3.04

The cost is measured at the date of the grant of the option based on the fair value of the optionestimated by the Corporation and is expensed on a straight line basis for the required period ofservice to earn the right to exercise the option (vesting period) against a capital contribution(additional paid-in capital).

For the years ended December 31, 2013 and 2012, the compensation cost recognized of theoptions amounted to $26 and $55, respectively.

Deferred borrowing costs

Borrowing costs that meet certain criteria are capitalized and amortized during the financingperiod using the effective interest rate method over the life of the loan.

Revenue recognition and concentration

Revenues produced by the sale of electricity are recognized based on output delivered to clientsaccording to the monthly liquidations prepared by the National Dispatch Center of the Republic ofPanama, considering rates and kilowatts specified under contract terms. For the years endedDecember 31, 2013 and 2012, 92% and 81% of contract revenues were derived from thedistribution companies (EDEMET, ECECHI and ENSA), eleven large customers (ImportadoraRicamar, Business Park I, Cemento Panama, Oficina de Electrificación Rural (old BOFCO),Contraloría General de la Republica, Sunstar Hotel, Gold Mills, Avipac, Inc, CementoInteroceanico and United States Embassy) and reserve contracts with the generation companyAES Changuinola, S. A.

Interest income corresponds to interest earned on time deposits calculated using the effectiveinterest method.


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Income tax

The income tax for the year comprises current tax and deferred tax. The income tax is recognizedin the income statement for the current year, except for taxes relating to items directly related toequity, in which case they are recognized in shareholders' equity. The current income tax relates tothe expected tax payable on taxable income tax, using the rate at the date of the statement ofincome tax and any adjustment to tax payable for previous years.

The deferred income tax is calculated based on the liability method, considering the temporarydifferences between the carrying amounts of assets and liabilities reported for financial purposesand the amounts used for taxation purposes. The resulting value of these differences will berecognized as an asset or deferred tax liability in the statement of financial position and valued atthe tax rate that management considers these differences will be made. The amount of deferredincome tax recognized in the income statement is based on the embodiment of timing differencesin the respective fiscal year, using the rate of income tax rate at the date of the relevant tax year.The Company establishes a valuation allowance when it is more likely than not that all or aportion of a deferred tax asset will not be used.

Use of estimates

The presentation of the financial statements in accordance with generally accepted accountingprinciples in the United States requires management to make estimates and assumptions affectingthe reported amounts of assets, liabilities, gain and losses, as well as the disclosure of contingentassets and liabilities. Actual results might differ from these estimates. The most importantestimates are the useful lives of long-lived assets and the assessments of potential disputes andclaims.

Seniority premiums and termination severance provision

The Panamanian Labor Code establishes the payment of a seniority premium. For this purpose aprovision has been established based on a compensation of one week for each year of work, whichamounts to 1.92% of the salaries paid during the year.

The Law No. 44 of August 12, 1995 establishes that, from the moment the law entered into effect,employers are compelled to establish a severance fund to pay employees the seniority bonus andseverance pay for unjustified dismissal established in the Labor Code. This fund is constitutedbased on the installment required for the seniority bonus and 5% of the monthly installment forseverance pay.


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4. Balances and Transactions with Affiliates and Related Parties

The Panamanian Government has a significant investment in the generation, distribution andtransmission companies in the electric power industry in Panama. Consequently, all the transactionsbetween the Company and such companies are considered transactions with related parties.

Through the Order of the Cabinet Council No.150 the National Government approved anadditional credit to the General Budget of the State effective for 2011, allocated to the Ministry ofEconomy and Finance in order to finance the Tariff Stabilization Fund and thus mitigate theimpact generated to AES Panamá, S. A. due to the collapse of the conduction tunnel of CentralHidroeléctrica Estí (Estí Hydroelectric Project). During 2012 the Company recorded $16,304 forthis concept, related to excess costs generated from May to September 2012. During 2013, theCompany has not received assignments for this concept.

The balances and transactions with related parties are as follow:

In the balance sheets2013 2012

Accounts Receivable:Empresa de Distribución Eléctrica Metro Oeste, S. A. (EDEMET) 20,927$ 24,656$Elektra Noreste, S. A. (ENSA) 5,670 8,197Empresa de Distribución Eléctrica Chiriquí, S. A. (EDECHI) 4,311 4,598Oficina de Electrificación Rural (OER) 1,931 2,183Enel Fortuna, S.A. 692 3,720Empresa de Transmisión Eléctrica, S. A. (ETESA) 382 166Empresa de Generación Eléctrica Bahía Las Minas, S. A. 562 2,320Autoridad del Canal de Panamá 4 56

34,479$ 45,896$


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4. Balances and Transactions with Affiliates and Related Parties (continued)

The balances and transactions with affiliates are as follow:


Accounts Payable:Autoridad del Canal de Panamá 3,171$ 280$Enel Fortuna, S. A. 2,136 558Empresa de Transmisión Eléctrica, S. A. (ETESA) 1,850 1,768Empresa de Generación Eléctrica Bahía Las Minas, S. A. 1,383 596Empresa de Distribución Eléctrica Metro Oeste, S. A. (EDEMET) 118 40Elektra Noreste, S. A. (ENSA) 82 158Empresa de Distribución Eléctrica Chiriquí, S. A. (EDECHI) 4 16

8,744$ 3,416$


Accounts Receivable:AES Bocas del Toro Hydro, S.A. 987$ 987$AES Changuinola, S.A. 4,996 30,114AES Corporation 225 3,225AES Latinoamerica S. De R.L. 3,817 3,495Other Affiliates 1,531 1,453

