printmgr file - Bolsa de Valores de Panamá

Transcription

These securities are in the process of registration with the national securities commission and as such the information in this offering
memorandum is subject to review and changes that could substantially vary the terms and conditions of this offer. This document is
distributed only for informational purposes.
Subject to completion, dated June 29, 2006
Preliminary offering memorandum
Elektra Noreste, S.A.
US$100,000,000 7.60% Senior Notes due 2021
Interest payable January 12 and July 12
Elektra Noreste, S.A. (“Elektra Noreste” the “Company” or the “Issuer”) is a sociedad anónima organized
under the laws of the Republic of Panama (“Panama”), through public deed number 143 of January 19, 1998
of the Second Notary Public of the Circuit of Panama, domiciled in the Republic of Panama, registered in
jacket 340439, roll 57983, image 56 of the Merchantile Section of the Public Register, since January 22, 1998.
The 7.60% senior notes offered hereby (the “Notes”) will mature on July 12, 2021. We will pay interest on
the Notes on January 12 and July 12 of each year, beginning January 12, 2007. We may redeem the Notes,
in whole or in part, at any time prior to their maturity at the redemption price described herein. See
“Description of the Notes—Redemption.”
See “Risk Factors” beginning on page 17 for a discussion of certain risks that you should consider in
connection with an investment in the Notes.
The Notes are registered in Panama, as described below. The Notes have not been registered under the
U.S. Securities Act of 1933, as amended (the “Securities Act”), any securities laws of any state located in the
United States (“U.S.”), or laws of any other U.S. jurisdiction. The Notes are being offered and sold in the
U.S. only to qualified institutional buyers within the meaning of Rule 144A under the Securities Act
(“Rule 144A”) and outside the U.S. in accordance with Regulation S under the Securities Act (“Regulation
S”) to persons other than U.S. persons as defined in Regulation S. Prospective investors that are qualified
institutional buyers are hereby notified that the seller of the Notes may be relying on the exemption from
the provisions of Section 5 of the Securities Act provided by Rule 144A. For a description of certain
restrictions on transfers of the Notes, see “Notice to Investors.”
Price to investors(1)(2)
Per note
Total
Expenses
US$
10,000.00 US$
250.00
US$100,000,000.00 US$2,500,000.00
Net proceeds to company
US$
9,750.00
US$97,500,000.00
(1) Plus accrued interest from July 10, 2006, if settlement occurs after that date.
(2) Price to investors is subject to change. See “Plan of Distribution.”
The Notes being offered in accordance with 144A are expected to be ready for delivery in book-entry form
through the facilities of The Depository Trust Company on or about July 10, 2006. Notes being offered in
accordance with Regulation S are expected to be ready for delivery in book-entry form through the
facilities of Euroclear Bank S.A./N.V., as the operator of the Euroclear System, or Euroclear, or Clearstream
Banking, société anonyme, or Clearstream, on or about July 10, 2006. Beneficial interests in the Regulation
S Global Note (as defined herein) may be held in Panama through Central Latinoamericana de Valores, S.A.,
or Latinclear, which is a participant in Clearstream.
It is a condition to the issuance of the Notes that the Notes be rated at least “BBB” by Fitch, Inc. or Fitch. A rating
is not a recommendation to buy, sell or hold a Note and is subject to revision or withdrawal by Fitch in the future.
The listing and sale of the Notes has been authorized by the Bolsa de Valores de Panamá, S.A. (Panama
Stock Exchange). This authorization does not imply any recommendation or opinion regarding the Notes or
the Company.
THESE NOTES HAVE BEEN AUTHORIZED FOR PUBLIC OFFERING IN PANAMA BY THE COMISIÓN NACIONAL
DE VALORES OF PANAMA (THE PANAMANIAN NATIONAL SECURITIES COMMISSION). THIS AUTHORIZATION
DOES NOT IMPLY A RECOMMENDATION ON THE PART OF COMISIÓN NACIONAL DE VALORES TO INVEST IN
THE NOTES, NOR A FAVORABLE OR UNFAVORABLE OPINION REGARDING THE BUSINESS OF THE COMPANY.
THE COMISIÓN NACIONAL DE VALORES SHALL NOT BE LIABLE FOR THE ACCURACY OR ADEQUACY OF THE
INFORMATION IN THIS OFFERING MEMORANDUM OR THE REPRESENTATIONS CONTAINED IN THE
REGISTRATION STATEMENT.
Lead manager and bookrunner
JPMorgan
June
, 2006
The issuer
Mr. Javier Pariente
Edificio Hatillo, Torre A
Ave. Justo Arosemena y Ave. Cuba
Plaza Panama 0833-0202
Panama City, Republic of Panama
Telephone: 507-207-0008
Facsimile: 507-227-5540
Email: [email protected]
Initial purchaser
J.P. Morgan Securities Inc.
270 Park Avenue
New York, New York 10017
Telephone: 877-217-2484
Facsimile: 212-834-6618
Independent auditors
Local broker
Ms. Aurora Diaz
PricewaterhouseCoopers
Avenue Samuel Lewis y Calle 55 E
Panama, Republic of Panama
Telephone: 507-223-1313
Facsimile: 507-264-5627
Mr. Carlos Samaniego
Wall Street Securities, S.A.
Calle Aquilino de la Guardia y Rogelio Alfaro
Apartado Postal 0819-09280
Telephone: 507-205-1700
Facsimile: 507-264-0111
Indenture trustee, registrar,
paying agent, authenticating and transfer agent
Ms. Lici Zhu
The Bank of New York
101 Barclay Street
Floor 21W
New York, NY 10286
Telephone: 212-815-5381
Facsimile: 212-815-5802
Legal advisors
To Elektra Noreste, S.A. as to U.S. law
To the Initial Purchaser as to U.S. law
Richard M. Kosnik, Esq.
Jones Day
222 East 41st Street
United States
Telephone: 212-326-3939
Facsimile: 212-755-7306
Stuart K. Fleischmann, Esq.
Shearman & Sterling LLP
599 Lexington Avenue
United States
Telephone: 212-848-4000
Facsimile: 212-848-7179
To Elektra Noreste, S.A. as to Panamanian law
To the Initial Purchaser as to Panamanian law
Arturo Gerbaud, Esq.
Aleman, Cordero, Galindo & Lee
Swiss Bank Building, 2nd Floor
Telephone: 507-269-2620
Facsimile: 507-264-3257
Ricardo Arango, Esq.
Arias Fabrega & Fabrega
Plaza 2000 Building, 16th Floor
50th Street
Telephone: 507-250-7000
Facsimile: 507-205-7001
Panama stock exchange
Bolsa de Valores de Panamá, S.A.
PO Box 87-0878, Zone 7
Panama 7, Republic of Panama
You should rely only on the information contained in this offering memorandum. Neither
Elektra nor J.P. Morgan Securities Inc. as the Initial Purchaser (the “Initial Purchaser”) has
authorized anyone to provide you with different information. Neither Elektra nor the Initial
Purchaser is making an offer of the Notes in any U.S., Panamanian or other jurisdiction where
the offer is not permitted. You should not assume that the information contained in this
offering memorandum is accurate as of any date other than the date on the front of this
offering memorandum.
Table of contents
Notice to New Hampshire residents . . . . .
iii
Notice to prospective investors in the
United Kingdom . . . . . . . . . . . . . . . . . . . .
iii
Notice to prospective investors in
Panama . . . . . . . . . . . . . . . . . . . . . . . . . . .
iv
Market data . . . . . . . . . . . . . . . . . . . . . . . . .
iv
Service of process and enforcement of
civil liabilities . . . . . . . . . . . . . . . . . . . . . . .
iv
Management’s discussion and analysis
of financial condition and results of
operations . . . . . . . . . . . . . . . . . . . . . . . .
33
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64
Overview of the Panamanian electricity
industry . . . . . . . . . . . . . . . . . . . . . . . . . .
96
Management . . . . . . . . . . . . . . . . . . . . . . .
117
Principal shareholders . . . . . . . . . . . . . . . .
124
Related party transactions . . . . . . . . . . . .
125
Presentation of financial and other
information . . . . . . . . . . . . . . . . . . . . . . . .
v
Description of other indebtedness . . . . .
126
Forward-looking statements . . . . . . . . . . .
v
Description of the notes . . . . . . . . . . . . . .
128
Available information . . . . . . . . . . . . . . . . .
vi
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
156
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Plan of distribution . . . . . . . . . . . . . . . . . .
162
Risk factors . . . . . . . . . . . . . . . . . . . . . . . . . .
17
Notice to investors . . . . . . . . . . . . . . . . . . .
165
Use of proceeds . . . . . . . . . . . . . . . . . . . . . .
29
Legal matters . . . . . . . . . . . . . . . . . . . . . . .
168
Capitalization . . . . . . . . . . . . . . . . . . . . . . . .
30
Independent accountants . . . . . . . . . . . . .
169
Selected historical financial data . . . . . . . .
31
Index to financial statements . . . . . . . . . .
F-1
i
In this offering memorandum, all references to “Elektra,” “we,” “our,” “ours” and “us” refer to
Elektra Noreste, S.A., except as otherwise provided. In this offering memorandum, all references
to the “Initial Purchaser” refer to J.P. Morgan Securities Inc.
Having made all reasonable inquiries, we confirm that, to the best of our knowledge, the
information that is material in the context of the issue and offering of the Notes and contained
herein regarding us and the Notes is true and accurate and not misleading, and the opinions and
intentions expressed herein are honestly held. Having made all reasonable inquiries, we further
confirm that, to the best of our knowledge, there are no other facts, the omission of which
would make this offering memorandum as a whole or any of the information or the expression
of any these opinions or intentions materially misleading. We accept responsibility for the
information contained herein. This offering memorandum has been prepared by us solely for use
in connection with the proposed offering of the Notes described herein.
For purposes of the Offering of the Notes under Rule 144A and in accordance with Regulation S,
this offering memorandum is personal to each offeree and does not constitute an offer to any
other person or to the public generally to subscribe for or otherwise acquire the Notes.
Distribution of this offering memorandum to any person other than a prospective investor and
any person retained to advise such prospective investor with respect to its purchase is
unauthorized, and any disclosure of any of its contents is prohibited. Each prospective investor,
by accepting delivery of this offering memorandum, agrees to the foregoing and to make no
photocopies of this offering memorandum or any documents referred to in this offering
memorandum.
We, and not the Initial Purchaser, have furnished the information in this offering memorandum.
To the best of our knowledge, the information in the offering memorandum is in accordance
with the facts and contains no material misstatements or omissions. The Initial Purchaser cannot
assure you that the information in this offering memorandum is accurate or complete. Nothing
contained in this offering memorandum is, or shall be relied upon as, a promise or
representation by the Initial Purchaser or its affiliates as to the past or future.
You should rely only on the information contained in this offering memorandum. We have not,
and the Initial Purchaser has not, authorized any person to provide you with different
information or to make any representation not contained in this offering memorandum. If
anyone provides you with different or inconsistent information, you should not rely on it. You
should assume that the information contained in this offering memorandum is accurate only as
of the date on the front cover of this offering memorandum. Our business, financial condition,
results of operations and prospects may have changed since that date.
The contents of our website do not form part of this offering memorandum and are not
incorporated herein.
Neither the U.S. Securities and Exchange Commission (the “SEC”), any U.S. state securities
commission nor any other U.S. regulatory authority has approved or disapproved the Notes nor
have any of the foregoing authorities passed upon or endorsed the merits of this offering or the
accuracy or adequacy of this offering memorandum. Any representation to the contrary is a
criminal offense.
The Notes are subject to restrictions on transferability and resale and may not be transferred or
resold in the U.S. except as permitted under the Securities Act and the applicable state securities
laws pursuant to registration or an exemption therefrom. As a prospective investor, you should
ii
be aware that you may be required to bear the financial risk of this investment for an indefinite
period of time. See “Plan of Distribution” and “Notice to Investors.”
In making an investment decision, prospective investors must rely on their own examination of us
and the terms of the offering, including the merits and risks involved. Prospective investors
should not construe anything in this offering memorandum as legal, business or tax advice. Each
prospective investor should consult its own legal, business, accounting or tax advisors as needed
to make its investment decision and to determine whether it is legally permitted to purchase the
Notes under applicable legal investment or similar laws or regulations including, without
limitation, the treatment of the acquisition of the Notes provided hereunder under Financial
Accounting Standards Board Interpretation Number 46. In connection with this offering, the
Initial Purchaser, or any person acting on its behalf, may over-allot or effect transactions with a
view to supporting the market price of the Notes at a level higher than that which might
otherwise prevail for a limited period after the issue date. However, there may be no obligation
on the Initial Purchaser to do this. Such stabilizing, if commenced, may be discontinued at any
time, and must be brought to an end after a limited amount of time.
This offering memorandum contains summaries believed to be accurate with respect to certain
documents, but reference is made to the actual documents for complete information. All such
summaries are qualified in their entirety by such reference. Copies of documents relating to the
Notes referred to herein will be made available to prospective investors upon request to the
Trustee described herein. See “Description of the Notes.”
Notice to New Hampshire residents
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS
BEEN FILED UNDER RSA 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT
FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT
NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A
TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON,
SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH
THE PROVISIONS OF THIS PARAGRAPH.
Notice to prospective investors in the United Kingdom
The content of this communication has not been approved by an authorized person within the
meaning of the United Kingdom Financial Services and Markets Act 2000 (as amended) (the
“FSMA”). No Notes are being offered to the public for the purposes of the FSMA and no
application has been or will be made for the admission of the Notes to the official list of the UK
Listing Authority or to trading on any other recognized investment exchange.
This communication is directed only at (i) persons outside the United Kingdom, (ii) persons who
are investment professionals for the purposes of Article 19(5) of The Financial Services and
Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”) or (iii) persons falling within
any of paragraphs (a) to (d) of Article 49(2) of the Order (“high net worth companies,
iii
unincorporated associations etc.”) (all such persons together being referred to as “relevant
persons”). This communication must not be acted on or relied on by persons who are not
relevant persons. Any investment or investment activity to which this communication relates is
available only to relevant persons and will be engaged in only with relevant persons.
Notice to prospective investors in Panama
The Notes have been authorized for public offering in Panama by the Comisión Nacional de
Valores (National Securities Commission), or the CNV, and the listing and sale of the Notes has
been authorized by the Bolsa de Valores de Panamá, S.A. (Panama Stock Exchange). Neither the
registration with the CNV nor the listing of the Notes on the Panama Stock Exchange implies any
certification as to the investment quality of the Notes, the solvency of the Company, or the
accuracy or completeness of the information as contained in this offering memorandum. This
document shall be known as the Prospecto Informativo in Spanish for purposes of the
registration of the offering of Notes with the CNV, and as the offering memorandum in English
for purposes of the offering of the Notes outside of Panama. This offering memorandum has
been drafted in the English language. All parties who participated in its drafting are fluent in
and understand the English language. Although a certified Spanish translation of this offering
memorandum and documents relating to this offering has been submitted for purposes of the
registration of the offering of Notes with the CNV, and although a certified Spanish translation
of this offering memorandum and documents relating to this offering may be submitted as
evidence in a court of law or governmental agency in Panama, in case of a conflict between the
English version and the certified Spanish translation, the English version will prevail.
Market data
This offering memorandum contains and refers to information and statistics regarding the
Panamanian electricity industry. This market data was obtained from independent public sources,
including publications and materials from participants in the electricity industry and from
governmental entities such as the Republic of Panama, the Ministerio de Economía y Finanzas,
the Comisión de Política Energética, the Contraloría General de la República, the Centro Nacional
de Despacho, Empresa de Transmisión Eléctrica , or ETESA, and Ente Regulador de los Servicios
Públicos, or the ERSP, among others. Some data are also based on our estimates, which are
derived from our review of internal reports, as well as independent sources. Although these
sources are believed to be reliable, we have not independently verified, and do not guarantee
the accuracy and completeness of this information.
Service of process and enforcement of civil liabilities
We are a corporation with limited liability (sociedad anónima) organized under the laws of
Panama. Substantially all of our directors, officers, controlling persons and certain of the experts
named herein reside outside the U.S. and all or a substantial portion of our assets are located
outside the U.S. As a result, it may not be possible for investors to effect service of process within
the U.S. upon such persons, including with respect to matters arising under the federal securities
laws of the U.S., or to enforce against such persons or against us, judgments of courts of the U.S.
predicated upon the civil liability provisions of the federal securities laws of the U.S. We have
been advised by our Panamanian legal counsel, Alemán, Cordero, Galindo & Lee, that there is
doubt as to the enforceability, in original actions in Panamanian courts of liabilities predicated
iv
solely on the U.S. federal securities laws and as to the enforceability in Panamanian courts of
judgments of U.S. courts obtained in actions predicated upon the civil liability provisions of the
U.S. federal securities laws of the U.S.