11,556$ 39,275$

Accounts Payable:AES Changuinola, S.A. 22,405$ 26,420$AES Corporation 2,138 1,290AES Solution LLC 6,439 4,258Otras Afiliadas 190 477

31,172$ 32,445$


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In the income statements for the years ended December 31, 2013 and 2012:

2013 2012Revenue:

Empresa de Distribución Eléctrica Metro Oeste, S. A. (EDEMET) 135,762$ 146,296$Elektra Noreste, S. A. (ENSA) 39,521 49,858Empresa de Distribución Eléctrica Chiriquí, S. A. (EDECHI) 29,516 28,759Oficina de Electrificación Rural (OER) 10,071 6,947Enel Fortuna, S.A. 6,099 13,965Empresa de Generación Eléctrica Bahía Las Minas, S. A. 3,716 6,243Empresa de Transmisión Eléctrica, S. A. (ETESA) 2,252 281Autoridad del Canal de Panamá 40 623

226,977$ 252,972$

Transmission fee:Empresa de Transmisión Eléctrica, S. A. 11,207$ 9,932$

Energy purchased and related costs:Autoridad del Canal de Panamá 24,314$ 8,642$Enel Fortuna, S. A. 17,606 10,893Empresa de Generación Eléctrica Bahía Las Minas, S. A. 14,578 18,483Empresa de Distribución Eléctrica Metro Oeste, S. A. (EDEMET) 1,218 447Empresa de Transmisión Eléctrica, S. A. (ETESA) 790 328Elektra Noreste, S. A. (ENSA) 57 723Empresa de Distribución Eléctrica Chiriquí, S. A. (EDECHI) 57 19

58,620$ 39,535$


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Balances and transactions with affiliated companies:

Sales-purchases energy

On March 9, 2007, the Company signed with its affiliate AES Changuinola, S. A., a contract for thepurchase - sale of firm capacity and energy for a period of ten years (from 2011 to 2020). On May14, 2010 the Company signed the first amendment to contract of reserve 01-07 where two new itemsof purchase and sale of firm capacity and energy were added for a period of 10 years, from 2012 and2013. On June 25, 2012 was signed the second amendment to contract where modified the duration,extending it is term until December 31, 2030. By note dated May 30, 2013, AES Changuinola hasexercised its rights under the ninth clause of the Reservation Contract 01-07 to be relieved fromfulfilling the commitments under the contract, considering a Fortuitous Event due to the extremehydrological conditions experienced in the Republic of Panama. As a result, starting May 1, 2013,AES Changuiniola, S.A. billings only include the energy generated by the units of the Changuinola IHydroelectric plant at the price established on the above mentioned contract. AES Changuinola,S.A. terminated the Fortuitous Event on October 2, 2013. On August 29, 2013 the third amendmentof this contract was signed, where from January 1st, 2014, the reserve contract will be managed as aphysical contract and a row is added to complete the sale of firm capacity of Chan I up to the year2030.

As of December 31, 2013 and 2012 the Company has recorded for this contract sales by $56,411and $46,890, respectively and purchases by $93,851 and $126,855, respectively.

Management fee income

The Company has a management contract with AES Changuinola, S. A. The agreement allows, onceconsidered the substantial completion of Changuinola project, a fee equivalent to 1% of incomebefore depreciation, interest and income tax. The total fees charged to management fee incomeincluded in other income (expenses), net in $58 and $713 for the year ended December 31, 2013 and2012, respectively.

In November 2010, the Company entered into a new management contract with AES SolutionsLLC, a subsidiary of The AES Corporation, effective January 1, 2010 through December 31, 2018.The Agreement provides that the annual fee will be for the minimum amount of $4,000, this amountshall be adjusted annually due to changes in inflation. The Board of Directors will approve thecharges that will be invoiced every six months which should be annually at least the minimumamount agreed. The total fee registered in the management fee expense amounts $5,642 and $4,858for the years ended December 31, 2013 and 2012, respectively.


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Rental income

As of December 31, 2013 and 2012, the Company invoiced for rentals to affiliated companies theamount of $248 and $317, respectively. The corresponding lease agreement is valid from February2013, it has a term of one year with an automatic renewal option and it is recorded as other(expenses) income, net in the income statement.

Dividends

The Company distributed dividends for the total amount of $28,500 and $44,500 in 2013 and 2012,respectively.

Insurance

The Company maintains an insurance against all risks in ASSA Compañía de Seguros S. A, thecompany in turn diversifies the risk reinsured with a group of insurance companies among whichincludes a related company of AES Panamá, S. A., called AES Global Insurance Corporation. Thepolicy taken with ASSA Insurance Company SA covers all operational risks including machinerybreakdown and loss of earnings. For this contract the Company has registered insurance expensesby $4,627 and $4,431 for the years ended December 31, 2013 and 2012, respectively. Theseamounts are included in operation and maintenance account in the income statement. In 2012 theCompany recognized an accounts receivable by $3,000, coming from American InternationalGroup, due to a reimbursement of legal expenses arising from claims of the Estí tunnel collapse.This amount was collected in July 2013.

Others

The Company recorded in its books accounts receivable of $56,411 and $46,890 as of December 31,2013 and 2012, respectively, which corresponds to the sales of energy related to the power purchaseagreement with its affiliate AES Changuinola, S. A. effective since January 2011. Accounts payablefor purchases of energy related to this contract up to September 30, 2011, were compensated withthe accounts receivable by agreement between the parties and the net balance receivable atSeptember 30, 2013 is presented in the balance sheet. As a December 31, 2013 and 2012, the totalcompensated amount was $2,492 and $67,573, respectively. The agreement between the parties alsostipulated that there will be a 7% interest on balances due and not canceled. At December 31, 2013and 2012, the company registered $2,197 and $3,678, respectively, for this concept and it isreflected in the item of interest income in the income statement.


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Result of this agreement, AES Panama, SA maintained a receivable overdue by $63,227, $ 23.367of which corresponded to the 2011 balances invoices, $36,525 to bills during 2013 and $3,335corresponds to interest over due balances. This amount was capitalized by approval of the Board ofAES Panama, S.A. at the meeting held on September 25, 2013. Through this transaction AESPanama, S.A. becomes the owner of 20% of AES Changuinola, S.A.

5. Property, Plant and Equipment, Net

Land Buildings

Electricitygenerationfacilities

Officefurniture and

equipmentT ransportat ion

equipmentConstructionin progress T otal

Cost:Begining balance 5,702$ 231,569$ 443,744$ 6,719$ 1,723$ 6,129$ 695,586$Addit ions - 76 126 59 3,673 3,934Reclass. and adjustments - 8,128 (4,959) 1,345 (38) (4,476) -Sales and disposals - (4,750) (608) (1,295) (6,653)Ending balance 5,702 234,947 438,253 6,895 1,744 5,326 692,867

Accumulated depreciationBegining balance - 74,385 186,045 5,647 817 - 266,894Current expense - 8,103 14,796 518 150 - 23,567Reclass. and adjustments - (1,908) 1,979 (140) 69 - -Sales and disposals - (1,060) (359) (1,101) - - (2,520)Ending balance - 79,520 202,461 4,924 1,036 - 287,941Net balance 5,702$ 155,427$ 235,792$ 1,971$ 708$ 5,326$ 404,926$

As of December 31, 2013


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5. Property, Plant and Equipment, Net (continued)

Land Buildings

Electricitygenerationfacilit ies

Officefurniture and

equipmentTransportation

equipmentConstructionin progress T otal

Cost:Begining balance 5,702$ 231,459$ 339,829$ 6,499$ 973$ 49,910$ 634,372$Additions - 71 2,689 245 883 57,537 61,425Reclass. and adjustments - 39 101,226 53 - (101,318) -Sales and disposals - - - (78) (133) - (211)Ending balance 5,702 231,569 443,744 6,719 1,723 6,129 695,586

Accumulated depreciationBegining balance - 66,547 176,366 5,315 806 - 249,034Current expense - 7,838 9,679 492 57 - 18,066Sales and disposals - - - (160) (46) - (206)Ending balance - 74,385 186,045 5,647 817 - 266,894Net balance 5,702$ 157,184$ 257,699$ 1,072$ 906$ 6,129$ 428,692$

As of December 31, 2012

The decrease in construction in progress account is due to repair works on the adduction tunnel ofthe Estí Hydroelectric Plant, these costs were transferred to fixed assets with the completion of thework on June 2012.

As of December 31, 2013 and 2012, there are capitalized interests and deferred financing costs by$386 and $1,641, respectively.

During 2013 the Company sold the previous former office floors 23, 24 and 25 for the total amountof $ 3,592. At the date of the transaction, their carrying value was $3,688, generating a loss on saleof assets by $96. Additionally, the Company sold generating equipments, furniture and softwareresulting on a loss on disposal of these assets for a total of $458.

During 2013 the Company reclassified $6,768 from electricity generation facilities to buildings as aresult of the review of the classification of groups of fixed assets.


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6. Prepaid Expenses

Prepaid expenses as of December 31, 2013 and 2012 are shown below:

2013 2012

Guaranty 314$ 316$Insurances 1,214 1,223Advance payment to suppliers 490 494ANAM - Water concessions 69 60Others 61 133

2,148$ 2,226$

7. Restricted Cash

In December 2006, the Company issued senior notes (issued under Rule 144A/Reg S of the Securityand Exchange Commission) in the national and international markets in the amount of $300,000 forthe main purpose of refinancing the balance of capital, interest, and other charges owed by thecompany due to the issuance of $320,000 in 2003.

The agreement for obtaining the new debt of $300,000 contemplates the creation of a trust fund withthe account “Debt Service Reserve Account”. This trust fund has been set up by AES Panamá, S. A.as Trustor, and HSBC Bank USA and National Association as Trustee and Collateral Agent, and itsgeneral purpose is to maintain a cash fund to secure the payment of interests of one semester. Theamount held in this account is $9,840 and $9,838 as of December 31, 2013 and 2012, respectively.

8. Investment in Affiliate

On September 25, 2013 the Board of AES Panama, S.A. approved the capitalization of the debtthat AES Changuinola, S.A. maintained with the Company for $63,227. The Board, afterreviewing independent evaluations to determine the fair value of AES Changuinola, S.A.,determined that the amount of the aforementioned debt represents 20% of the value of AESChanguinola, S.A. On November 25, 2013 the transaction was completed once the transfer andissuance of the corresponding shares occurred.


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8. Investment in Affiliate (continued)

As the affiliate AES Changuinola, S.A. is under common control with the same entity as AESPanama, S.A. the initial recognition of the investment is made at the carrying value of the assets ofthe affiliate which, at the date of the transaction, totaled $208,535. The amount equivalent to the20% of the share amounts to $41,707. The difference between the value of the share of investmentand capitalized debt ($63,227) should be recorded in equity since no profit or loss for the transferof assets between entities under common control should be recognized; the amount in equity is$21,520.