We have appointed CT Corporation System, with offices currently at 111 Eighth Avenue, New
York, New York 10011, as our authorized agent upon which process may be served in any action
which may be instituted in any U.S. federal or state court having subject matter jurisdiction in the
Borough of Manhattan, the City of New York, New York, arising out of or based upon the
indenture governing the Notes or the Notes. See “Description of the Notes.”
Presentation of financial and other information
We maintain our books and records in balboas, the monetary unit of the Republic of Panama,
however, we prepare our financial statements in U.S. dollars and in conformity with
U.S. generally accepted accounting principles (“U.S. GAAP”). Included elsewhere in this offering
memorandum are our audited balance sheets at December 31, 2005 and 2004 and the audited
statements of income, changes in shareholders’ equity and cash flows for the years ended
December 31, 2005, 2004 and 2003. The financial information for the years ended December 31,
2005, 2004 and 2003, and as at December 31, 2005 and 2004, included elsewhere in this offering
memorandum has been derived from these audited financial statements. Also included elsewhere
in this offering memorandum is our unaudited balance sheet at March 31, 2006 and the
unaudited statements of income, changes in shareholders’ equity and cash flows for the three
months ended March 31, 2006 and 2005. The financial information for the three months ended
March 31, 2006 and 2005, and as at March 31, 2006 and 2005, included elsewhere in this offering
memorandum has been derived from these unaudited financial statements. Unless otherwise
specified, references herein to “U.S. dollars,” “dollars,” “$” or “US$” are to U.S. dollars.
References herein to “Balboas” or “Bs.” are to the official currency of Panama, which serves only
as coinage and as a unit of account, and has been pegged at parity with the U.S. dollar since
1904. The U.S. dollar is used as legal tender in Panama.
Rounding adjustments have been made to some of the figures included in this offering
memorandum. As a result, numerical figures shown as totals in some tables may not be an
arithmetic aggregation of the figures that preceded them.
Forward-looking statements
This offering memorandum contains “forward-looking statements,” as defined in Section 27A of
the Securities Act and Section 21E of the U.S. Securities Exchange Act of 1934 (the “Exchange
Act”), relating to our business. These statements are subject to change and uncertainty which
are, in many instances, beyond our control and have been made based upon management’s
current expectations, estimates and projections. Words such as “believes,” “expects,” “intends,”
“plans,” “projects,” “estimates,” “anticipates” and similar words and expressions are used to
identify such forward-looking statements. These statements are not guarantees of future
performance and involve risks and uncertainties that are difficult to predict. Forward-looking
statements are only our current expectations and are based on our management’s belief and
assumptions and on information currently available to our management. Therefore, actual
outcomes and results may differ materially from these expressed or implied in such
forward-looking statements.
v
By their very nature, forward-looking statements are subject to risks and uncertainties, and
actual results may differ materially from those expressed or implied in the forward-looking
statements as a result of various factors, including, but not limited to, those identified under the
caption “Risk Factors.” These factors include:
• extensive government legislation and regulations that apply to us and the electricity
distribution business;
• our ability to adapt to changes in governmental regulations, including tariff adjustments that
apply to the electricity distribution business;
• adverse changes in applicable laws, regulations, rules, principles or practices governing tax,
accounting and environmental matters;
• future economic conditions in the regional, national and international markets, including but
not limited to regional and national wholesale electricity markets;
• extraordinary events affecting our operations, including unexpected system failures, strikes,
emergency safety measures, military or terrorist attacks and natural disasters;
• ability to carry out marketing and sales plans, as well as manage changes in business strategy,
operations or development plans;
• our ability to attract and retain qualified management and other personnel;
• political, economic, regulatory and demographic developments in Panama;
• market perception of the energy industry and us;
• financial market conditions and performance including, but not limited to, changes in interest
and inflation rates and in availability and costs of capital;
• effectiveness of risk management policies and procedures and the ability of counterparties to
satisfy their contractual commitments; and
• other risk factors as set forth under “Risk Factors.”
Forward-looking statements speak only as of the date they are made, and we do not undertake
any obligation to update them in light of new information or future developments or to release
publicly any revisions to these statements in order to reflect later events or circumstances or to
reflect the occurrence of unanticipated events. You should consider these cautionary statements
together with any written or oral forward-looking statements that we may issue in the future.
Available information
We are not subject to the information requirements of the Exchange Act. To preserve the
exemption for resales and transfers under Rule 144A under the Securities Act, we have agreed
that we will promptly provide any holder or any prospective purchaser of the Notes who is
designated by that holder and is a “qualified institutional buyer,” as defined under Rule 144A,
upon the request of such holder or prospective purchaser, information meeting the requirements
of Rule 144A(d)(4), unless we either furnish information to the SEC in accordance with
Rule 12g3-2(b) under the Exchange Act or file information with the SEC pursuant to Section 13 or
15(d) of the Exchange Act. Any such request should be directed to Elektra Noreste, S.A., Edificio
Hatillo, Torre A, Ave. Justo Arosemena y Ave. Cuba, Panama City, Republic of Panama,
Telephone: 507-207-0008, Attn: Javier Pariente. Following completion of this offering, except as
described below under the caption “Description of the Notes—Certain Covenants—Provision of
vi
Financial Statements and Reports,” we are not otherwise obligated to furnish holders of the
Notes or any other person with any supplemental information, discussion or analysis of our
business or financial reports.
We have filed with the Panamanian National Securities Commission a registration statement, of
which this offering memorandum forms a part. We will also file with the Panamanian National
Securities Commission and the Panama Stock Exchange our audited annual financial statements,
each prepared in accordance with U.S. GAAP. This information can be obtained by investors upon
request at the Panama Stock Exchange, located at Edificio Bolsa de Valores de Panama, Calle 49 y
Av. Federico Boyd, Panama, Republic of Panama, or upon request at the Comisión Nacional de
Valores located at Avenida Balboa, Edificio Bay Mall, Piso 2, Oficina 206, Panama, Republic of
Panama.
You can find additional information regarding Panama’s political and economic conditions in the
documents filed by Panama with the SEC, which are available at www.sec.gov. These documents
include a registration statement on Schedule B (File No. 333-120098) and an annual report on
Form 18-K (File No. 333-07558). We expressly do not incorporate the contents of these documents
into this offering memorandum. Neither we nor the Initial Purchaser shall have any liability or
responsibility with respect to the information contained therein. Furthermore, neither we nor
the Initial Purchaser have investigated or confirmed nor do either accept any responsibility for
the veracity of any statements contained in any such documents.
vii
Summary
You should read the following summary together with the more detailed information regarding
us and our financial statements and Notes appearing elsewhere in this offering memorandum.
This summary highlights selected information from this offering memorandum and may not
contain all the information that is important to you. For a more complete understanding of our
business and the Notes offered pursuant to this offering memorandum, you should read this
entire offering memorandum, including the risk factors and the financial statements and
description of the terms of the Notes appearing elsewhere herein.
Overview
We are the second largest electricity distribution company in Panama in terms of electricity
volume distributed, number of customers and area served. We hold an exclusive concession under
a concession contract with the Panamanian Government, or the Concession Contract, to operate
the electricity distribution network in the northern and eastern part of Panama, including the
eastern part of Panama City, the port city of Colón and the Gulf of Panama. As of March 31,
2006, our operations covered a territory of approximately 29,200 square kilometers that included
approximately 1.3 million inhabitants, or 41% of Panama’s total population including three of
Panama’s main economic centers. As of the same date, we had a market share of approximately
43% of the customers and approximately 40% of total energy sales in Panama. In 2005, we had
total energy sales of 1,916 GWh to an average of 288,321 customers. Of our 2005 customers
approximately 92.2% were residential customers, 7.1% were commercial and industrial customers
and substantially all of the remaining were government customers. Of our total 2005 energy
sales (1,916 GWh), approximately 34.9% of our sales were to residential customers,
approximately 50.1% were to commercial and industrial customers and approximately 14.8%
were to government customers. For the three months ended March 31, 2006, we had total
energy sales of 485 GWh to an average of 299,233 customers. As of March 31, 2006,
approximately 92.2% of our customers were residential customers, 7.0% were commercial and
industrial customers and substantially all of the remaining were government customers. For the
three months ended March 31, 2006, approximately 34.0% of our 485 GWh gross energy sales
were to residential customers, approximately 52.0% were to commercial and industrial customers
and approximately 14.0% were to government customers.
As of December 31, 2005, our electricity distribution network was comprised of approximately
7,212 kilometers of distribution and transmission lines, twelve key substations, approximately
19,000 transformers and related equipment. We own 7,212 kilometers of distribution lines, which
are composed of approximately 7,030 kilometers of overhead cable circuits and 182 kilometers of
underground cable circuits. Our service territory is relatively dense with twelve key substations
and a load factor, which is the ratio of average load to peak load, of approximately 74%,
reflecting a good balance between residential load profile and the daytime air conditioning and
lighting requirements of the commercial sector.
As of December 31, 2005 and March 31, 2006, we had, respectively, a peak demand of
345.24 MW and 342.38 MW, revenues of US$272.5 million and US$71.2 million and earnings
before interest, taxation, depreciation and amortization, or EBITDA, of US$47.3 million and
US$9.5 million.
1
History and ownership structure
In connection with the process of privatizing the Panamanian electricity sector, we were
incorporated on January 22, 1998 and, through a Sale and Purchase Agreement (Contrato de
Compraventa de Acciones) dated October 30, 1998, 51% of our common stock was sold to the
Panama Distribution Group, S.A., or PDG with the remaining 49% retained by the Panamanian
Government.
PDG was and remains a holding company incorporated in Panama. At the time of sale,
Constellation Power International Investments, Ltd., or CPII, a Cayman Islands exempted company
with limited liability, owned 80% of the outstanding shares of common stock of PDG and Primer
Grupo Energético, a Panamanian company, owned the remaining outstanding shares. In
September 2005, CPII purchased Primer Grupo Energético’s minority interest in PDG, and CPII’s
parent, Constellation Power, Inc., sold its 100% interest in CPII to certain investment funds
managed by Ashmore Investment Management Limited, or Ashmore. This resulted in these
investment funds owning, through their ownership of CPII, all of the outstanding shares of the
common stock of PDG. At the time of this sale, CPII underwent a name change and is now known
as CPI, Limited. At present, 51% of our common stock is owned by PDG, 48.25% is owned by the
Panamanian Government, and the remaining amount is owned by employees or held as treasury
stock. The shares of our common stock held in treasury are shares that were originally sold to our
employees, which we have since repurchased at their fair value.
As part of a corporate restructuring at the Ashmore level, the investment funds that own CPI,
Limited and that are managed by Ashmore have contributed their collective ownership of CPI,
Limited to Ashmore Energy International LLC, or AEI Delaware, a Delaware limited liability
company and a wholly-owned subsidiary of Ashmore Energy International Limited, or AEI, a
Cayman Islands exempted company with limited liability. In exchange for their contribution,
these funds have been issued shares in AEI. These investment funds are the controlling
shareholders of AEI, which now owns 100% of PDG, through AEI’s indirect ownership of CPI,
Limited. See “Principal Shareholders.”
Pursuant to a Management Consulting Agreement dated November 16, 1998, as amended (the
“Management Consulting Agreement”), CPI, Limited provides us with management and consulting
services, including, but not limited to, strategic and operating advice, preparation of an annual
business plan, business development and contract review. Under the Management Consulting
Agreement, CPI, Limited is entitled to a management fee of 4% of our earnings before interest,
taxation, depreciation and amortization. See “Related Party Transactions—Management
Agreements.”
2
The diagram below summarizes our ownership following the privatization.
Constellation
Power Inc.
(100% ownership
of CPI, Limited)
Primer Grupo
Energético, S.A.
(20% ownership of
PDG)
Constellation
Power International
Investments, Ltd.
(CPII n/k/a CPI, Limited)
(80% ownership of
PDG)
Panama
Distribution
Group, S.A.
(PDG)
(51.0%)
Republic
of
Panama
(48.25%)
.
Elektra
Noreste, S.A.
3
Employees
(0.43%)
.
Treasury
Stock
(0.32%)
The diagram below summarizes our current ownership structure.
Ashmore
Energy
International LLC
(AEI DE)
(100% ownership
of CPI, Limited)
CPI Limited
(100% ownership
of PDG)
Panama
Distribution
Group, S.A.
(PDG)
(51.0%)
Republic of
Panama
(48.25%)
Employees
(0.43%)
Treasury
Stock
(0.32%)
Elektra
Noreste, S.A.
Panamanian electricity regulatory framework
Panama has an established regulatory structure for the electricity industry, which is based on
legislation introduced between 1996 and 1998 in preparation for the privatization of the
distribution and generation sectors in the latter part of 1998. This framework provides for an
independent regulator, the Ente Regulador de los Servicios Públicos, or the ERSP (whose name
changed in April 2006 to Autoridad Nacional de los Servicios Publicos or the National Authority
of Public Service or the NAPS), and for a transparent tariff setting process to regulate the use of
system charges and tariff structures for the sale of energy to those who purchase directly from
electricity distributors, or regulated customers. The tariff structure has two components: the
energy cost component and the maximum distribution tariff component. The energy cost
component of tariffs charged by distribution companies to their regulated customers are
established as a pass-through of energy costs and are set to allow distributors to recover the cost
of energy, transmission tolls and public lighting consumption. The maximum distribution tariff
component, or the Value Added by Distribution (Valor Agregado de Distribución), or the VAD,
charged by distribution companies is set to allow these companies to recover their efficient
investments, operating, maintenance, administrative and commercial expenses, standard energy
losses and a reasonable return on their invested capital. Each of these costs and return on capital
is determined by the ERSP based on the expenses and returns of comparable companies. Any
operating and investing amounts that exceed those of comparable companies are considered
inefficient and are not recoverable.
4
Under the regulatory framework originally established by the ERSP, VAD tariff formulas are
determined every four years and charges are adjusted every six months based on the Panamanian
consumer price index, or CPI, while the energy cost component had been adjusted every six
months to reflect fluctuations in energy costs. However, on March 27, 2006, the Energy Saving
and Rationing National Commission, or the Energy Commission, composed of, among others, the
Minister of the Presidency, the Minister of Finance and Economy and the Comptroller General of
the Republic of Panama, issued a report containing formal recommendations on the tariff rate
increases and the electricity industry. Based on these recommendations, the Executive Branch
issued Cabinet Resolution No. 22, dated March 29, 2006, adopting the Energy Commission
recommendations and requesting that the ERSP implement these recommendations. As a
consequence thereof, the ERSP issued Resolution No. JD-5930, dated March 31, 2006, or the
March 2006 Resolution, adopting several of the Energy Commission recommendations. In
accordance with this March 2006 Resolution, starting July 1, 2006, the ERSP will use a new
methodology to adjust the energy cost component of our tariffs to reflect fluctuations in energy
costs. We expect that this new method will consider monthly adjustments rather than semiannual adjustments and, beginning July 1, 2006, the energy cost component of our customer
tariffs will be adjusted to include our actual costs during the third month prior to the month in
which the adjustment is made. The result is that our actual costs for April 2006 will be included in
the July 2006 adjustment. We also expect that beginning January 1, 2007, the procedure for
adjusting the fuel component in the tariff will return to the previous procedure that includes six
months of actual fuel costs, plus six months of estimated fuel costs.
Additionally, in this March 2006 Resolution, the ERSP established that the VAD tariffs, which
were last set on July 1, 2002, and scheduled to be reset on July 1, 2006, will be extended beyond
this expiration date. The current VAD tariffs will remain in effect until December 31, 2006. As a
consequence, the new formulas for the VAD tariff reset period are expected to become effective
January 1, 2007 and remain in place for a four-year period. On June 9, 2006, the ERSP issued
Resolution No. AN-065-Elec. announcing its initial proposal for the permitted pre-tax rate of
return to be applied during the next four-year regulatory period and commencing the public
process for interested parties to respond to the proposal before the ERSP issues its final
resolution. Furthermore, in its March 2006 Resolution, the ERSP approved, as of April 1, 2006,
that the demand charge to regulated customers cover those customers with a demand greater
than 15 kW, instead of the previous level of 12 kW, and that the demand charge will be applied
to the actual demand meter reading, rather than the average of the highest three demand meter
readings over the previous six-month period.
For the last several years, increases in rates resulting from the semi-annual rate adjustment
process were not fully passed through to distribution company customers in the form of tariff
increases but were passed through directly to customers, in part, with the remaining amount
subsidized by the Panamanian Government. In January 2006, the ERSP announced that the
previously approved rate increases for the period of January 1, 2006 to June 30, 2006 would be
suspended during a 90-day moratorium while the Energy Commission studied the tariff rate
increases and the electricity industry. In its March 27, 2006 report, the Energy Commission
recommended that a new rate be implemented for the period from April 1, 2006 through
December 31, 2006.