Affiliated Commercial activity 2013 2012 2013 2012

AES Changuinola, S.A. Electicity generation (Hydroelectric) 20% - 38,366 -

% of equityparticipation December 31

Since November 25, 2013 the Company has recognized, in respect of the 20% participation in theresults of AES Changuinola S.A., a loss of $3,341, decreasing the value of the investment. Thisamount is recorded in the balance sheet under the investments in affiliate account and in thestatement of income within share of loss in affiliate.

9. Bonds Payable, Net

On December 21, 2006, the Company refinanced the $320,000 debt with a new credit of$300,000. This credit was subscribed and distributed by Credit Suisse and UBS Investment Bank.The Company paid issuance costs for $5,024 for obtaining the new credit; these costs weredeferred and will be amortized during the debt term. Net deferred borrowing costs amounted$1,840 and $2,384 as of December 31, 2013 and 2012, respectively.

The Company issued a bond payable amounting to of $300,000 (issued under rule144A/Regulation S of the Securities and Exchange Commission) in the national and internationalmarket with a due date of December 21, 2016 and an annual interest rate of 6.35% with a singlepayment upon maturity of the capital, and semiannual interests payments. The Company shows inits balance sheets the debt securities for $299,099, net of an unamortized discount, which isamortized under the effective interest rate method.

FinanceInformation Net Equity

Affiliated Date Assets Liabilities Equity Revenues Expenses Loss participation

AES Changuinola, S.A. Dec-31-2013 675,004 479,800 195,204 95,096 133,704 (38,608) (3,341)


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9. Bonds Payable, Net (continued)

The bonds payable were issued in accordance with the provisions of the Note Issuance Facilitysigned by AES Panamá, S. A. and HSBC Bank USA, National Association as trustee.

The following is a list of the relevant commitments and restrictions of this debt:

· The Company has to maintain a “Debt Service Reserve Account” with the funds deposited andavailable to secure the semiannual interest payment.

· Limitation at the time for contracting certain debts:

a. Bank acceptances, letters of credit and other debts should not exceed $20,000 at any time.b. Enter into lease contracts that exceed $10,000 at any time.

· Limitation on the sale of generation assets.

· The audited financial statements must be presented at the latest 120 days after the close of thefiscal period.

As of December 31, 2013 and 2012, the Company is in compliance with all of its commitmentsand restrictions.

As of December 31, 2013 and 2012, bonds payable, net from discount are as follows:

2013 2012

Bonds 300,000$ 300,000$Discount (901) (1,168)

Bonds payable, net 299,099 298,832

Amortization of the discount is included in interest expenses in the accompanying incomestatements.


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10. Commitments and Contingencies

Commitments

Purchase – sale energy contracts

The Company has contracted certain obligation in connection with the concession contracts andpurchase of energy. The Company maintains contract performance guarantees for $30,300 toguarantee the obligations according to the contracts signed with the distribution companies. TheCompany also maintains contract performance guarantees for $28,000 in favor of the AutoridadNacional de los Servicios Públicos / Contraloría General de la República de Panamá for theconcession of the hydroelectric exploitation, which guarantee the generation of electric energy.

The Company also maintains a stand-by letter of credit for $2,474 to guarantee the payments forpurchases in the spot market. In addition, the Company maintains guarantees in favor of ETESA for$783.7 and $7.9 to guarantee the payments for transmission services.

During 2006, the Company won bids 15-06 and 19-06 for the sale of firm capacity and associatedenergy. Contract 15-06 with Edemet for a total of 15MW and contract 19-06 with Edechi for a totalof 35MW, both of them effective from January 1, 2011 to December 31, 2020.

On March 9, 2007, the Company signed with its affiliate AES Changuinola, S. A., a contract for thepurchase - sale of firm capacity and energy for a period of ten years (from 2011 to 2020). On May14, 2010 the Company signed the first amendment to contract of reserve 01-07 where two new itemsof purchase and sale of firm capacity and energy were added for a period of 10 years, from 2012 and2013. On June 25, 2012 the second amendment to contract was signed, extending its term untilDecember 31, 2030. By note dated May 30, 2013, AES Changuinola has exercised its rights underthe ninth clause of the Reservation Contract 01-07, to be relieved from fulfilling the commitmentsunder the contract, considering a Fortuitous Event due to the extreme hydrological conditionsexperienced in the Republic of Panama. As a result, starting May 1, 2013, AES Changuiniola, S.A.billings only include the energy generated by the units of the Changuinola I Hydroelectric plant atthe price established on the above mentioned contract. AES Changuinola, S.A. terminated theFortuitous Event on October 2, 2013. On August 29, 2013 the third amendment of this contract wassigned where, from January 1st, 2014, the reserve contract will be managed as a physical contractand a row is added to complete the sale of firm capacity of Chan I up to the year 2030.

In October 13, 2008, the Company signed contracts Edemet 04-08 and 08-08 to supply firm capacityand energy for a 10-year period that runs from the year 2012 to 2022.

In December 2010 the Company singed the supply contracts GC No.02-11 with DesarrolloInmobiliario del Este effective until December 31, 2016.


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10. Commitments and Contingencies (continued)

In a addition, in April 2011, the Company signed the second amendment to the contract GC 02-09and the first amendment to the contract GC 02-10 both of them with Importadora Ricamar for the“Supply of firm capacity and energy to Large customer” and effective until December 31, 2015.

In July 2011, the Company signed surplus energy contracts with the three distribution companies forthe period from July 01st, 2011 to June 30th, 2012: Contract 61-11 EDECHI – AES Panama;Contract 48-11 EDEMET – AES Panama and Contract 28-11 ELEKTRA- AES Panama. Later onthe same month, the Company signed the first amendment.

In July 2011, the Company signed a new supply contract GC No. 03-11 with Sunstar HotelsDevelopment, S.A, effective until December 31, 2017. The start date of this contract will be the nextsaturday after the Esti Hydroelectric Plant has started again commercial operation, which happensthe first days of June 2012.

On February 29, 2012, the Company signed a new supply contract GC No. 01-12 with the Ministryof the Presidency on behalf of the Rural Electrification Office (ERO), effective December 31, 2012.In December 28, 2012, the Company signed the first amendment to this contract to extend theexpiration date up to February 28, 2013.

On February 28, 2013, the contract No.01-12 kept with Oficina de Electrificación Rural ended. Thiscontract was replaced by the contract No. 01-13 signed on March 1st 2013 starting on the same day,for a self-generating power with the Oficina de Electrificación Rural effective until December 31,2013.

In August 2012, the Company participated in the act of long-term tender ETESA 01-12 and onSeptember 17, 2012 ETESA notified the award of the principal bid submitted by AES Panama bythe matter of power the amount of 159 MW from 2019-2020, 209 MW by 2021, 309 MW by 2022and 350 MW from 2023 to 2030. In October 2012 the corresponding contracts to this adjudicationwere signed with the three distribution companies.

On July 9, 2012 the Company signed a contract for the supply of firm power and energy to largecustomer with Costa del Este Office Properties, INC. effective until December 31, 2016. The startdate of delivery will be the following Saturday after Costa del Este Office Properties, INC hascomplied with the guarantee of payment as specified in clause 3.1 of Contract No. 02-12.

On November 7, 2012 the Company signed the contract No. 254-2012-ADM with the ContraloríaGeneral de la República for the supply of firm power and energy to large customer; this contract willrun until November 2015.


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On December 28, 2012 the Company signed a contract with Gold Mills in Panama for the supply offirm power and energy, effective through December 31, 2018. The start date of delivery will be thefollowing Saturday after Gold Mills has fulfilled the guarantee of payment as stated in the contractin clause 3.1 of Contract No. 04-12.

In December 2012 the Company signed a surplus power and energy contract with large customerwith Caja de Seguro Social, effective until 36 months after the commencement of supply. Thesupply will start when Caja de Seguro Social has complied with the conditions of certification that ithas the financial resources and budget to ensure payment of the monthly billing and delivery of theoriginal contract countersigned by the General Comptroller of the Republic, as stated in Clause 9.6of the contract No. 03-12.

As a result of the award of the International Competitive Bidding ETESA 03-12, the Companysigned with Elektra Noreste (ENSA) - contract DME-016-12, with EDEMET - Contract No. 24-12and EDECHI - Contract 45-12; to supply surplus energy from July 2012 to December 31, 2015.

On June 2013, the Company signed the following contracts for the supply of firm capacity andenergy to large customers:

· Cemento Interoceánico, Contract 02-13, from July 1st, 2013 to December 31, 2015. Theclient began supplying on August 20, 2013.

· Machetazo Compañía Goly, Contract 04-13, from November 1, 2013 to December 31, 2015.The client has not even started supply.

· United States Embassy, Contract 05-13, from September 15, 2013 to December 31,2015.The client began supplying on November 2nd, 2013.

· Avipac, Inc, Contract 06-13, from August 1, 2013 to December 31, 2015. The client begansupplying on August 10, 2013.

· Varela Hermanos, Contract 07-13, from September 01st, 2013 to December 31, 2015. Theclient has not even started supply.

· Doit Center, Contract 08-13, from January 1, 2014 to December 31, 2015.

Concession contracts

The Company has acquired the water concession contracts of fifty years which give certain rights,including the generation and sale of electricity generated by the hydroelectric plants and water rightsfor the use of the Bayano, Chiriquí, Los Valles and Caldera rivers. The Company is required tomanage, operate, and provide maintenance to the plants throughout the contracts term. Said term canbe renewed for an additional fifty years subject to prior approval from the Public ServicesRegulatory Agency (ERSP).


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The most important terms of the concession contracts signed between the Company and the PublicServices Regulatory Agency (now the National Public Services Authority – ASEP) are describedbelow:

· The ASEP grants the Company a concession for the generation of hydroelectric energy bymeans of the exploitation of hydroelectric resources located on the Bayano, Chiriquí, LosValles and Caldera rivers.

· The Company is authorized to render the generation of electricity as a public service, whichentails the operation and maintenance of power plants with their respective transmission linesto connect to the public network, and transformation equipment for producing and sellingpower on the national electrical system as well as selling energy on the international market.

· The duration of each of the concessions granted is fifty (50) years, and they can be extendedfor a period of up to fifty (50) years by means of a request to the ASEP.

· The Company will have the right to own, operate and maintain the property on the facilitiesand to make improvements to them. Previous authorization is required in those cases in whichthe Company increases the capacity of any of the plants by 15% or more at the same site.

· The Company will have full access to its own property and to the property of the facilities.