The ERSP, in its March 2006 Resolution, established that the tariff increase to our regulated
customers for this new rate period should not exceed 10.7%, which is lower than the 20.5%
5
increase we had submitted. However, the ERSP at the same time recognized that we should
receive a government subsidy of US$25.2 million, which would include a US$0.5 million credit
from previous subsidies granted, in order to avoid a rate increase for all our customers with
consumption levels under 200 kWh and limit the 10.7% rate increase to those customers above
this consumption level. Together, the ERSP established rate increase and the US$25.2 million
subsidy will compensate us for the increased energy costs in our original 20.5% rate increase
proposal. See “Overview of the Panamanian Electricity Industry — Recent Developments.”
Unlike prior rate adjustments in which we included both the difference between our projected
and actual energy costs incurred during the previous tariff revision period and our projected
energy costs for the following six-month period, the new rate adjustment only includes our
projected energy costs for the nine-month period through the end of 2006. This change has
meant that we have been unable to pass through to customers and recover our accumulated
energy cost component adjustments from prior tariff revision periods through these new tariffs.
The Minister of the Presidency and the Minister of Finance and Economy have indicated to us
that our recovery of our accumulated energy cost component adjustments for the twelve-month
period from April 1, 2005 through March 31, 2006 will be recovered from the Panamanian
Government in the form of cash or a debt instrument rather than through our regulated tariffs.
Although we have been informed by the Minister of the Presidency and the Minister of Finance
and Economy that we will recover our unpaid accumulated energy cost component adjustments
for the April 1, 2005 to March 31, 2006 period directly from the Panamanian Government, on
March 31, 2006, in order to preserve our rights relating to this matter, we filed a complaint in the
Third Chamber of the Supreme Court of Justice seeking a declaration of illegality of the ERSP’s
Resolution No. JD-5806 issued on January 23, 2006, which ordered us to suspend the previously
approved tariff adjustments for the first six months of 2006, which were scheduled to become
effective January 1, 2006. The Third Chamber of the Supreme Court of Justice is reviewing the
admissibility of this complaint for procedural compliance. On April 11, 2006, the ERSP stated in
Resolution No. JD-5956 that, aside from the maximum allowable income we were permitted to
recover during the four-year regulatory period from July 2002 to June 2006, we received
additional income in excess of our actual costs. The ERSP attributed this supposed excess income
to variations in our projected and actual number of customers and our sales in the different rate
categories during this tariff period and has ordered us to credit or reimburse our customers an
aggregate of approximately US$4.0 million beginning May 1, 2006 until December 31, 2006. We
are currently challenging this determination as we believe that the Concession Contract and the
resolutions instituting the VAD do not permit the ERSP to modify previously approved tariffs
where our actual income exceeds our projected maximum allowable income charged to
customers, and the methods used to determine our maximum allowable income is favorable to
us. These customer credits have been suspended while our motion for reconsideration is pending.
See “Business — Legal Proceedings” and “Overview of the Panamanian Electricity Industry —
Recent Developments.”
6
Our business strategy
Overall, we seek to maintain strong cash flow generation and profitability by ensuring highly
efficient operations, increasing service quality and improving customer satisfaction. Key elements
of our strategy include:
Providing our customers with affordable, high-quality service. Electricity distribution companies
in Panama are monitored by the ERSP to assure compliance with concession contracts based on
service quality parameters such as the frequency and duration of service interruptions and
customer satisfaction. We monitor compliance with, and meet or exceed, the established
regulatory benchmarks for network reliability and quality of service. To continue improving our
service quality and customer satisfaction levels, we plan to expand current systems to enhance
remote monitoring of our network performance, improve customer relationships through our
call center operations, improve responsiveness to customers’ demands and inquiries, and enhance
preventive maintenance efforts to reduce risks and electricity failures.
Cost-effectively operating and maintaining our distribution network. Since December 1999,
employee productivity has increased from 255 customers to 526 customers per employee, and our
energy sales per employee have also increased from 2,092 MWh per employee to 3,398 MWh per
employee through December 2005. As of March 31, 2006, the number of customers per employee
increased to 549 and, for the three months ended March 31, 2006, the energy sales per employee
were 883 MWh. We intend to continue maintaining high levels of operating efficiencies by
improving employee productivity through additional training, process improvement, further
upgrading and automating our operations and information systems and improving our billing
and collection processes. In total, we have invested over US$151.2 million in our facilities and
systems since our privatization in 1998, US$57.5 million of which was made from January 2003
through March 2006.
Training and developing our team. We believe that enhanced employee technical training not
only improves employee skills and the efficiency of our maintenance and repair crews, but also
supports our philosophy of promoting and providing an accident-free environment for our
employees, contractors and customers, and the public at large. We have developed, and intend
to continue to develop, training programs for our employees in a variety of areas including
vehicular safety, electric utility operations and repairs, customer service, and administrative and
financial expertise.
Making strategic and precise capital expenditures. We closely coordinate and evaluate all
proposed capital expenditures across our operations in order to allocate available resources for
projects associated with service expansion, specific improvement and line extension projects, and
enhancements of the reliability and quality of service. We also consider on an ongoing basis,
specific improvement and line extension projects. Prior to undertaking any capital expenditure,
we model the impact of each proposed capital expenditure and only make those expenditures
that we believe will most enhance network reliability and quality of service while maintaining
costs within our budget. The potential improvement in network reliability and quality of service
that results from each capital expenditure is also modeled and analyzed to improve capital
performance throughout our distribution networks.
Keeping electricity losses at or below current low levels. Our loss reduction program has
resulted in a decrease of total electricity losses from approximately 24% in 1998 to approximately
7
12.5% in 2005. Since the privatization in 1998, we have converted approximately 101,000 illegal
connections into regulated customers, approximately 80,500 of which were converted from
January 2003 through March 2006. Even though the cost associated with electricity loss is part of
our electricity distribution cost, only a standard electricity loss level is recognized as a
pass-through to our customers. We intend to improve upon our current levels of electricity losses
by continuously updating our distribution network, performing regular targeted inspections and
meter replacements, strengthening our internal meter reading and billing processes, and
developing a strong corporate communications program directed at users with illegal
connections so that losses can be lowered and revenues increased by converting such users into
regulated customers.
Insulating our customers from fluctuations in the cost of electricity through an actively managed
power purchase program. In accordance with the 1997 Electricity Law, we are required to enter
into power purchase agreements with electricity generators to cover the demands of our
regulated customers. In order to mitigate the volatility of these agreements (and limit any
associated energy costs), we have developed a comprehensive purchasing program that
anticipates possible electricity capacity problems over the next several years, higher energy costs
such as the limited generating capacity to cover increasing demand, the availability of
hydroelectric and efficient thermal generating plants and the expected availability of water to
power hydroelectric plants. Our power purchasing program, which favors medium and long-term
power supply arrangements with electricity generators, supports existing electricity distributors
to develop additional capacity and encourages new generators to enter into the market in order
to meet our projected electricity needs.
Competitive strengths
We believe we owe our success in growing and developing our business to our competitive
strengths. The combined effect of these competitive strengths have resulted in predictable cash
flows from year to year and strong operating results.
Disciplined, forward-looking strategy. Our strategy is focused on providing our customers with
affordable, high-quality service, cost-effectively operating and maintaining our installations,
keeping electricity losses at or below current low levels, training and developing our team,
protecting our customers from fluctuations in the cost of electricity through an actively managed
power purchase program, and making strategic and precise capital expenditures.
Established and transparent regulatory regime with incentives for efficiency gains. The 1997
Electricity Law created a market-oriented framework for the country’s electricity distributors,
which allows us to retain the financial benefits derived from efficiency gains during each
four-year regulatory period. The VAD portion of our tariffs relating to our permitted rate of
return is subject to maximum amounts set every four years by the ERSP in consultation with us
and based on our future operating and capital expenditures as estimated by the ERSP. Under the
1997 Electricity Law, we are able to pass through to our customers the cost of electricity and
capacity we purchase from electricity generators. Additionally, we are allowed to retain the
benefit from operating and capital efficiencies, which provides incentives to earn higher returns
through efficient operating and capital expenditures.
8
Attractive service area and strong market position. Our service area encompasses some of the
most densely populated and economically active regions in Panama, including a significant
portion of Panama City, the Canal Area and the port city of Colón, three of Panama’s main
economic centers. As of March 31, 2006, our operations covered a territory of approximately
29,200 square kilometers that included close to 41% of Panama’s population and represented
approximately 40% of all energy sales in Panama.
Stable economic environment. Panama has experienced low inflation and strong growth in its
Gross Domestic Product, or GDP, averaging approximately 6.1% per year since 2003 with the GDP
in 2005 reaching 6.4%. As a result of the combined effect of reducing our technical and
non-technical losses of electricity and Panama’s growing GDP, our sales have increased from
1,714 GWh in 2003 to 1,916 GWh in 2005. Expectations are that Panama’s GDP growth and
inflation rates will continue at these approximate levels during 2006. In addition, Panama’s
monetary system recognizes the U.S. dollar as legal tender, which eliminates foreign exchange
controls and foreign exchange risks.
Controlling shareholder assistance and experienced management team. Our controlling shareholder
is indirectly owned by AEI. AEI, through CPI, Limited, provides management and technical expertise
and assistance to us. In addition, our management team includes executives with extensive
experience in electricity distribution, the wholesale energy market, electricity industry regulation and
the business sector in Panama. See “Related Party Transactions—Management Agreements.”
9
Summary of the offering
The following summary contains basic information about the Notes and is not intended to be
complete. It does not contain all the information that is important to you. For more complete
understanding of the Notes, please refer to the section of this document entitled “Description of
the Notes.” For purposes of the description of the Notes included in this offering memorandum,
references to the “Company,” “Issuer,” “us,” “we” and “our” refer only to Elektra Noreste, S.A.
Issuer . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . .
US$100,000,000 aggregate principal amount of 7.60% Notes.
Closing Date . . . . . . . . . .
July 10, 2006
Maturity . . . . . . . . . . . . . .
July 12, 2021.
Use of Proceeds . . . . . . .
The proceeds from the offering of the Notes will be used:
• to repay the principal and interest on our existing long-term
indebtedness, which totaled approximately US$95.2 million as of
March 31, 2006, of which US$93.8 million is principal and US$1.4
million is interest, under our US$100.0 million syndicated long-term
loan agreement, dated October 19, 2004, among us, Banco
Continental de Panama, S.A., Primer Banco del Istmo, S.A., Citibank,
N.A., Panama Branch and Banco Bilbao Vizcaya Argentaria
(Panama), S.A. with Banco Continental de Panama as administrative
agent, or the Syndicated Long-Term Loan;
• to pay the expenses of the offering of the Notes described herein;
and
• to the extent there are amounts remaining after (i) and (ii) to pay
our outstanding short-term indebtedness and for general corporate
purposes.
The following four lenders under our Syndicated Long-Term Loan will
be paid in the following amounts:
• approximately US$32.8 million due 2014, bearing an interest rate of
LIBOR plus 3.5%, which is owed to Banco Continental de Panama,
S.A.;
LIBOR plus 3.5%, which is owed to Primer Banco del Istmo, S.A.;
LIBOR plus 3.5%, which is owed to Citibank, N.A., Panama Branch;
and
LIBOR plus 3.5%, which is owed to Banco Bilbao Vizcaya Argentaria
(Panama), S.A.
See “Use of Proceeds.”
10
Principal Amount . . . . . .
The principal amount of the Notes will be due and payable in full,
together with accumulated and unpaid interest and other amounts, if
any, on the maturity date stated above, to the extent the Notes have
not been redeemed or repurchased prior thereto.
Interest . . . . . . . . . . . . . . .
The Notes will bear interest from July 10, 2006 at a fixed rate of 7.60%
per annum, payable semiannually in arrears on January 12 and July 12
of each year and on the stated maturity date, or, if such date is not a
business day, the next succeeding business day, commencing on
January 12, 2007. Interest on the Notes will be computed on the basis
of a 360-day year of twelve 30-day months.
Ranking . . . . . . . . . . . . . .
The Notes will be our direct unsecured and unsubordinated
obligations and will rank pari passu amongst themselves and equal in
right of payment with all other present and future unsecured and
unsubordinated obligations of ours that are not, by their terms,
expressly subordinated in right of payment to the Notes.
However, the Notes will rank junior to statutory preferred obligations
described under “Risk Factors—Risks Relating to the Notes—Our
obligations under the Notes are subordinate to payment of certain
statutory liabilities.”
Ratings . . . . . . . . . . . . . . .
It is a condition to the issuance of the Notes that the Notes be rated at
least “BBB” by Fitch, Inc. or Fitch. A rating is not a recommendation to
buy, sell or hold a Note and is subject to revision or withdrawal by
Fitch in the future.
Indenture . . . . . . . . . . . . .
The Notes will be issued pursuant to an indenture (the “Indenture”)
between Elektra Noreste, S.A., as issuer, and The Bank of New York, as
trustee, registrar, New York paying agent and transfer agent.
Redemption . . . . . . . . . . .
We may redeem the Notes in whole, or in part, at our option, at any
time and from time to time prior to the maturity thereof upon
satisfaction of certain conditions including, without limitation, the
payment of a specified make-whole premium. See “Description of the
Notes—Redemption.
We also may redeem the Notes in whole but not in part at 100% of
their principal amount, plus accrued and unpaid interest, if any, to the
date of redemption and any additional amounts then due and
payable, at our option in the event of specified changes affecting
taxation of the Notes. See “Description of the Notes—Redemption.”
Other than in accordance with the foregoing, the Notes will not
otherwise be redeemable by us or by the holders of the Notes prior to
maturity.
11
Covenants . . . . . . . . . . . .
The terms of the Indenture will require us, among other things, to:
• pay all amounts owed by us under the Indenture and the Notes
when such amounts are due;
• perform all our obligations under the Indenture and the Notes;
• maintain our corporate existence;
• use reasonable best efforts to comply with all applicable laws;
• use reasonable best efforts to maintain all necessary government
approvals;
• use reasonable best efforts to pay all material taxes and other
claims;
• use reasonable best efforts to maintain insurance;
• maintain independent auditors;
• maintain our books and records;
• maintain an office or agency in Borough of Manhattan, the City of
New York for the purpose of service of process; and
• give notice to the trustee of any defaults and events of default
under the Indenture.
In addition, the terms of the Indenture will restrict our ability to:
• undertake certain mergers, consolidations or similar transactions;
• incur certain indebtedness; and
• create liens on our assets.
These covenants are subject to a number of important qualifications
and exceptions. See “Description of the Notes—Certain Covenants.”
Events of Default . . . . . .
The Notes and the Indenture will contain certain events of default
relating to us and, in some instances, our material subsidiaries,
including, among others, the following:
• failure to pay principal when due, whether on the maturity date,
upon redemption or otherwise;
• failure to pay interest and other amounts within fifteen calendar
days of the due date thereof;
• breach of covenants as set forth under the section “Description of
the Notes.”
• certain events of bankruptcy, liquidation, reorganization,
dissolution, winding up or insolvency;
12
• failure to pay debts as such debts become due;
• defaults under certain debt instruments that, in the aggregate,
equal or exceed certain specified amounts;
• the unenforceability of the Indenture or the Notes or our contesting
the enforceability of the Indenture or the Notes;
• breach of a covenant or agreement in the Indenture, the Notes or
the Concession Contract relating to the operation of our electricity
business;
• the Concession Contract is suspended, revoked, terminated,
materially amended in a manner that reasonably can be expected to
have a material adverse effect or ceases to be in full force and effect
in any material respect;
• certain events of nationalization, condemnation, expropriation,
attachment or seizure of specified assets by the Panamanian
Government;
• the Panamanian Government’s suspension of payments on specified
indebtedness;
• certain judgments that, in aggregate, equal or exceed certain
specified amounts;
• the Indenture or the Notes, shall cease to be in full force and effect
or binding and enforceable; and
• the destruction or irreparable damage of the electrical distribution
facilities we operate, which is not covered by insurance.
Withholding Taxes;
Additional Amounts . . .
Listing . . . . . . . . . . . . . . . .
All payments of principal, redemption amount and interest in respect
of the Notes will be made without withholding or deduction for any
present or future taxes, duties, assessments or other governmental
charges imposed by Panama and any political subdivision or
governmental authority of Panama and any jurisdiction through
which payments are made by a paying agent, unless such withholding
or deduction is required by law. In that event, subject to certain
exceptions, we will pay such additional amounts as are necessary to
ensure that the holders of the Notes receive the same amounts as they
would have received without such withholding or deduction. See
“Description of the Notes—Payment of Additional Amounts.”
Application has been made for the Notes to be listed on the Panama
Stock Exchange.
13
Transfer Restrictions;
Trading . . . . . . . . . . . . . . .
Governing Law . . . . . . . .
Clearance and
Settlement . . . . . . . . . . . .
Form and
Denomination . . . . . . . . .
Risk Factors . . . . . . . . . . .
The Notes have not been and will not be registered under the
Securities Act or the securities laws of any state in the U.S. and are
subject to certain restrictions on transfer and resale in the U.S. There is
currently no market for the Notes, and there can be no assurance as to
the development or liquidity of a market for the Notes. See “Risk
Factors—Risks Relating to the Notes—No market for the Notes
currently exists in the U.S.” and “Notice to Investors.”
The Indenture and the Notes will be governed in all respects by the
laws of the State of New York.
The Restricted Global Note will be issued in book-entry form and
registered in the name of a nominee of DTC and deposited on behalf
of the purchasers of the Notes represented thereby with a custodian
of DTC and will trade in DTC’s Same-Day Funds Settlement System.
The Regulation S Global Note will be issued in book-entry form and
registered in the name of a nominee of a common depository of
Euroclear or Clearstream and will be settled in accordance with their
respective rules and operating procedures. Owners of beneficial
interests in Notes held in book-entry form will not be entitled to
receive physical delivery of certificated notes except in certain limited
circumstances. For a description of certain factors relating to clearance
and settlement, see “Description of the Notes.”
The Notes will be issued in fully registered form without interest
coupons attached. Any Notes sold outside the U.S. to non-U.S. persons
in reliance on Regulation S under the Securities Act will be issued in
denominations of US$10,000 and integral multiples of US$1,000 in
excess thereof. Any Notes sold pursuant to Rule 144A under the
Securities Act will be issued in denominations of US$100,000 and
integral multiples of US$1,000 in excess thereof.
You should carefully consider the risk factors discussed under the
caption “Risk Factors” on page 17 before purchasing any Notes.
14
Summary historical financial data
The following summary historical financial data of the Company with respect to the years ended
December 31, 2005, 2004 and 2003 has been derived from, and should be read together with,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
“Selected Historical Financial Data” and our audited financial statements and the accompanying
notes included elsewhere in this offering memorandum. The following summary historical financial
data of the Company with respect to the three months ended March 31, 2006 and 2005 has been
derived from, and should be read together with, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Selected Historical Financial Data” and our
unaudited financial statements and the accompanying notes included elsewhere in this offering
memorandum. In the opinion of management, all adjustments considered necessary for a fair
presentation of our 2006 and 2005 interim results and financial position have been included in
those results and financial position. Interim results and financial position are not necessarily
indicative of the results financial position that can be expected for a full fiscal year.
(US$ in millions)
Year Ended December 31, Three Months Ended March 31,
2006
2005
2005
2004
2003
(Unaudited)
(Unaudited)
Income Statement Data:
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total operating costs and expenses . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Shares (in millions) . . . . . . . . . . . . . . . . . . . . . .
Operating income per share(1) . . . . . . . . . . . . . $
272.5 $
237.2
35.3
7.6
19.2 $
49.8
0.71 $
225.4 $
193.5
31.9
4.4
19.6 $
49.8
0.64 $
211.5
187.8
23.7
3.9
14.0
49.9
0.48
Balance Sheet Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . .
Current portion of bank debt . . . . . . . . . . . . .
Long-term bank debt . . . . . . . . . . . . . . . . . . . .
Capitalization(2) . . . . . . . . . . . . . . . . . . . . . . . . . $
303.7 $
124.4
10.0
90.0
224.4 $
282.7 $
110.1
5.0
95.0
210.1 $
279.9
155.3
16.9
37.8
210.0
$
Cash Flow Statement Data:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from operations . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . .
Net cash used in financing activities . . . . . . . .
19.2
31.2
(19.3)
(16.9)
19.6
27.8
(15.7)
(7.1)
14.0
25.7
(17.2)
(8.3)
$
$
$
$
Operating Data:
Energy purchases in GWh . . . . . . . . . . . . . . . . .
Energy sales in GWh . . . . . . . . . . . . . . . . . . . . .
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average number of customers . . . . . . . . . . . .
Number of customers at end of period . . . . .
Customer per employees(3) . . . . . . . . . . . . . . . .
Sales MWh per employees . . . . . . . . . . . . . . . .
$
$
$
$
2,277
1,916
564
288,321
296,681
526
3,398
Other Data:
EBITDA(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
$
$
$
2,193
1,800
568
266,837
276,560
487
3,168
47.3 $
$
$
$
$
2,135
1,714
563
247,019
255,960
455
3,044
42.9 $
34.1
$
$
$
$
71.2
64.7
6.4
2.1
3.1
49.8
0.13
313.1
129.8
12.0
88.8
230.6
3.1
1.0
(3.3)
0.8
$
$
$
$
$
278.0
114.1
5.3
95.0
214.4
$
$
$
$
4.0
10.8
(4.1)
(12.2)
570
485
549
299,223
301,316
549
883
$
9.5
546
455
575
280,371
282,518
491
791
$
(1) Operating income per share is calculated by dividing operating income for the period by the total amount of shares
outstanding at the end of the reporting period.
(2) This represents our outstanding long-term bank debt, the current portion of bank debt and shareholders’ equity.
(3) Based on the number of customers at the end of the period.
15
61.2
53.6
7.5
1.6
4.0
49.8
0.15
10.5
(4) EBITDA represents earnings before interest, taxation, depreciation and amortization. EBITDA is not a financial measurement
of our financial performance under U.S. GAAP. EBITDA is presented because we believe that some investors find it to be a
useful tool for measuring a company’s financial performance. EBITDA should not be considered as an alternative to, in
isolation from, or a substitution for analysis of our financial condition or results of operations, as reported under U.S. GAAP.
Other companies in our industry may calculate EBITDA differently than we have for purposes of this offering memorandum,
limiting EBITDA’s usefulness as a comparative measure. The definition of EBITDA in this section differs in certain respects from
the definition of “EBITDA” for purposes of the indenture which will govern the Notes being offered herein. See “Description
of the Notes.”
Reconciliation of EBITDA to net income
The following table provides a reconciliation of EBITDA to net income. For additional
information regarding the use of EBITDA, see “Selected Historical Financial Data.”
Year Ended December 31,
(US$ in millions)
Three Months Ended March 31,
2006
2005
(Unaudited)
(Unaudited)
2005
2004
2003
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . .
$19.2
8.6
7.6
11.9
$19.6
8.0
4.4
10.9
$14.0
6.0
3.9
10.2
$3.1
1.3
2.1
3.0
$ 4.0
2.0
1.6
2.9
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$47.3
$42.9
$34.1
$9.5
$10.5
16
Risk factors
You should carefully consider the risks and uncertainties described below and the other
information in this offering memorandum before making an investment in the Notes. The risks
described below are not the only ones facing us or investments in Panama in general. Our
business, financial condition or results of operations could be materially adversely affected by
any of these risks. There are a number of factors, including those described below, which may
adversely affect our ability to make payment on the Notes. Additional risks not presently known
to us or that we currently deem immaterial may also impair our business operations. See
“Forward-Looking Statements.”
This offering memorandum also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including the risks faced by us described
below and elsewhere in this offering memorandum.
Risks relating to Panama
Panama’s economic and political situation may adversely affect our financial results and our
ability to repay the Notes.
All of our operations and all of our current customers are located in Panama. Accordingly, our
financial condition and results of operations, including our ability to meet our obligations under
the Notes, are substantially dependent on economic and political conditions prevailing from time
to time in Panama. The discussion of recent developments in Panama that follows was derived in
part from information recently filed by the Panamanian Government with the Securities and
Exchange Commission. We have not independently verified this information.
According to official Panamanian Government figures, Panama’s GDP grew by 4.2% in 2003,
7.6% in 2004 and 6.4% in 2005. Sectors having a high growth in 2005 included cargo
transportation with a 10.9% increase, wholesale and retail commerce with an 8.9% increase and
financial services with a 13.4% increase. Lower growth occurred in 2005 compared to 2004
primarily due to an implemented tax reform as well as the changes in the Social Security law.
The Panamanian economy is small and relatively undiversified, being largely focused on the
service sector (which represented approximately 76.3% of GDP in 2004), a significant portion of
which consists of businesses linked to Panama Canal activities, a large free-trade zone, and an
international banking center. Since our operations are focused on the Panamanian domestic
market, our results of operations and financial condition are necessarily dependent on the local
economy and the effect the economy has on our customers. Due to the small size and limited
focus of the Panamanian economy, adverse developments in Panama could have a more
pronounced effect than would be the case if the developments occurred within the context of a
larger, more diversified economy.
We may be adversely affected by future political crises in Panama.
Panama’s economy has experienced different types of government and governmental policies.
Prior to 1968, Panama generally had a constitutional democracy and a growing economy. In
1968, the military secured control over the government and military rule continued until 1987,
17
when a political crisis erupted among the then ruling military dictator, General Manuel Antonio
Noriega, civilian organizations, political parties and the business community, which had been
agitating for a return to democratic rule. In December 1989, Mr. Noriega was deposed, largely as
a result of U.S. military intervention, and Guillermo Endara, who had been elected by an
overwhelming majority of Panama’s population in a popular vote earlier in the year, was sworn
in as President. Since the end of 1989, the Panamanian Government has maintained political and
economic stability under successive democratically elected governments, and favorable relations
with the U.S. have been fully restored. However, in view of the past instability of the
Panamanian Government, there can be no assurance that our operations would not be adversely
affected in the event of any future political crisis in Panama.
We may be adversely affected by governmental policies.
The Panamanian Government has exercised, and continues to exercise, significant influence over
the Panamanian economy through and among other means, its ownership of certain public
utilities and other enterprises. The Panamanian Government also has had a significant impact on
the economy through various statutory and other governmental initiatives, including
enforcement of a rigid labor code, subsidies, tariff policies and price controls. Accordingly, the
Panamanian Government’s actions regarding the economy could have significant adverse effects
on private sector entities in general and on us in particular. It is not possible to determine what
effect such plans or actions or the implementation thereof will have on the Panamanian
economy or on our financial condition or results of operations.
We could also be affected by changes in economic or other policies of the Panamanian
Government, which has exercised and continues to exercise substantial influence over many
aspects of the private sector, or other political or economic developments in Panama, such as
changes in import and export practices, changes in the electric regulatory policy and taxation,
over which we have no control. Accordingly, there can be no assurance that the recent growth in
Panama’s economy will continue in the future or that future developments in Panamanian
political, economic or regulatory situations will not adversely affect us.
Since the Panamanian monetary system is dependent on the U.S. dollar, any downturns in the
U.S. economy may adversely affect us.
Since 1904, Panama has used the U.S. dollar as legal tender and its sole paper currency, using the
Balboa only as coinage and as a unit of account with an exchange rate set at parity with the
U.S. dollar. Panama’s monetary system is unique in the emerging markets in that it is limited in its
ability to conduct a stimulative monetary policy and can finance public sector deficits only
through borrowing. As a result, Panama has enjoyed low inflation commensurate with levels of
inflation generally prevailing in the U.S. Panama had no inflation in 2003, a 0.5% increase in
2004 and a 3.3% increase in 2005. However, there is no assurance that these relatively low rates
of inflation will continue. In addition, given the relationship of the Panamanian monetary system
to the U.S. dollar and, indirectly, Panama’s dependence on the U.S. economy, there can be no
assurance that appreciation or depreciation of the U.S. dollar against other Euro-covered
currencies or the existence of sustained higher levels of inflation in the U.S. economy (and the
resultant effect on the value of the U.S. dollar) or increases or decreases in interest rates in the
U.S. will not adversely affect the Panamanian monetary system or, indirectly, us.
18
The planned expansion of the Panama Canal or a delay in the Panama Canal’s expansion may
adversely affect the economy and our customers and, as a result, our financial condition.
In 2006, a proposed public referendum is planned to authorize a planned expansion of the
Panama Canal to accommodate a significant number of Post-Panamax vessels (vessels too large to
transit the Canal at present), which represent the fastest growing type of vessels in the global
shipping business.
Research conducted by the Panama Canal Authority, or the PCA, indicates that Panama’s
economy is heavily dependent on Canal-related activities, both directly and indirectly. The PCA
estimates that as of December 2004, such activities generated approximately 8.6% of Panama’s
GDP, 41% of services exports, 34.7% of government revenues and 20% of direct and indirect
employment. In addition, the PCA estimates that US$1.00 of Canal-related output generates, on
average, US$1.27 in the rest of the economy. Depending on technical specifications still to be
determined, the planned expansion of the Panama Canal is expected to require a total
investment ranging from US$4 billion to US$5 billion, or between approximately 30% to 59% of
Panama’s 2004 GDP. Financial models used by the PCA suggest that the Panama Canal’s
operating cash flow will provide funding for most of the required investment over the project’s
execution period, which is expected to last from seven to eight years.
The proposed expansion signifies a much anticipated short-term economic stimulus for Panama
and is vital for the preservation of the Canal’s competitive position as a key route for global
shipping in the medium and long-term, thus enabling the PCA to sustain revenue growth and
remain a significant source of income for the Panamanian Government. The anticipated
economic stimulus from the proposed expansion of the Canal could offset the potential adverse
impact of the Panamanian Government’s recently enacted tax and social security reforms and a
free trade agreement between Panama and the U.S. A negative outcome in the upcoming
referendum or a delay in the implementation of the expansion project, could result in lower
levels of trade in Panama and could adversely affect the economy; the delay could adversely
affect the growth of our industry as well as our customers’ ability to meet their financial
obligations to us, thereby potentially impacting our ability to repay the Notes.
Since Panama is a service-based economy, fluctuation of prices in basic goods and commodities
such as oil, may have a significant impact on the Panamanian economy and us.
Panama is an importer of goods and commodities and, particularly, a net importer of crude oil.
Several other Panamanian industries are directly affected by high crude oil prices, including
transportation, maritime (Panama Canal), energy, manufacture, agriculture, products and
services. Increases in the price of crude oil have contributed to higher costs of electricity, which
has become a source of economic instability that has affected the competitiveness of Panamanian
businesses.
With respect to public consumption, according to data from the Ministry of Economy and
Finance, the price in 2004 for basic consumption goods (comprised of a basket of 50 basic goods
for a three-member family) increased 2.1% (US$3.94) to reach US$193.16, the largest increase of
its kind since 1996. During August 2005, the price of the basket rose to US$202.8, a 2.5% increase
compared to 2004. If prices continue to increase, the country runs the risk of deceleration of
demand, consumption and employment. This, in turn, may adversely affect the growth of our
industry as well as our customers’ ability to meet their financial obligations to us, thereby
potentially impacting our ability to repay the Notes.
19
Adverse political and economic conditions in other Latin American countries may adversely
affect us.
From time to time, the economies of other Latin American countries, particularly those in Central
America, Brazil, Mexico and Argentina, have suffered from high rates of inflation, currency
devaluation and/or other developments that have had an adverse effect not only on their
economies but also on the economies of other countries in the region. Although all of our
activities are concentrated in Panama, we may still be affected by adverse developments in other
Latin American economies.
Following the currency devaluation crises and the ensuing financial and economic crises in the
1990s in Mexico, Russia, Argentina and Asia, the economies of certain Latin American countries
experienced reduced levels of economic activity, which adversely affected our international trade
transaction business with Colón Free Trade Zone customers. As a result, there can be no
assurances that high inflation rates, volatility in exchange rates or declines in economic activity in
other Latin American countries or world markets in general will not have an adverse effect on
the Panamanian economy, on our customers, on us or on the trading values of the Notes.
It may be difficult to enforce civil liabilities against us or our directors and executive officers and
controlling persons.