· The Company will have rights over the real estate as well as the right of way or easementwithin the hydroelectric facilities so that it can accomplish all of the activities required for thegeneration and sale of hydroelectric energy. Likewise, the Company will also have the right ofway and access to the areas of the hydroelectric facilities that are currently in workingcondition and in use.

· The Company has the right to request the forcible acquisition of real estate and theestablishment of easements in its favor in accordance with the provisions of Law No.6 and itsregulation.

Unavailability of the Esti Hydroelectric Plant

On October 30, 2010, Esti hydroelectric plant was temporarily retired from the system to perform aninspection of the water conveyance tunnel, due to the detection of a considerable reduction in theirinflows levels.

On January 31, 2011, the Company Norconsult, who were the consultants contracted for the tunnelinspection and analysis, issued a report detailing the extent of damage and estimated repair cost.


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On June 15, 2011, the Company entered into a contract with Seli Ossa JV Panama, S. A., SELISocieta Esecuzione Lavori Idraulici SPA and Obras Subterraneas, S. A., in order to repair Estitunnel. This contract includes debris removal, temporary reinforcement placement and additionalsupport for non-affected areas in order to avoid similar problems in the future.

On June 8, 2012 Units # 1 and # 2 of the Esti Hydroelectric Plant were declared available anddelivered to the National Dispatch Center (CND), currently these generating units are in line with amaximum capacity of 123.5 MW.

ASSA Insurance Company, S.A. along with their reinsurers (which include AES Global InsuranceCorporation, a related company of AES Panama, S.A.) have recognized $10,940 compensation forbusiness interruption to December 31, 2012. Additionally, the same group received $37,368 inrespect of cost recovery at December 31, 2012. These amounts are related to Estí tunnel collapseoccurred in October 2010 and the loss of Bayano plant transformer.

The Company recognized in 2012 after confirmation received from the American InternationalGroup, an account receivable of $3,000 as reimbursement of legal expenses denied from the claimrelated to the Esti Tunnel. This amount was recognized as a decrease of legal expenses withinoperating and maintenance expenses.

As a result of the unavailability of the Esti Hydroelectric plant, AES Panama, S. A. has purchasedenergy in order to meet its contractual PPA obligations.

The Company submitted a conservatory and protective action and subsequently filed an ordinarydemand in April 2011 to reduce the obligation of the purchase/sale energy contracts related to theEsti Hydroelectric plant, the order was granted on May 6, 2011 and became effective on May 14,2011 having been notified to the distribution companies.

By Order of the Cabinet Council No. 150, the Panamenian Government approved an additionalappropriation to the General State Budget for fiscal year 2011 with an allocation to the Ministry ofEconomia y Finanzas to fund the Rate Stabilization Fund and so mitigate the impact generated byAES Panama, S. A. with the collapse of the adduction tunnel of the Esti Hydroelectric Plant. During2012 the Company recorded costs by $16,304 from January to May 2012.

In June 2013, the Company recognized an accounts receivable by $31,333, through the SettlementAgreement between AES Panamá, S. A and the Consortium who built the Esti Plant, incompensation for direct losses incurred by the Estí tunnel collapse, that caused one of itshydroelectric plants out of operation, forcing the Company to make purchases in the spot market tomeet its contractual commitments. This amount was collected in July 2013 and it is recorded in thestatement of income within electricity purchases.


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Contingencies

The Company is involved in certain legal processes as part of the ordinary course of business. It isthe opinion of the lawyers and the Company that none of the outstanding claims will have anadverse effect on the results of its operations, financial position, or cash flows.

The Company may be exposed to environmental costs as part of the ordinary course of business.The liabilities are recognized when the environmental impact studies indicate that correctivemeasures are binding and the costs can be estimated in a reasonable manner. The estimates of theliabilities are based on currently available facts, existing technology, and current laws andregulations. They also take into consideration the probable effects of inflation and other social andeconomic factors, and include an estimate of associated legal costs. As of December 31, 2013 and2012 there are no known environmental liabilities.

The ASEP issued on October 22, 2010, Resolution AN No.3932-Elec related to dam safety in theelectricity sector. This legislation provides very sensitive and important issues concerning safety andthe environment. The resolution took effect on November 9, 2011. As of December 31, 2012 theCompany was preparing its draft amendments to the Plan of Action for Emergencies (PADE) of theBayano plant to present it to the ASEP, which was approved on 2013; the PADE of Esti, La Estrellaand Los Valles are still under review by the ASEP. As for the rules related to dam safety, theCompany contracted a consulting firm to the adequacy of all documents of the Central Bayano,currently in the process of reviewing the documents to be delivered to the ASEP.

11. Retirement Plans and Seniority Premiums

According to Panamanian labor laws, the Company is required to contribute to a severance fund tocover payments and seniority premium of employees upon retirement or termination. Thecontributions are based on 1.92% for the seniority premiums and 0.32% for severance pay of theremuneration paid to employees.

The severance pay fund must be deposited with and administered by an authorized privateinstitution.

Furthermore, the Company offers a defined contribution plan available to all employees. TheCompany makes contributions of up to 7% of their annual salary, in addition to the possibility ofdiscretionary contributions by the employees. The contributions to the plan are restricted for a periodof 10 years. The Company had contributed $306 and $124 to the plan in 2013 and 2012,respectively.