We are a sociedad anónima, or stock corporation, organized under the laws of Panama. Some of
our directors, executive officers and controlling persons reside in Panama or outside of the U.S. In
addition, all or a substantial portion of the assets of these persons and of our assets are located
outside the U.S. As a result, it may not be possible for investors to effect service of process within
the U.S. upon such persons, or to enforce against them in U.S. courts judgments predicated upon
the civil liability provisions of the federal securities laws of the U.S. or otherwise obtained in
U.S. courts. Because a substantial portion of our assets are located outside the U.S., any judgment
obtained in the U.S. against us may not be fully collectible in the U.S. We have been advised by
Alemán, Cordero, Galindo & Lee, our Panamanian counsel, that no treaty exists between the U.S.
and Panama for the reciprocal enforcement of foreign judgments. However, subject to the
issuance of a writ of exequatur by the Supreme Court of the Republic of Panama, a final
judgment rendered in a foreign court (including the U.S.) against us could be recognized and
enforceable in the Courts of the Republic of Panama without reconsideration of the merits,
provided that (i) such foreign court grants reciprocity to the enforcement of judgments of Courts
of the Republic of Panama, (ii) the party against whom the judgment was rendered, or its agent,
was personally served in such action within such foreign jurisdiction, (iii) the judgment arises out
of a personal action against the defendant, (iv) the obligation in respect of which the judgment
was rendered is lawful in the Republic of Panama and does not contradict the public policy of the
Republic of Panama, (v) the judgment is properly authenticated by diplomatic or consular officers
of the Republic of Panama or pursuant to the 1961 Hague Convention on the legalization of
documents and (vi) a copy of the final judgment is translated into Spanish by a licensed
translator. We have been advised by our Panamanian legal counsel, Alemán, Cordero, Galindo &
Lee, that there is doubt as to the enforceability, of original actions in Panamanian courts of
liabilities predicated solely on the U.S. federal securities laws and as to the enforceability in
Panamanian courts of judgments of U.S. courts obtained in actions predicated upon the civil
liability provisions of the U.S. federal securities laws of the U.S. Under Article 43 of Law No. 24 of
June 30, 1999 of the Republic of Panama, the administration of our Concession Contract dated
October 22, 1998 between us and the ERSP and regulated by the ERSP may not be subject to
provisional remedies prior to judgment (medidas cautelares).
20
The Panamanian Government’s recently enacted tax reform may slow the economy’s growth
and negatively affect our financial condition and our ability to repay the Notes.
In February 2005, the Panamanian Government enacted a fiscal reform package consisting of
both revenue raising and expenditure reduction measures. The revenue raising measures include:
an expansion of the definition of taxable income, covering certain individual income sources
previously not fully taxable; a narrower definition of offshore income (which is tax exempt); the
introduction of an alternative minimum tax for individuals and corporations; the elimination of a
tax exemption on capital gains derived from public tender offers; and the elimination of certain
tax incentives to manufacturing and construction activities. In addition, tax authorities were
granted increased enforcement powers and tax evasion became a criminal offense. As part of this
fiscal reform effort, the Panamanian Government has committed to reduce public sector
headcount to 1999 levels (which implies a 18% reduction over four years), cap current
expenditure growth at the rate of current sovereign revenue growth and extract savings from
professional fees paid of approximately US$25.0 million per year.
Analysts estimate that this program, if fully implemented, may, among other things, reduce the
non-financial public sector deficit from 5% of GDP in 2004 to approximately 1% in 2009. We
believe fiscal reform is a high priority of the current Panamanian Government and its
implementation will be actively pursued. Nevertheless, there can be no assurances that this fiscal
reform package will achieve its objectives or that additional revenue raising measures may not be
necessary to preserve or reestablish fiscal balance in the near future.
Fiscal measures aimed at reducing Panama’s non-financial public sector deficit may result in
higher taxes and other obligations payable by us to the Panamanian Government. Higher fiscal
obligations from us to the Panamanian Government may adversely impact us, including our
ability to repay the Notes.
Risks relating to our business
Early termination of our concession contract could impair our ability to repay our indebtedness.
We operate our distribution network pursuant to a Concession Contract with the Panamanian
Government. This Concession Contract, which expires in October 2013, contains several
requirements regarding our distribution of electricity and compliance with applicable
Panamanian laws and regulations. Violation of the Concession Contract could result in sanctions
or termination of the Concession Contract. In certain cases, including repeated non-compliance
with laws and regulations, a material breach of the Concession Contract, and/or certain
bankruptcy proceedings, and/or dissolution or suspension of payments by us, the Panamanian
Government would be entitled to exercise the performance guarantee we have provided and
acquire our network assets at their fair market value minus a 10% reduction. The Panamanian
Government may unilaterally terminate our Concession Contract in case of war, serious
disturbance of the public order or urgent social interest and, if it so terminates, must pay us the
fair market value for our network assets plus a 10% premium. See “Business—Our Concession.”
We may be adversely affected by the application and interpretation of regulations that could
affect our revenues.
As an electricity distribution company, we are subject to extensive regulation by the Panamanian
Government through the ERSP. Accordingly, the results of our operations depend upon the
21
applicable regulatory framework and its interpretation by the ERSP. The regulatory framework
governing electric utility businesses was implemented in 1997 and, therefore, we have had only
one experience with the ERSP and its administration of the regulated tariff structure with respect
to a rate reset in July 2002. We are generally required to obtain and comply with a wide variety
of licenses, permits and other approvals in order to operate our facilities. Currently, we are in
compliance with existing regulations, but we may incur significant additional costs as a result of
our compliance with future requirements. If we fail to comply with these regulations, we could
be subject to penalties such as the imposition of liens or fines without any attendant criminal or
civil liability, the termination of the Concession Contract and the exercise of the performance
bond we have granted to the Panamanian Government under our Concession Contract. In
addition, existing regulations may be revised or reinterpreted, new laws and regulations may be
adopted or become applicable to us or to our facilities, and future changes in laws and
regulations including changes to rules and regulations with respect to transmission charges and
price regulations for distributors may have a detrimental effect on our business and financial
results.
Recently, through the empaneled Energy Commission, the Panamanian Government undertook a
review of the regulated tariff structure and the electricity industry, as a whole, in connection
with the marked increase in energy costs experienced by electricity distributors. The distribution
companies’ right to recover their energy costs through tariff adjustments was not questioned;
however, the Energy Commission concluded in its report that: electricity prices are distorted and
have resulted in a disproportionate rate increase for customers; this distortion is partially due to
electricity distribution companies’ failure to timely contract its electricity energy supply thereby
exposing customers to the volatility of spot market prices; there are distortions in the prices
offered by the electricity generators; and there are anomalies in the calculation of the demand
charges paid by customers. On the basis of these findings, the Energy Commission made various
recommendations adjusting the tariff increases, the dates on which these tariffs are to be
effective and how often they are to be adjusted. Based on these recommendations, the Executive
Branch issued Cabinet Resolution No. 22, dated March 29, 2006, adopting the Energy Commission
recommendations and requesting that the ERSP implement these recommendations. As a
consequence thereof, the ERSP issued Resolution No. JD-5930 adopting many of these
recommendations into our regulatory framework. See “Overview of the Panamanian Electricity
Industry—Recent Developments.”
We cannot assure you that future developments in the establishment and interpretation of
regulations will be favorable to us or that there will not be decisions affecting the regulatory
regime that will adversely affect our operations or financial results.
The ERSP regulates our tariffs and, therefore, we may not be able to obtain tariff increases
necessary to cover projected capital expenditures.
Every four years, the ERSP establishes the VAD charge for distributors’ cost of purchasing and
transmitting electricity from generators that we are allowed to include in our tariff to our
regulated customers. Our last tariff reset was on July 1, 2002, which was set to expire June 30,
2006, but has been postponed by the ERSP until December 31, 2006. As a consequence, we expect
the new formulas for the VAD tariff reset period to become effective January 1, 2007 and remain
in place for a four-year period. See “Overview of the Panamanian Electricity Industry—Tariff
Structure” and “—Recent Developments.” However, if the ERSP sets the VAD at a rate that is
insufficient to cover our costs, or if the ERSP categorizes certain of our investments as
22
“inefficient,” thereby lowering the asset base to which we can apply the permitted rate of
return, then revenues received by us may not be sufficient to implement our capital expenditure
plans or may reduce the amount of revenue we could generate in that four-year tariff period.
Furthermore, if our projected VAD is set at an amount greater than our actual costs for that VAD
tariff reset period, we could be subject to customer credits. These events could have an adverse
affect on our business, liquidity and profitability and may affect our ability to meet our
obligations under the Notes.
Any failure by the ERSP to timely revise our tariff could adversely affect our liquidity.
Historically, the ERSP had adjusted semi-annually the electricity cost component of the tariff that
we may charge to our regulated customers on the basis of our expected versus our actual energy
costs incurred during the previous six-month tariff period and our projected energy costs over the
following six-month period. However, the ERSP will use a new methodology to the electricity cost
component of our tariff to reflect fluctuation in energy costs. Beginning July 1, 2006, we expect
this new method will consider monthly adjustments rather than semi-annual adjustments and,
the energy cost component of our customer tariffs will be adjusted to include our actual costs
during the third month prior to the month in which the adjustment is made. The result is that
our actual costs for April 2006 will be included in the July 2006 adjustment. We also expect that
beginning January 1, 2007, the procedure for adjusting the fuel component in the tariff will
return to the previous procedure that includes six months of actual fuel costs, plus six months of
estimated fuel costs. See “Overview of the Panamanian Electricity Industry—Tariff Structure” and
“—Recent Developments.” If the ERSP fails to adjust our base tariff in any future one-month
period, and in any case we are unable to pass on our cost of electricity to regulated customers
through the base tariff or recover the cost in the form of a subsidy from the Panamanian
Government, our liquidity may be adversely impacted by any significant increase in our electricity
costs. Additionally, the ERSP had ordered a 90-day suspension of the tariff adjustment of the
power distribution companies for the first six months of 2006 that was scheduled to become
effective on January 1, 2006 and has recently ordered that a new adjusted tariff rate be put into
effect for the period from April 1, 2006 to December 31, 2006. This original 90-day suspension has
affected the timing of our recognition of cash flows from our operations, as we have not been
able to pass the full amount of our increased cost on to our customers. Accordingly, during the
first quarter of 2006, we have had to use some of our short-term financing as a source of
liquidity. We cannot assure you that the amount of allowable pass-through energy costs will
cover our actual costs incurred during any applicable rate adjustment period.
Substantial rate increases for our customers, or a failure by the Panamanian Government to
continue to provide subsidy payments to us for required rate increases we are not allowed to
pass along to our customers, could adversely affect our business, liquidity and profitability.
For the past several years and through the most recent tariff adjustment period which will end
December 31, 2006, increases in electricity distribution companies’ rates charged to customers
due to the semi-annual rate adjustment process required under the regulatory structure for the
electricity industry, were not fully passed through but were partially passed through to customers
in the form of tariff increases with the remaining amount subsidized by the Panamanian
Government. The Panamanian Government’s failure to provide subsidy payments to us for
required rate increases that we are not allowed to pass along to our customers would result in us
not fully recovering certain increased costs as permitted by existing regulations. In addition, a
23
decision by the ERSP to pass future substantial rate increases entirely through to customers may
result in the inability of some of our customers to make required payments to us. Either of these
events could adversely affect our ability to pay electricity generators and negatively impact our
business, liquidity and profitability and may affect our ability to meet our obligations under the
Notes. See “Overview of the Panamanian Electricity Industry—Tariff Structure.”
Public pressure could result in changes to the regulatory framework in Panama.
Because electricity is a utility with high social impact, there may be public debate and pressure to
modify the existing regulatory framework for the electricity industry. For example, since 2002 the
dramatic rise in the energy costs of electricity distribution companies resulted in significant
increases in the rates that those companies were allowed to charge their customers. During this
period, the amounts that electricity distribution companies were allowed to recover were either
passed through to their customers or paid to them in the form of subsidies from the Panamanian
Government. Continued increases in the rates charged to electricity distribution company
customers, or in the amounts of subsidies paid by the Panamanian Government, could increase
pressure to modify the regulatory framework for the electricity industry. Any proposals to modify
the electricity regulatory framework may inhibit investments in the electricity sector in the
future. We cannot predict what future changes may be made to the regulatory framework or the
effect of any changes on our business or results of operations. See “Overview of the Panamanian
Electricity Industry—Tariff Structure” and “—Recent Developments.”
Our business performance may be affected by the nature of our response to various operating
risks typically faced by electricity distribution companies.
We face a number of operating risks applicable to electricity distribution companies including:
• periodic service disruptions and variations in power quality in our electricity distribution
network, which may result in significant revenue loss and potential liabilities to third parties;
• fluctuations or a decline in aggregate consumer demand for electricity in line with prevailing
economic conditions, which could result in decreased revenues;
• the inability of electricity generation licensees to generate sufficient electricity for transmission
to us, and in turn for distribution by us to our electricity distribution customers, which would
affect the availability of electricity supply over our electricity distribution networks;
• failures and faults in the electricity transmission system in Panama or in the electricity
generation facilities of electricity generation companies in Panama, neither of which we
control;
• system failure affecting our information technology systems or those of other electricity
industry participants, which could result in loss of certain operational capacities or critical data;
• environmental costs and liabilities arising from our operations, which may be difficult to
quantify and could affect our results of operations;
• certain levels of energy loss, whether arising from technical reasons inherent in the normal
operation of electricity distribution systems or arising from non-technical reasons (such as
theft, fraud and inaccurate billing), which results in lost revenues;
24
• injuries to third parties or our employees in connection with our electricity distribution services,
which may result in higher insurance costs or denial of insurance coverage; and
• any failure by us to successfully negotiate and enter into future collective bargaining
agreements with the union representing their employees, which may result in work stoppages.
As we engage only in the electricity distribution business, our results of operations may also be
exposed to a greater degree of fluctuation as compared to electricity companies that have more
diversified operations, such as those that vertically integrate electricity generation, transmissions
and distribution.
Failure of transmission lines owned by Empresa de Transmisión Eléctrica S.A. (ETESA) may
adversely affect our operating results.
Damage to either the connection line linking us to Panama’s national interconnected electricity
system, or the National Interconnected System, or to the National Interconnected System itself,
could prevent us from receiving electricity we have contracted to purchase. A failure to deliver
electricity to our regulated customers could result in the imposition of certain penalties and
would affect our financial results.
We are subject to environmental and health and safety laws and regulations.
We are subject to a broad range of environmental, health and safety laws and regulations in
Panama which expose us to the risk of substantial costs and liabilities. These laws and regulations
relate to, among other things, limits on emissions, water and air quality, noise, the forest habitat,
minimizing risks to the environment while maintaining the quality, safety and efficiency of the
electricity sector and the use and handling of hazardous materials and waste disposal practices.
In July 1998, the Panamanian Government enacted environmental legislation creating an
environmental protection agency (ANAM) and imposing new environmental standards affecting
our operations with which we believe we are in compliance. Failure to comply with applicable
environmental standards, stricter laws and regulations, or stricter interpretation of existing laws
or regulations, may impose new liabilities, resulting in the need for additional investments or
adversely impact our ability to complete future projects. This may adversely affect our business,
financial condition and results of operations in the future. See “Overview of the Panamanian
Electricity Industry—Environmental Regulation.”
Our property may be damaged and our business interrupted or impaired by the occurrence of a
natural disaster.
Although we build our electricity infrastructures to withstand natural forces, and we have
adopted procedures to follow in the event of a natural disaster, a natural disaster could severely
impact our physical assets or cause an interruption in our ability to deliver electricity. Although
we maintain an “all risk” insurance policy covering physical damage and business interruption,
there can be no assurance that the scope of damages suffered by us in the event of a natural
disaster would not exceed the policy limits of our insurance. In addition, the effects of a natural
disaster on Panama’s economy could be severe and prolonged, leading to a decline in demand
for the electricity services that we provide. The occurrence of a natural disaster, particularly one
that causes damages in excess of our insurance policy limits, could have a material adverse effect
on our business, financial condition and results of operations.
25
Drought may result in shortages in the water supply that support the hydroelectric generators,
reducing the electricity available for purchase in Panama.
Panama experiences decreases in rainfall from time to time causing drought. During periods of
drought, the level of water in the reservoirs behind Panama’s hydroelectric dams falls and the
hydroelectric generators are not able to operate at full capacity. Because approximately 62% of
Panama’s installed generating capacity consists of hydroelectric plants, periods of drought
require the distribution system to increase the volume of electricity purchased from
thermoelectric plants or abroad, generally at higher cost than the electricity generated by
hydroelectric generators. In the event of severe drought, if the National Dispatch Center, or CND,
is unable to import sufficient amounts of electricity, the Panamanian Government may institute
rationing of electricity, rolling blackouts or other measures to suspend the services of distribution
companies. A drought could materially adversely affect our ability to distribute electricity and,
accordingly, our business and results of operations.
We may not succeed in countering an attitude of non-payment among certain of our residential
customers.
Some of our smaller residential customers tend to pay their invoices late with some frequency.
There can be no assurance that we will succeed in countering an attitude of non-payment among
certain of our customers and that we will collect revenues for all of the electricity that we
distribute. Collecting from smaller residential clients, particularly those who were previously
illegal consumers, may prove difficult, especially if rates increase beyond their ability to pay
amounts due.
Labor relations could affect our business.
As of March 31, 2006, we employed 549 people, approximately 43% of whom are represented by
the Sindicato de Trabajo de la Industria Eléctrica y Similares de la República de Panamá, or the
Electricity Industry Labor Union, a national labor union representing electricity industry workers.
See “Business—Employees.” Under applicable labor regulations, utility workers are not allowed
to engage in work stoppages or strikes that affect the delivery of utilities services. However, if
our employees were to engage in strikes or other work stoppages, including sabotage, we could
experience a significant disruption of our operations and higher ongoing labor costs, which could
have an adverse effect on our business, financial position or results of operations.
Risks related to the Notes
The Notes may not be freely transferred in the U.S.
We have not registered, and will not register, the Notes under the Securities Act or any other
applicable U.S. securities laws. Rather, the offering of the Notes in the U.S. will be made pursuant
to exemptions from, and in transactions not subject to, the registration provisions of the
Securities Act and from state securities laws that limit who may own the Notes. Accordingly, the
Notes are subject to certain restrictions on resale and other transfer thereof in the U.S. See
“Notice to Investors.” Consequently, a holder of Notes and an owner of beneficial interests in
those Notes must be able to bear the economic risk of their investment in the Notes for the term
of the Notes.
26
No market for the Notes currently exists in the U.S.
The Notes are a new issue of securities in the U.S., and there is currently no market in the U.S. for
the Notes we are offering for sale. We cannot assure you that a public market for the Notes will
develop or that you will be able to sell your Notes or of the price at which you may be able to sell
your Notes. If a market for the Notes were to develop, the Notes could trade at prices that may
be higher or lower than their initial offering price depending on many factors, including some
beyond our control. The liquidity of, and trading market for, the Notes may be adversely affected
by changes in interest rates and declines and volatility in the market for similar securities, as well
as by any changes in our financial condition or results of operations and by declines in the market
for high-yield and emerging market securities generally.
Investors in our Notes may not receive the same level and type of disclosure that they would
receive from issuers in the U.S.
Panama’s securities laws governing publicly-traded debt or equity securities impose disclosure
requirements that differ from those in the U.S. in certain important respects. As a regulated
industry, we are required to submit to the ERSP a statement of our compliance with the
conditions under the Concession Contract, legislation and regulations governing the electricity
sector, our audited financial statements, and technical, commercial and statistical information
about our operations. We will also be required to submit to the CNV information that must be
made available to all holders of the Notes, specifically, audited financial statements on an annual
basis accompanied by the report of independent accountants and an annual report of our
activities and developments, and unaudited financial statements on a quarterly basis along with
a quarterly report of our activities and developments. As a result, investors in the Notes may not
obtain information equivalent to that which is generally available from issuers subject to
U.S. securities laws.
Our credit ratings may not reflect the potential impact of all risks relating to the value of the
notes and changes to the credit ratings could affect the value of the notes.
The credit ratings of our Notes may not reflect the potential impact of all risks relating to the
value of the Notes. In addition, real or anticipated changes in our credit ratings or the credit
ratings of the Notes will generally affect the market value of the Notes. Thus, even though we
are making interest payments when due, the price of our Notes in the secondary market that
may develop may be considerably less than the price you paid for your Notes. A credit rating is
not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction
or withdrawal at any time by the assigning rating agency.
Our obligations under the Notes are subordinated to our payment of certain statutory liabilities.
The Notes will be our direct unsecured unsubordinated obligations. Under Panamanian law, such
unsecured obligations are subordinated to certain statutory preferences. In the event of our
bankruptcy, insolvency or liquidation, such statutory preferences, such as claims for salaries,
wages and credits guaranteed over assets (but up to the value of such assets), social security
contributions, taxes, court fees and expenses, will have preference over any other unsecured
claims, including the claims by any investor in respect of the Notes.
27
The Notes will be structurally junior to the indebtedness and other liabilities of future
subsidiaries we may establish.
We conduct all of our operations directly and currently have no subsidiaries or joint ventures. We
may, however, establish subsidiaries in the future and engage in additional operations through
those new subsidiaries. The Notes will be structurally subordinated to any outstanding
indebtedness and other liabilities of these subsidiaries. If a future subsidiary were to be
liquidated, the creditors of that subsidiary would be paid in full from the assets of the liquidated
subsidiary before holders of the Notes would be paid from those assets.
We are controlled by our controlling shareholders, which have the power to take unilateral
action and may have conflicts of interest with us or you in the future.
The Panamanian Government beneficially owns approximately 48.25% of our common stock and
CPI, Limited, which is indirectly owned by AEI, owns 100% of the shares of PDG, which owns 51%
of our common stock. As a result, these controlling shareholders control our affairs and policies
and our decision to enter into any corporate transaction that requires approval of equity holders.
Circumstances may occur in which the interests of our controlling shareholders conflict with the
interests of the holders of the Notes. In addition, our controlling shareholders may have an
interest in pursuing acquisitions, divestitures or other transactions that, in their judgment, could
enhance their equity investment in us, even though such transactions might involve risks to
holders of the Notes.
Other risks.
We may also be affected by certain market risks including those described in pages 61 to 63 of
this offering memorandum, relating to liquidity, interest rates, regulatory tariff resets, customer
credit, foreign currency and inflation. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
28
Use of proceeds
The net proceeds received by us from the offering of the Notes are estimated to be
approximately US$97.5 million after payment of the Initial Purchaser’s underwriting fee. We
estimate that the expenses in connection with the offering will be US$2.5 million.
We intend to use the net proceeds of the offering: (i) to repay the principal and interest on our
existing long-term indebtedness, which totaled approximately US$95.2 million as of March 31,
2006, consisting of US$93.8 million in aggregate principal and US$1.4 million in interest; (ii) to
pay the expenses of the offering of the Notes described herein; and, (iii) to the extent there are
amounts remaining after (i) and (ii), to pay our outstanding short-term indebtedness and for
general corporate purposes.
Our current outstanding long-term indebtedness as of March 31, 2006, totaled an aggregate
principal amount of US$93.8 million, which includes approximately US$88.8 million of long-term
indebtedness and US$5.0 million of the current portion of maturities on this long-term
indebtedness, under our Syndicated Long-Term Loan. All of our existing long-term indebtedness
under our Syndicated Long-Term Loan will be repaid by the net proceeds of this offering to the
following four lenders in the following amounts: (i) approximately US$32.8 million due 2014,
bearing an interest rate of LIBOR plus 3.5%, which is owed to Banco Continental de Panama,
S.A.; (ii) approximately US$32.8 million due 2014, bearing an interest rate of LIBOR plus 3.5%,
which is owed to Primer Banco del Istmo, S.A.; (iii) approximately US$18.8 million due 2014,
bearing an interest rate of LIBOR plus 3.5%, which is owed to Citibank, N.A., Panama Branch; and
(iv) approximately US$9.4 million due 2014, bearing an interest rate of LIBOR plus 3.5%, which is
owed to Banco Bilbao Vizcaya Argentaria (Panama), S.A.
Our current outstanding short-term indebtedness as of March 31, 2006, totaled an aggregate
principal amount of US$7.0 million, of which US$5.0 million are borrowings under our short-term
credit facility between us and Banco Bilbao Vizcaya Argentaria (Panama) bearing an interest rate
of one month’s LIBOR plus 1.25%, or the Banco Bilbao Credit Facility, and US$2.0 million are
borrowings under our short term credit facility between us and Citibank, N.A., Panama Branch
bearing an interest rate of one month’s LIBOR plus 1.20%, or the Citibank Credit Facility.
29
Capitalization
The following table sets forth our short-term debt, long-term debt and shareholders’ equity,
computed on the basis of U.S. GAAP, at March 31, 2006, as adjusted to give effect to the issuance
of the Notes offered hereby and to application of the proceeds from the sale of the Notes, as if
the issuance of the Notes and the application of the proceeds had occurred on March 31, 2006.
Other than giving effect to the application of the net proceeds as described herein, there has
been no material change in our capitalization since March 31, 2006. See “Use of Proceeds.” For
additional information, see the audited and unaudited financial statements and notes thereto
included elsewhere in this offering memorandum.
At March 31, 2006
Actual As Adjusted(1)
(Unaudited)
(Unaudited)
(US$ in millions except share and per share data)
Equity
Shareholders’ equity:
Common stock, no par value, 50,000,000 shares authorized, issued
and outstanding, actual; 50,000,000 shares, issued and
outstanding, as adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$106.1
21.8
1.9
$106.1
20.3
1.9
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$129.8
$128.3
Debt
Short-term debt:
Short-term borrowings(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of maturities of long-term debt(4) . . . . . . . . . . . . . . . .
Interest payable on Syndicated Long-Term Loan . . . . . . . . . . . . . . . . .
$
$
7.0
5.0
1.4
2.2
0.0
0.0
Long-term debt:
Syndicated Long-Term Loan(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes offered hereby(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88.8
0.0
0.0
100.0
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$102.2
$102.2
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$232.0
$230.5
(1) Reflects the issuance of US$100.0 million of Notes and the application of estimated net proceeds therefrom.
(2) Includes amortization of the debt issuance costs net of deferred income tax relating to costs incurred with our Syndicated
Long-Term Loan.
(3) Represents the principal amount outstanding under our short-term credit facilities, of which US$5.0 are borrowings under the
Banco Bilbao Credit Facility and US$2.0 million are borrowings under our Citibank Credit Facility. Following this offering and
the repayment of the Syndicated Long-Term Loan and the interest due under that loan, we will have had returned to us the
US$2.5 million currently held in trust by our lenders as collateral for amounts due under the Syndicated Long-Term Loan. The
as-adjusted amount of our short term borrowings estimates repaying US$4.8 million of our outstanding short-term
borrowings and paying an estimated US$2.5 million in issuance fees.
(4) Represents the principal amount outstanding under the Syndicated Long-Term Loan. This Syndicated Long-Term Loan, plus
the current portion of maturities on such long-term debt, will be repaid with the proceeds of this offering.
(5) The US$100.0 million offered hereby represents approximately 94.3% of our paid-in capital.
30
Selected historical financial data
The following selected historical financial data of the Company with respect to the years ended
December 31, 2005, 2004 and 2003 has been derived from, and should be read together with,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
our audited financial statements and the accompanying notes included elsewhere in this offering
memorandum. The following selected historical financial data of the Company with respect to
the three months ended March 31, 2006 and 2005 has been derived from, and should be read
together with, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our unaudited financial statements and the accompanying notes included
elsewhere in this offering memorandum. In the opinion of management, all adjustments
considered necessary for a fair presentation of our interim 2006 and 2005 results and financial
position have been included in those results and financial position. Interim results and financial
position are not necessarily indicative of the results financial position that can be expected for a
full fiscal year.
Three Months Ended
March 31,
2006
2005
2003 (Unaudited) (Unaudited)
(US$ in thousands)
2005
2004
Income Statement Data:
Total revenue . . . . . . . . . . . . . . . . . . . . . . . $272,486 $225,388 $211,506
Total operating costs and expenses . . . . . 237,234 193,468 187,769
Operating income . . . . . . . . . . . . . . . . . . .
35,252
31,920
23,737
Interest expense . . . . . . . . . . . . . . . . . . . . .
7,640
4,441
3,887
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,237 $ 19,574 $ 13,963
$ 71,159
64,743
6,416
2,082
$ 3,073
$ 61,158
53,608
7,550
1,578
$ 3,990
Balance Sheet Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $303,729 $282,725 $279,878
Shareholders’ equity . . . . . . . . . . . . . . . . . 124,389 110,110 155,324
Current portion of bank debt . . . . . . . . . .
10,000
5,000
16,900
Long-term bank debt . . . . . . . . . . . . . . . . .
90,000
95,000
37,800
Capitalization(1) . . . . . . . . . . . . . . . . . . . . . . $224,389 $210,110 $210,024
$313,067
129,775
12,000
88,750
$230,525
$278,020
114,100
5,250
95,000
$214,350
Cash Flow Statement Data:
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from operations . . . . . . . . . . . . .
Net cash used in investing activities . . . .
Net cash used in financing activities . . . .
Operating Data:
Energy purchases in GWh . . . . . . . . . . . . .
Energy sales in GWh . . . . . . . . . . . . . . . . . .
Employees . . . . . . . . . . . . . . . . . . . . . . . . . .
Average number of customers . . . . . . . . .
Number of customers at end of
period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer per employees(2) . . . . . . . . . . . .
Sales MWh per employees . . . . . . . . . . . .
$ 19,237
$ 31,228
$ (19,279)
$ (16,917)
$ 19,574
$ 27,821
$ (15,688)
$ (7,068)
$ 13,963
$ 25,689
$ (17,218)
$ (8,312)
$ 3,073
$ 1,027
$ (3,264)
$
750
$ 3,990
$ 10,753
$ (4,055)
$ (12,167)
2,277
1,916
564
288,321
2,193
1,800
568
266,837
2,135
1,714
563
247,019
570
485
549
299,223
546
455
575
280,371
296,681
526
3,398
276,560
487
3,168
255,960
455
3,044
301,316
549
883
282,518
491
791
Other Data:
EBITDA(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,339 $ 42,969 $ 34,019
$
9,493
(1) This represents our outstanding long-term bank debt, the current portion of bank debt and shareholders’ equity.
31
$ 10,519
(2) Based on the number of customers at the end of the period.
(3) EBITDA represents earnings before interest, taxation, depreciation and amortization. EBITDA is not a financial measurement
of our financial performance under U.S. GAAP. EBITDA is presented because we believe that some investors find it to be a
useful tool for measuring a company’s financial performance. EBITDA should not be considered as an alternative to, in
isolation from, or a substitution for analysis of our financial condition or results of operations, as reported under U.S. GAAP.
Other companies in our industry may calculate EBITDA differently than we have for purposes of this offering memorandum,
limiting EBITDA’s usefulness as a comparative measure. The definition of EBITDA in this section differs in certain respects from
the definition of “EBITDA” for purposes of the indenture which will govern the Notes being offered herein. See “Description
of the Notes.”
Reconciliation of EBITDA to net income
The following table provides a reconciliation of EBITDA to net income.
(US$ in millions)
2005
2004
2003
Three Months Ended
March 31,
2006
2005
(Unaudited) (Unaudited)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . .
$19,237 $19,574 $13,963
8,572
8,044
5,986
7,640
4,441
3,887
11,890
10,910
10,183
$3,073
1,317
2,082
3,021
$ 3,990
2,028
1,578
2,923
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$47,339 $42,969 $34,019
$9,493
$10,519
32
Management’s discussion and analysis
of financial condition and results of operations
The following discussion should be read in conjunction with our historical financial statements
and the notes thereto included elsewhere in this offering memorandum. The following discussion
includes certain forward-looking statements. For a discussion of important factors, including the
continuing development of our business, actions of regulatory authorities and competitors and
other factors which could cause actual results to differ materially from the results referred to in
the forward-looking statements, see “Forward-Looking Statements” and “Risk Factors.”
General
The discussion and analysis of our financial condition and results of operations have been
organized to present the following:
• a brief overview and the principal factors that influence our results of operations, financial
condition and liquidity;
• a review of our critical accounting policies;
• a discussion of the principal macroeconomic factors that influence our results of operations;
• a discussion of our results of operations for the years ended December 31, 2005, 2004 and 2003
and for the three months ended March 31, 2006 and 2005;
• a discussion of our liquidity and capital resources as of December 31, 2005 and as of March 31,
2006 and the cash flows for the years ended December 31, 2005, 2004 and 2003, and for the
three months ended March 31, 2006 and 2005 and our material short-term and long-term
indebtedness for the three months ended March 31, 2006;
• a discussion of our capital expenditures and contractual commitments; and
• a discussion of our risk management policies.
Overview
volume distributed, number of customers and area served. We hold an exclusive concession to
operate the electricity distribution network in the northern and eastern part of Panama,
including the eastern part of Panama City, the port city of Colón and the Gulf of Panama. As of
March 31, 2006, we had a market share of approximately 43% of the customers and
approximately 40% of total energy sales in Panama. For the three months ended March 31, 2006,
we had total energy sales of 485 GWh to an average of 299,223 customers.
Our results of operations, financial condition and liquidity have been influenced and will
continue to be influenced by a variety of factors, including:
• the growth rate of our customers, the Panamanian GDP and demographic trends in Panama, all
of which affect the demand for and usage of electricity and consequently, the amount of
electricity that we sell;
33
• the periodic re-setting of the VAD component of our regulated tariffs, both the initial reset in
July 2002 and the expected reset in January 2007, which directly affects our gross margin and
earnings;
• our ability to fully recover from our customers or, as has been the case in recent years, the
Panamanian Government, the fuel component adjustment within our regulated tariffs;
• our level of electricity losses, including technical losses during the transmission and
transformation process and non-technical losses, resulting from theft, fraud or inaccurate
billing;
• the ongoing costs of our quality of service improvements;
• our ability to generate cash flows from operations through sales of electricity;
• the timing of the recovery of our cost of electricity through increases in the electricity tariffs
approved by the ERSP and payments received in respect of fuel adjustments, which affects our
cash flows from operations; and
• our capital expenditure requirements, which consist primarily of maintenance, compliance with
reliability, quality of supply and customer service standards, the extension of our distribution
systems and upgrades of our information systems.