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11. Retirement Plans and Seniority Premiums (continued)

The Company also offers its employees a bonus in the form of shares of The AES Corporation.These shares are deposited in a Trust Fund known as the “Non Contributive Pension Plan” which ismanaged by an authorized third party that maintains individual accounts for each employee. Thecontributions to this plan are subject to the decisions of the Board of Directors and the calculationsare based on a percentage of the salary of each permanent employee. The provision for thiscontribution amounted to $242 and $434 as of December 31, 2013 and 2012, respectively.

12. Other Income, Net

For the years ending on December 31, 2013 and 2012, other (expenses) income is as follows:

2013 2012

(Loss) gain of fixed assets sales and disposals (554)$ 725$Rental income 248 317Administrative seervices income 58 713Income from insurance claim - 36,270Expenses related to the sale of properties - (166)Inventory disposal 46 -Other incomes (expenses) 270 (8)

68$ 37,851$

13. Income Tax

For the years ending on December 31, 2013 and 2012, income tax provision consists of thefollowing:

2013 2012

Current 4,300$ 3,213$Deferred 4,273 18,931

8,573$ 22,144$


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13. Income Tax (continued)

In Panama, as established under the Tax Code, the income tax for individuals legal entities in whichthe state has a shareholding of more than 40%, is calculated using a rate of income tax of 30%.

Additionally, legal persons whose taxable income exceeds one million five hundred thousand dollars($ 1,500,000) estimate the annual income tax by applying the tax rate for the greater of:

a) The net taxable income calculated by the method set (Traditional)b) The net taxable income resulting from applying the total taxable income of the four point sixty-seven percent (4.67%), (Alternate Method of calculating income tax - CAIR).

On August 28, 2012 a reform to the current tax code in Panama was enacted; one of the changes wasthe elimination of the monthly advance income tax (AMIR), under which the companies paid the1% per month on their taxable income. This arrangement remained in force until 31 July 2012 whenit was changed to introduce the payment of estimated income tax for legal entities. Under the newrules taxpayers submit a statement of estimated income they will realize in the next year whichfollows the presented affidavit. This estimated income as declared shall not be less than the rentspecified in the affidavit. Taxpayers must make advance payments to income tax based on thedetermination of the estimated statement divided into three items to be paid quarterly in the monthsof June, September and December.

During fiscal year 2012, the obligation to jointly pay the first and second fee was due September 30,2012 based on the income tax caused by the affidavit of income in 2011. Monthly advances fromJanuary to July 2012 were applied as a credit to estimated income tax. The Company anticipated$3,626 and $6,948 estimated tax during the year 2013 and 2012, respectively, of which $1,403 wasunder the regime of AMIR and $5,545 under the regime estimated income tax.

The reconciliation between the statutory tax rate and the Company’s effective tax rate as apercentage of the income before tax as of December 31 is as follows:

2012%

Statutory income tax rate 30.00Increase (decrease) resulting from: Non taxable income (4.04) Non deductible other expenses 0.40 Non deductible costs and expenses in proportion to taxable incom 3.77 Others (3.08)Effective income tax rate 27.05


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As of December 31, 2013, the Company generated a tax loss under the traditional method and, as aresult, the estimate of current income tax has been determined pursuant to CAIR, at the rate of4.67% to the total taxable income for determining the estimated income to which the 30% rate isapplied to determine the tax year. For December 31, 2012, the current income tax was determined inaccordance with the traditional method as it was greater than the CAIR.

According to current tax regulations, the Company’s income tax returns are subject to review by thetax authorities for the last three years including the year ended on December 31, 2013. Furthermore,the Company is subject to an inspection by the tax authorities to confirm compliance with the taxstamp law.

As of December 31, 2013 and 2012 the deferred income tax assets and liabilities is comprised asfollows:

2013 2012

Deferred tax assets: Provision for obsolescence 12$ 25$ Expense provisions 632 1,234 NOL carry forward 1,410 -

Total deferred tax on short term assets 2,054$ 1,259$

Defferred tax on long term assets:

NOL carry forward 5,644$ -$ Difference in tax base for generation-related assets 1,943 1,900

Total deferred tax on long term assets 7,587 1,900

Deferred tax on liability: Insurance compensation capitalized (10,546)$ (11,629)$ Arbitration compensation capitalized (8,037) - Accumulated depreciation on investment-related assets (4,320) (4,677) Accelerated depreciation (27,963) (22,992) Capitalized interests (705) (632) Accumulated depreciation on assets donated to government (2,356) (2,469)

Total deferred tax on long term liability (53,927)$ (42,399)$Total deferred tax on net non-current assets and liabilities (46,340)$ (40,499)$


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The deferred tax assets consists primarily of obsolescence provisions, labor costs and other estimatesfor financial reporting purposes but according to the current tax law are deductible when they areactually paid or used.

According to the Fiscal Code in force the current operations losses can be deducted ratably over thenext 5 years; this deduction can not reduce by more than 50% of taxable income for those years. AtDecember 31, 2013, the Company has a NOL carry forward that can be applied to future taxableincome which expire as follows:

For financial reporting purposes, these losses are not recognized until not be deducted from taxableincome, so the Company recognizes a deferred tax asset to be amortized under use or expiration.

Based on current and projected results of the Company's, the administration believes there will beenough taxable income to realize the deferred tax assets shown in the financial statements.

Law No. 28 of June 20, 1995, which was in force until the year 2000, allowed companies to investin technology in order to obtain an investment tax credit. The investment had to be validated by aqualified technical institution in order to apply for this fiscal incentive that consists of the applicationof a tax credit of 25% on income tax payable in the fiscal period. The tax credit is applicable untilthe Company has fully utilized the total cost of the investments.