Critical accounting policies
The accounting policies described below are significant to our business operations and the
understanding of our results of operations, financial condition and liquidity. A critical accounting
policy is one that is both important to the presentation of our financial condition and results of
operations and requires management to make difficult, subjective or complex accounting
estimates and assumptions. By their nature, these judgments are subject to an inherent degree of
uncertainty. These judgments are based on our historical experience, our observance of trends in
the industry, information with respect to our consumers, terms of existing contracts, and
information available from other independent sources, as appropriate. There can be no assurance
that our judgments will prove correct or that actual results reported in future periods will not
differ from our expectations reflected in our accounting treatment of certain items.
We believe that the following accounting policies involve the application of critical accounting
estimates. In order to provide an understanding about how we form our judgments and
estimates about certain future events, including the variables and assumptions underlying the
estimates of those judgments to different variables and conditions, we have included comments
related to the following critical accounting policies under U.S. GAAP. For a more complete
summary of our significant accounting policies, see our audited financial statements included
elsewhere in this offering memorandum.
Electric utility regulation
We are subject to regulation by the ERSP. This agency regulates and makes the final
determination regarding the tariffs we charge to our customers. We also maintain our accounts
in accordance with the Uniform System of Accounts prescribed for electric utilities by the ERSP.
As a result, we apply FASB Statement No. 71, “Accounting for the Effects of Certain Types of
Regulation,” which requires the financial statements to reflect the effects of tariff regulation.
Through the tariff-making process, the regulators may require the inclusion of costs or revenues
34
in periods different than when they would be recognized by a non-regulated company. This
treatment may result in the deferral of expenses and the recording of related regulatory assets
based on anticipated future recovery through tariffs or the deferral of gains or creation of
liabilities and the recording of related regulatory liabilities. The application of Statement No. 71
has a further effect on our financial statements as a result of the estimates of allowable costs
used in the tariff-making process. These estimates may differ from those actually incurred by us.
Fuel component adjustment
The regulated system under which we operate provides that any excess or shortfall between the
estimated energy costs reflected in the applicable tariff and the actual costs incurred be included
as a compensation adjustment to be recovered or refunded in the next tariff revision period.
Accordingly, any excess in energy costs that was charged to our regulated customers results in a
reduction of the tariff to be recovered from our regulated customers during the next tariff
revision period. Alternatively, where there is a deficiency in energy cost charged to customers, a
tariff increase will occur in the next tariff revision from customers. Any excess in energy costs
charged to customers is accrued in the accounts payable on the balance sheet and leads to a
reduction in the next tariff revision to be applied to our customers. Alternatively, any deficit in
energy cost charged to customers is accrued in the account receivable on the balance sheet and
leads to an increase in the next tariff revision to be recovered from our customers. There is no
fuel component adjustment with respect to our unregulated customers, as they only pay us a
distribution tariff. This methodology operates to pass through to our regulated customers the
associated costs related to the increase or decrease in the fuel component index that is found in
our thermal power purchase agreements and the purchases in the spot markets. The refund or
recovery of these differentials occurs over the tariff revision period. Prior to January 1, 2006, the
fuel component adjustment in the tariff included six months with actual fuel costs, plus six
months of estimated fuel costs. In January 2006, the ERSP announced that the previously
approved rate increases for the period of January 1, 2006 to June 30, 2006 would be suspended
during a 90-day moratorium while the Energy Commission studied the tariff rate increases and
the electricity industry. Starting April 1, 2006, unlike prior rate adjustments in which we included
both the difference between our projected and actual energy costs incurred during the previous
tariff revision period and our projected energy costs for the following six-month period, the new
rate adjustment only includes our projected energy costs for the nine-month period through the
end of 2006. This change has meant that we have been unable to pass through to customers and
recover our accumulated energy cost component adjustments from prior tariff revision periods
through these new tariffs. We expect to recover these costs from the Panamanian Government.
Beginning July 1, 2006, we expect that the energy cost component of our customer tariffs will be
adjusted monthly rather than semi-annually to include our actual costs during the third month
prior to the month in which the adjustment is made. The result is that our actual costs for April
2006 will be included in the July 2006 adjustment. We also expect that beginning January 1,
2007, the procedure for adjusting the fuel component in the tariff will return to the previous
procedure that includes six months of actual fuel costs, plus six months of estimated fuel costs. To
assist us, we routinely prepare a forecast of the fuel price, based on the international fuel price
market and our estimates could vary depending on external fluctuations which are outside our
control.
Unbilled energy revenues
Our revenues related to the distribution of electricity are generally recorded when energy is
consumed by our customers. However, the determination of energy actually distributed to
35
individual customers is based on the reading of their meters, which is performed on a systematic
(reading cycles) basis throughout the month. At the end of each quarter, amounts of energy
delivered to customers since the date of the last meter reading are estimated and the
corresponding unbilled revenue is calculated. Unbilled electricity delivered revenue is estimated
based on the daily average energy consumption and applicable tariff rates for our customers. As
additional information about our customers becomes available, or actual amounts of electricity
are determinable, the calculated estimates are revised monthly. Consequently, our operating
results can be affected by revisions to our prior accounting estimates.
Impairment of long-lived assets
We are required to periodically evaluate our long-lived assets, such as our substations, our
underground conductors and ducts, our overhead conductors and accessories, our electric
transformers, as well as our poles, towers, accessories, and other fixed assets, for impairment in
accordance with the Financial Accounting Standard Board issued Statements of Financial
Accounting Standards No. 144, or SFAS No. 144, “Accounting for the Impairment or Disposal of
Long Lived Assets,” to determine whether any events or circumstances indicate that the carrying
amount of the assets may not be recoverable. Examples of such events include a significant
decrease in the market price, a significant adverse change in the manner an asset is being used or
its physical condition and an accumulation of cost significantly in excess of the amount originally
expected for the construction or acquisition of an asset, among others. SFAS No. 144 provides
that an impairment loss shall only be recognized if the carrying amount of an asset is not
recoverable and exceeds its fair value. The carrying amount is considered not recoverable if the
carrying amount exceeds the sum of the undiscounted future cash flows expected to result from
the use and eventual disposition of the asset.
Therefore, when a triggered event occurs as defined in SFAS No. 144, we are required to estimate
the undiscounted future cash flows associated with a long-lived asset or group of long-lived
assets. This necessarily involves judgment surrounding the inherent uncertainty of future cash
flows. If we determine that the undiscounted cash flows from an asset to be held and used are
less than the carrying amount of the asset, we must estimate the fair value to determine the
amount of any impairment loss. The estimate of fair value under SFAS No. 144 also involves
management’s judgment. We may consider prices of similar assets or employ valuation
techniques, such as using a single interest rate that is commensurate with the risk involved with
the investment to discount the estimated future cash flows associated with the asset. The use of
this method involves the same inherent uncertainty of future cash flows as discussed above with
respect to undiscounted cash flows. As of March 31, 2006, no asset impairments were recorded.
Contingencies
We are involved in several legal proceedings and our management has been required to assess
the magnitude of each individual case and we provide an estimate of potential damages in the
cases where there is a reasonably likelihood that we will be affected. Our pending legal matters
are reviewed on a quarterly basis and any provision we make is adjusted, depending on the
specific developments or changes in each case. Our legal department, in conjunction with our
external legal counsel, submits a status report which serves as the basis for calculating the
provision. Based on our consultation with our legal counsel, the liability, if any, under these
proceedings would not have a material adverse effect on our overall financial condition, results
of operations or cash flows.
36
Principal factors affecting the results of operations
A number of principal factors affected our financial performance during fiscal years 2003, 2004
and 2005 and for the first quarter of fiscal 2006. These factors continue to affect our results of
operations and financial performance and are discussed below.
Growth of Panama’s GDP, our customer base and demand for electricity
Sales of electricity in Panama represented approximately all of our revenue in 2003, 2004 and
2005 and for the first quarter of fiscal 2006. The remainder of our revenue for these periods
included income received from wheeling charges, pole rentals to third party commercial
enterprises, connection and reconnection charges and electrical infrastructure contributions from
real estate developers. As a Panamanian company with all of our assets and operations in
Panama, we are significantly affected by economic conditions in Panama. Our results of
operations and financial condition have been, and will continue to be, affected by the growth
rate of GDP in Panama because the levels of use of electricity by our customers is correlated to
the level of economic activity in Panama as well as the demands of our customer base.
The actual amount of electricity distributed across our distribution network, in combination with
the tariffs charged by us, significantly determines the amount of revenues that we earn.
However, the volume of electricity distributed over our network is essentially a function of
market demand for and usage of electricity by our customers within our concession area, and our
ability to affect such demand is quite limited. Changes in demand for electricity are driven largely
by general factors outside of our control, including changes in the level of economic activity in
Panama, changes in the level of usage of electricity by our customers, our provision of electricity
to new distribution customers and changes in the nature and mix of economic activity and
industries in Panama. The level of utilization of our distribution network, and therefore the
revenue we derive from our distribution network, varies from period to period in response to
variations in such general factors. Electricity demand in Panama does not vary significantly on a
seasonal basis.
We added approximately 25,099, 19,818, 21,484 and 10,902 additional customers in 2003, 2004,
2005 and the first quarter of 2006 respectively. GDP in Panama grew at a compound average rate
of 3.9% from 1999 through 2005. GDP in Panama increased by 4.2% in 2003, 7.6% in 2004 and
6.4% in 2005. Overall consumption in Panama of electricity increased by 4.5% in 2002, 4.7% in
2003 and 6.7% in 2004. The official electricity consumption for 2005 has not yet been published.
Our customers’ consumption of electricity increased 5.6% in 2003, 5.0% in 2004 and 6.5% in
2005. The increase in the consumption of electricity from 2002 through 2004 was primarily due to
economic growth in the commercial sector in Panama.
Panamanian GDP has grown due to increased activities in the Colón Free Zone, construction and
financial services sectors, ports, shipping and related canal operations; we anticipate that this
growth will continue in the future. We believe that economic growth in Panama will positively
affect our future revenues and results of operations. However, lack of growth or a recession in
Panama will likely reduce our future revenue and is likely to have a negative impact on our
results of operations.
Regulatory tariff (VAD) resets
Our revenues are dependent on our tariff structure, which establishes the rates we charge our
regulated customers for distributing and selling electricity across our distribution network. The
37
ERSP establishes the maximum distribution tariff, or VAD, that we may charge our customers. The
VAD is set at a level which, based on estimates at the beginning of the four-year tariff period,
will allow us to generate revenues to cover for our efficient investments, operating,
maintenance, administrative and commercial expenses (including metering, billing and customer
service), a standard level of loss and a reasonable return on invested capital. Due to our
regulated tariff structure, our ability to generate revenue is effectively limited by these maximum
tariff amounts, as we must abide by these maximum allowable tariffs under our Concession
Contract.
Every four years, the VAD component of our tariff rate is reset, however, based on Cabinet
Resolution No. 22 dated March 29, 2006, the ERSP postponed the four-year VAD reset scheduled for
July 1, 2006. The current VAD tariffs will remain in effect until December 31, 2006. The new
formulas for the VAD tariff reset period are expected to become effective January 1, 2007 and
remain in place for a four-year period. The proper setting of the VAD is central to our business
because the VAD sets a ceiling for the revenues we can generate from the distribution network. On
June 9, 2006, the ERSP issued Resolution No. AN-065-Elec. announcing its initial proposal for the
permitted pre-tax rate of return to be applied during the next four-year regulatory period and
commencing the public process for interested parties to respond to the proposal before the ERSP
issues its final resolution. See “Overview of the Panamanian Electricity Industry — Recent
Developments.”
During the first four-year regulatory period after privatization (between July 1998 and June
2002), the ERSP underestimated certain key components to the tariff calculations, such as
operating and maintenance expenses, standard level of losses and depreciation, our base assets
and a level of investment for the four-year period to which we applied the permitted rate of
return. Due to these low estimates, during the first rate period, we were not able to generate
revenues that completely covered our level of investment and improvements to our distribution
network. These low estimates were corrected by the ERSP in connection with the VAD rate reset
on July 1, 2002, and contributed to the noticeable difference in our results of operations from
the first four-year rate period and the second four-year rate period since July 2002. At the time
of the VAD rate reset on July 1, 2002, the ERSP categorized certain of our investments made
during the initial four-year regulatory period as “inefficient,” which lowered the asset base to
which we could apply the permitted rate of return, thereby reducing the maximum amount of
revenues we could generate during that four-year tariff period. Certain investments originally
initiated by Recursos Hidráulicos y Electrificacion, or IHRE, before the privatization, which we
assumed with the privatization and made during the initial four-year regulatory period, were
deemed to be “inefficient” because the international unit costs for these investments based on
comparable companies were less than our actual unit cost. This resulted in our July 1, 2002 rate
reset using the “efficient” international unit costs rather than our actual costs, when the ERSP
considered the value of our base assets. We are currently challenging the ERSP’s ability to
categorize such investments as “inefficient” under the 1997 Electricity Law. We believe this
categorization by the ERSP is not permitted within the tariff reset process which provides that
the value of a distributors’ base assets are to be set at the original book value of those assets at
the beginning of each rate period.
On April 11, 2006, the ERSP stated in Resolution No. JD-5956 that, aside from the maximum
allowable income we were permitted to recover during the four-year regulatory period from July
2002 to June 2006, we received additional income in excess of our actual costs. The ERSP
attributed this supposed excess income to variations between our projected and actual number
38
of customers and our sales in the different rate categories during this tariff period and has
ordered us to credit or reimburse our customers an aggregate of approximately US$4.0 million
beginning May 1, 2006 until December 31, 2006. We are currently challenging this determination
as we believe that the Concession Contract and the resolutions instituting the VAD do not permit
the ERSP to modify previously approved tariffs where our actual income exceeds our projected
maximum allowable income charged to customers, and the methods used to determine our
maximum allowable income is favorable to us. These customer credits have been suspended
while our motion for reconsideration is pending.
The distribution and commercial components of the VAD are adjusted every six months to reflect
changes in the CPI. See “Business—Distribution Tariffs” for more information on our tariff
structure.
Pass-through of energy costs
In addition to the VAD tariff component, the tariffs for our regulated customers have a separate
component that include the weighted average cost of energy we purchase from generators and
in the spot market, transmission tolls paid to ETESA and public lighting energy consumption. This
energy component is established by the ERSP as a pass-through of our energy costs to our
customers and is adjusted every six months to reflect the actual costs of energy due to the
fluctuation in fuel costs and energy prices in the spot market.
In accordance with procedures, on November 1, 2005, we published our six-month tariff
adjustments for the period beginning January 1, 2006. This adjustment included an increase of
approximately 30% from the prior period to take into account the increase in our energy costs
for the period of April-September 2005, primarily due to the increase in fuel and spot market
prices and the projected cost of energy for the next six-month period. After implementing the
tariff increase, the ERSP suspended the implementation of this adjustment on January 23, 2006
for a 90-day period expiring on March 31, 2006. On March 27, 2006, the Energy Commission
recommended that a new adjusted tariff rate be implemented for the period from April 1, 2006
to December 31, 2006. The ERSP, in its March 2006 Resolution adopting many of the
recommendations of the Energy Commission, approved a rate adjustment for this nine-month
period based on our projected energy costs through December 31, 2006. The ERSP, in its
March 2006 Resolution, established that the tariff increase to our regulated customers for this
new rate period should not exceed 10.7%, which was lower than the 20.5% increase we had
submitted. However, the ERSP at the same time recognized that we should receive a government
subsidy of US$25.2 million, which would include a US$0.5 million credit from previous subsidies
granted, in order to avoid a rate increase for all our customers with consumption levels under
200 kWh and limit the 10.7% rate increase to those customers above this consumption level.
Together, the ERSP established rate increase and the US$25.2 million subsidy will compensate us
for the increased energy costs in our original 20.5% rate increase proposal. While this new rate
adjustment only includes our projected energy costs, we have been prohibited from passing
through to customers our accumulated energy cost component adjustment from prior tariff
revision periods. However, the Minister of the Presidency and the Minister of Finance and
Economy have indicated to us that our recovery of our accumulated energy cost component
adjustments for the twelve-month period from April 1, 2005 through March 31, 2006 will be
recovered from the Panamanian Government in the form of cash or a debt instrument rather
than through our regulated tariffs. Nevertheless, this suspension has affected the timing of our
recognition of cash flows from our operations, as we have not been able to pass the full amount
39
of our increased cost on to our customers. Accordingly, during the first quarter of 2006, we have
had to use some of our short-term financing, in the form of unsecured credit line facilities, as a
source of liquidity. See “Overview of the Panamanian Electricity Industry—Recent
Developments.”