The tax credit would apply until the Company consummates the total investment cost. At December31, 2013 and 2012, the liability for deferred income tax comprises the depreciation of the assets thatgave the credit for investment, which has been used by the Company to reduce the current 25% taxeach year. For tax purposes the depreciation of these assets is not considered deductible while forfinancial purposes is depreciated over the asset's useful life.

Since 2009, the Company applies the tax benefit of accelerated depreciation (sum of digits) one ofthe methods allowed in the rules of the income tax. The application of this method was calculatedfor a group of company assets, but these assets for financial reporting purposes, remain depreciatedby the straight-line method.

2014 4,703$2015 4,7032016 4,7032017 4,7032018 4,703NOL carry forward 23,517$


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As of December 31, 2012, the Company has registered as other income, insurance compensations by$36,278, which corresponds to the repair costs of the Estí tunnel. As of December 31, 2013, theCompany also registered in the income statement $31,697 corresponding to the compensationpayment agreement between the Company and the construction consortium of the Esti plant.According to rules of income tax, are deductible losses from deterioration, damage, destruction,loss, breakage or spoilage of goods taxable income producers, caused by fire, flood, crime, tornado,earthquake, or any other accidental cause or force majeure, in the amount not covered or notcompensated by insurance or indemnity. Therefore for tax purposes the above charges were offsetby the costs capitalized to property, plant and equipment.

Dividend tax

Shareholders pay an income tax of ten percent (10%) which is withheld from the dividends theyreceive. Without dividends, or if the total distribution is less than forty percent (40%) of the nettaxable income, the Company should issue a tax payment over dividends by four percent (4%) untilthese dividends are finally declared. This rate of four percent (4%) is called "Deemed Tax" and isconsidered an advance dividend tax. During the years ended December 31, 2013 and 2012, theCompany paid deemed tax for the sums of $534 and $2,249, respectively. During 2013 and 2012,the Company held $2,850 and $5,300, respectively for the tax on the dividends paid this year andapplied $1,140 and $1,159 of deemed tax of profits paid through dividends in 2013 and 2012,respectively.

Transfer Pricing Law

During 2012, the tax authorities established transfer pricing regulations. They reach to anytransaction that the taxpayer had with related parties that are tax residents of other jurisdictions,provided that such operations take effect as revenues, costs or deductions in determining taxableincome for purposes of income tax in the fiscal period the operation occurs.

Thus, taxpayers must meet annually and as of fiscal year 2012, with the obligation of transferpricing report (Report 930), six months after the end of the fiscal period, and must have, at the samedate, a study that covers that year and contains information and analysis to assess and documenttheir transactions with related parties in accordance with the provisions of the Tax Code.

The Company estimates that these obligations will not have significant impact on the income taxprovision in 2013 and 2012.


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Tax contingencies

According to ASC 740, the Company must recognize the effect of tax positions in the financialstatements if they meet the criterion that it is “more likely than not.” While assessing the itemsrelated to this criterion, the Company has to determine if each tax position can be maintained basedsolely on its technical merit in the event of an inspection by the tax authorities. The interpretationrequires that the Company establish liabilities to reflect the portion of those positions that cannot beconcluded as “more likely than not” to be realized before the last instance of final liquidation. Theyare referred to as liabilities for tax benefits not recognized under ASC 740. By adopting thisinterpretation, the Company identified and assessed any potential uncertain tax positions andconcluded that there are no uncertain tax positions that require a mention in the financial statements.Management expects that the tax authorities will accept these positions upon examination, and has ahigh degree of confidence in the technical merit of the positions. Consequently, Managementexpects that the total amount of the tax positions will finally be realized and recognized in thefinancial statements.

14. Fair Value of Financial Instruments

The Company established a process to determine fair value. The determination of fair valueconsiders market quoted prices. Nevertheless, in many occasions no quoted market prices exist forseveral of the Company’s financial instruments. In cases in which market quoted prices are notavailable, 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 rateand future cash flows.

Financial instruments at book value which approximates fair value

Due to their short-term nature, the book value of certain financial assets, including cash, accountsreceivable and related accounts receivable, as well as certain financial liabilities including accountspayable and related accounts payable, are considered to be their fair value.

Bonds Payable

The estimated fair value as of December 31, 2013 and 2012 is based on information available as ofthe date of the balance sheets. The Company does not have knowledge of any factor that mightsignificantly affect the estimates of fair value as of that date. For bonds payable with a fixed rate, theCompany established a process to determine fair value.


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14. Fair Value of Financial Instruments (continued)

The determination of the fair value considers quoted prices of the Panamanian market (Level 1) thatare detailed below:

15. Credit Risk

The Company has exposure to credit risk on financial assets.

Credit risk is the risk that the borrower or issuer of a financial asset, owned by the Company, doesnot comply fully and on time, with any payment to be made in accordance with the terms andconditions agreed to when we acquired or originated the respective financial asset.

The Company management has financial instruments with minimal risk of loss due to electricitymarket rules provide for the collection and payment within 30 days of delivery of the invoice. Atbalance sheet date there are no significant concentrations of credit. The maximum exposure to creditrisk is represented by the balance of accounts receivable included in the balance sheet.

16. Subsequent Events

Subsequent events were evaluated by the Administration until March 31, 2014, date on whichfinancial statements were authorized by the Administration for its issuance.

Bookvalue

Fairvalue

Bookvalue

Fairvalue

Financial liabilitiesLong-term debt 299,099$ 317,250$ 298,832$ 329,250$

20122013

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