Energy losses
Our ability to maintain and improve on our energy losses is an important factor to our financial
performance. As a distributor, we suffer from both technical losses, those that occur in the
ordinary course of the distribution of electricity or those resulting from the specific characteristics
of our distribution network, and non-technical losses, those that result from illegal connections,
fraud or billing errors. Since privatization, we have reduced our total energy losses from 24.0% in
1998 to 12.5% (7.7% technical and 4.8% non-technical) in 2005. By minimizing our level of
energy loss, we are able to generate more net income. We intend to reach a sustainable level of
energy loss by 2006, within the range of 11.0% to 12.0%, where the expenditures for loss
reduction initiatives are equal to the benefits we receive. In order to be able to reach this goal
and maintain our level of energy loss, we have allocated approximately US$10.5 million to energy
loss related capital expenditure projects over the past six years, such as installing special
conductors, protecting meters from tampering and replacing transformers and cables.
Capital and operating efficiencies
We operate within a publicly open regulatory framework, which takes into account a number of
factors in setting the tariffs we charge our customers during each four-year tariff period. Every
four years, the ERSP sets the maximum tariff level for our VAD, which is a significant determinant
of our operating results. Because our network tariffs are subject to these maximum levels, and
the VAD component is based on our future operating and capital expenditures, as assumed by
the ERSP at the start of each such four-year period, we can increase our profitability if we are
able to increase our operating and capital efficiencies during each four-year period beyond the
levels assumed by the ERSP. In its March 31, 2006 resolution, the ERSP extended the current
four-year tariff period scheduled to expire on June 30, 2006 until December 31, 2006, with the
next four-year period commencing January 1, 2007. This regulatory framework allows us to retain
the benefit of the operating and capital efficiency gains we achieve during each four-year tariff
period and provides incentives to earn higher returns through efficient operating and capital
expenditures. Since December 1999, employee productivity has increased from 255 customers per
employee to 526 customers per employee at year end 2005. For the same period, our energy sales
per employee have also increased from 2,092 MWh per employee to 3,398 MWh per employee. If
we do not meet the ERSP’s assumed future operating and capital expenditures or our maximum
tariffs are set too low, then our actual costs may exceed the revenues permitted to be collected
pursuant to our maximum allowable tariffs and we may see our profitability decrease or fall into
a net loss position if our capital and operating expenditures exceed the level of expenditures
assumed by the ERSP.
40
Results of operations
Three months ended March 31, 2006 compared to the three months ended 2005
Revenues
The following table depicts revenues for the three months ended March 31, 2006 and March 31,
2005 for the indicated categories:
2006
2005
(Unaudited)
(Unaudited)
Net energy sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$69,145,279
2,013,852
$59,044,679
2,113,142
Total revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$71,159,131
$61,157,821
Purchase of energy and transmission charges, net . . . . . . . . . . . . . . .
Gross distribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53,648,896
$17,510,235
42,792,909
$18,364,912
Net energy sales. Our net energy sales, which consist of revenues we obtain from sales of
electricity to our regulated customers, increased US$10.1 million for the three months ended
March 31, 2006, or approximately 17.1%, as compared to net energy sales for the same period of
2005. This increase was due to a growth in the number of customers we provided electricity to
and the larger volume of units of energy invoiced to our customers for the three months ended
March 31, 2006, which were 485 GWh in this period, compared to 455 GWh in the same period of
2005. In these three months of 2006, our average number of customers increased by 18,852, or
approximately 6.7%, to 299,223 average number of customers, as compared to the 280,371
average number of customers in the three months of 2005. This increase was primarily due to the
growth in the Panamanian economy and the expansion of our distribution network. Lastly,
approximately 89.0% of the increase in our net energy sales in the first quarter of 2006 as
compared to the same period in 2005, was due to the higher energy purchases and transmission
charges included in the tariff. This approved pass-through tariff increased due to greater spot
market energy purchases, purchases from thermal electricity generators, and higher fuel costs
and spot market prices.
Other revenues. Other revenues, which include wheeling, pole rental, connection and
reconnection charges, collections from uncollectible accounts and other income, decreased for
the three months ended March 31, 2006 by approximately US$99 thousand, or approximately
4.7%, down from US$2.1 million in the first quarter of 2005 to US$2.0 million, in the same period
in 2006. This decrease was primarily due to US$81 thousand in revenue from public lighting
consumed by large unregulated customers that was not recovered in the first quarter of 2006
once these unregulated customers became regulated. The decrease in our other revenue for the
first quarter of 2006 was offset by the increased net energy sales for the same period as these
unregulated customers became our regulated customers.
Purchase of energy and transmission charges, net. In the first three months of 2006, our
purchase of energy and transmission charges, which are net of our fuel component adjustment,
increased US$10.9 million, or 25.4%, to US$53.6 million compared to US$42.8 million in the first
three months of 2005. The increase in purchase of energy and transmission charges was primarily
due to an increase in the average overall cost of energy during the first quarter of 2006, which
41
increased to US$96.73 per MWh, or approximately 18.2%, from US$81.81 per MWh in the same
period in 2005. This increase in the average overall cost of energy in the first quarter of 2006 was
due to our purchasing approximately 64.0% of our energy needs from thermal electricity
generators and in the spot market as compared to purchases in the first quarter in 2005 when we
purchased approximately 56% from thermal electricity generators and in the spot market. This
increase to 64.0% of dependency on thermal electricity generators and the spot market was due
to our hydroelectric contracts expiring at the end of fiscal 2005. An additional factor in the
increase in purchase of energy and transmission charges was due to the increased amount of our
energy purchases (570 GWh in the first quarter of 2006, up from 546 GWh in the same period of
2005), which was due to both the expansion of our network through the connection of new
regulated customers, which expands the reach of our network to other future customers, and an
increase in customers from the prior period.
Gross distribution margins. Our gross distribution margins, based on our total revenues less our
purchase of energy and transmission charges, decreased US$0.9 million, or 4.7%, to US$17.5
million in the first quarter of 2006 as compared to US$18.4 million in 2005. This decrease was
mainly the result of a reduction in the other income invoicing and the increase of the energy loss
costs which were considerably higher during the first quarter of 2006.
Operating expenses
The following table reflects our operating expenses for the three months ended March 31, 2006
and March 31, 2005:
2006
2005
(Unaudited)
(Unaudited)
Labor and other personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Severance expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repair and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sales and disposal of fixed assets, net . . . . . . . . . . . . . . . . . . .
$ 2,083,611
107,987
604,936
610,665
2,079,057
393,000
3,020,668
2,015,956
178,186
$ 2,138,652
72,061
604,116
550,936
1,887,099
451,000
2,922,680
2,055,171
133,305
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,094,066
$10,815,020
Labor and other personnel. Our labor and other personnel expenses decreased slightly by
approximately US$55 thousand, or 2.6%, to $2.1 million for the first quarter of 2006, from
slightly more incurred during the same period in 2005. The decrease in our labor and other
personnel expenses was attributable primarily to an increase in the estimated amount of labor
costs reclassified as a capital expense for various projects, which represented an additional credit
of US$54 thousand.
Severance expenses. Our severance expenses increased approximately US$36 thousand, or
approximately 50.0%, for the first quarter of 2006 from US$72 thousand for the same period in
2005. This increase was primarily due to the expected reduction of personnel that occurred in
connection with our reorganization of our Engineering and Information Technology
departments.
42
Provision for doubtful accounts. In the first quarter of 2006, our provision for doubtful accounts
for non-payment of electricity sales was stable compared to the same period in 2005. We believe
that our provision for doubtful accounts is adequate to cover our customers’ portfolio
receivables.
Repair and maintenance. Repair and maintenance expense increased slightly by US$60
thousand, or 10.8%, for the first quarter of 2006 to US$610 thousand compared to US$551
thousand for the same period in 2005. These increases were primarily due to the expansion of
our distribution network in the first quarter of 2006 and the growth in the number of customers
we service.
Professional services. For the three months ended March 31, 2006, our professional services
expenses (i.e., payments to third parties) relating to connection and reconnection, grid
maintenance crew, security, meter reading, customer service, legal consultants and wholesale
electricity market consultants increased by approximately US$191 thousand, or 10.2%, to US$2.1
million compared to US$1.9 million for the same period in 2005. The increase in our professional
service expenses was attributable primarily to legal fees, inspection services and other services for
customers’ connections.
Management fees. Management fees paid to CPI, Limited in the first quarter of 2006 decreased
slightly by US$58 thousand, or 12.9%, to US$0.4 million compared to US$0.5 million in the first
quarter of 2005. This decrease in management fees was due to the decrease in EBITDA, which is
the benchmark used to calculate this fee. See “Related Party Transactions—Management
Agreements.”
Depreciation and amortization. Depreciation and amortization expense increased
US$98 thousand to US$3.0 million in the first quarter of 2006 compared to US$2.9 million in the
same period in 2005. This increase was attributable primarily to an increase in our property and
equipment as a result of capital acquisitions associated with the expansion of the electricity grid
and increased customer growth. In the first quarter of 2006, investment in capital expenditures
included $2.2 million for expansion of our network (including construction of our Tinajitas
substation), US$0.6 million for meter installation, US$0.1 million for improvements to the quality
of our distribution network, US$0.1 million for systems and other information technologies,
US$0.1 million for installation of public lighting and US$0.3 million for capitalized labor and
interest costs.
Administrative and other expenses. Administrative and other expenses for the first quarter of
2006 were slightly less than those for the same period in 2005. The US$39 thousand decrease in
the first quarter of 2006 was primarily due to decrease in our provision for removal of obsolete
inventory and decreased spending on television and radio advertising.
Loss on sale of fixed assets, net. Our loss on sale of fixed assets in the first quarter of 2006 was
US$178 thousand compared to approximately US$133 thousand in the same period in 2005. This
US$45 thousand increase related to the disposal of some of our meter reading equipment, poles,
conductors, lamps and transformers that are replaced periodically to maintain our distribution
network.
43
Other income (expense)
The following table reflects other income (expense) for the three months ended March 31, 2006
and March 31, 2005:
2006
2005
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
55,831
(2,082,158)
$
47,092
(1,578,482)
Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(2,026,327)
$(1,531,390)
Interest income. In the first quarter of 2006, our interest income relating to interest received on
our treasury management increased slightly by approximately US$9 thousand to approximately
US$56 thousand as compared to approximately US$47 thousand in the same period in 2005.
Consistent with our policy to mitigate against interest risk, we place our surplus funds in
interest-bearing bank deposits with prime financial institutions in Panama.
Interest expense. Our interest expense for the first quarter of 2006 was US$2.1 million
compared to US$1.6 million in the same period in 2005. The increase of US$0.5 million was
primarily related to our increased use of our short-term credit facilities which, at March 31, 2006,
had US$7.0 million outstanding, compared to the same period in 2005, which had US$3.8 million
outstanding. Additionally, the LIBOR interest rate applicable in the first quarter of 2006 under
these facilities and under our Syndicated Long-Term Loan increased to 4.7%, compared to the
2.8% interest rate applicable during the same period in 2005.
Income taxes
Our effective income tax rate was 30.0% in the first quarter of 2006 and 33.7% in the same
period of 2005. In the first quarter of 2006, our total income tax expense amounted to US$1.3
million compared to US$2.0 million in the same period of 2005. This US$0.8 million decrease in
taxes related to a lower gross distribution margin in 2006 of US$0.8 million and US$0.3 million
and US$0.5 in higher operating expenses and interest expenses, respectively, compared to the
three months ended March 31, 2005. In addition, the effect of a US$0.2 million income tax is
included as part of the income tax expense in the first quarter of 2005, due to a change in the
previously enacted rate.
Net income
As a result of the above, we recorded net income of US$3.1 million, or 4.3% of revenues, in the
first quarter of 2006, compared to net income of US$4.0 million, or 6.5% of revenues in the same
period in 2005.
44
Year ended December 31, 2005 compared to the year ended December 31, 2004
Revenues
The following table depicts revenues for the years ended December 31, 2005 and December 31,
2005
2004
Net energy sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$263,501,949 $217,615,046
8,983,742
7,773,157
$272,485,691 $225,388,203
193,905,488
151,822,767
$ 78,580,203 $ 73,565,436
Net energy sales. Our net energy sales, which consist of revenues we obtain from sales of
electricity to our regulated customers, increased US$45.9 million for the year ended December 31,
2005, or approximately 21.1%, as compared to net energy sales for 2004. This increase was due to
an increase in the number of customers we provided electricity to and the larger volume of units
of energy invoiced to our customers for the year ended December 31, 2005, which were
1,916 GWh in 2005, compared to 1,800 GWh in 2004. In 2005, our average number of customers
increased by 21,484, or approximately 8.1%, to 288,321 average number of customers, as
compared to the 266,837 average number of customers in 2004 primarily due to the growth in
the Panamanian economy and the expansion of our distribution network. Another factor for this
increase was that our distribution margin, or the VAD component of our tariff, for the year
ended 2005 increased from US$48.52 per MWh in 2004 up to US$49.87 per MWh due to inflation
as well as an adjustment in the charges for distribution loss. Lastly, our net energy sales increased
approximately 82% due to an increase in the energy component of our tariff through which we
pass through to our customers the increase in energy costs, which in 2005 were mainly due to
both the rising prices in bunker fuel under our power purchase agreements with thermal
electricity generators and our spot market purchases.
reconnection charges, collections from uncollectible accounts and other income, increased in
2005 by approximately US$1.2 million, or approximately 15.6%, to US$9.0 million, as compared
to 2004. This increase was due in large part to the increase in wheeling charges, those fees we
receive from electricity generators and other electricity distributors who use our distribution
network to deliver electricity to their customers, which increased approximately US$0.5 million,
or 19.6%, to US$3.3 million, as compared to 2004. Our wheeling charges also increased in 2005
due to increased use by Metro Oeste, another Panamanian electricity distributor, and other
unregulated customers of our network. Additionally, in 2005, we rented out more of our poles to
third-party commercial enterprises, which generated moderately higher revenues than 2004, and
we received approximately US$0.3 million in additional revenue from fees charged to real estate
developers for infrastructure inspection services.
Purchase of energy and transmission charges, net. In 2005, our purchase of energy and
transmission charges, which are net of our fuel component adjustment, increased
US$42.1 million, or 27.7%, to US$193.9 million compared to US$151.8 million in 2004. The
increase in purchase of energy and transmission charges was primarily due to an increase in the
average overall cost of energy in 2005, which increased to US$87.98 per MWh, or approximately
45
22.0%, from US$72.09 per MWh in 2004. This increase in the average overall cost of energy in
2005 was due to our purchasing approximately 60% of our energy needs from hydroelectric
generators (whose prices are fixed) and 40% from thermal electricity generators and in the spot
market as compared to purchases in 2004. In 2004, we purchased approximately 25% from
thermal electricity generators and in the spot market. This 40% dependency on thermal
electricity generators and the spot market resulted in greater expenses to us due to the fact that
contracted prices under these agreements were higher due to the rising bunker fuel prices in
2005. An additional factor in the increase in purchase of energy and transmission charges was
due to the increased amount of our energy purchases (2,204 GWh in 2005, up from 2,106 GWh in
2004), which was due to both the expansion of our network through the connection of new
regulated customers, which expands the reach of our network to other future customers, and an
increase in customers from the prior period.
purchase of energy and transmission charges, increased US$5.0 million, or 6.8%, to
US$78.6 million in 2005 as compared to US$73.6 million in 2004. This increase was the result of
more units of energy invoiced to our customers for the year ended December 31, 2005 as well as
our improved energy loss recovery program. In 2005, we reduced our total percentage of energy
loss to 12.5%, down from 13.9% in 2004.
Operating expenses
The following table reflects our operating expenses for the years ended December 31, 2005 and
December 31, 2004:
2005
2004
Labor and other personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Severance expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repair and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sales and disposal of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,218,840 $ 9,115,038
195,942
358,756
1,483,867
524,429
2,575,193
2,237,051
8,499,148
8,506,837
1,943,000
1,756,246
11,890,034
10,909,897
7,517,199
8,180,320
1,005,214
56,989
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$43,328,437 $41,645,563
Labor and other personnel. Our labor and other personnel expenses decreased approximately
US$0.9 million, or 9.8%, to US$8.2 million in 2005 from US$9.1 million in 2004. The decrease in
our labor and other personnel expenses was attributable primarily to employee reductions
associated with the reorganization and merging of our customer service and loss reduction
departments, which lowered our number of employees by 0.7%.
Severance expenses. In 2005, our severance expenses decreased approximately US$0.2 million,
or approximately 45%, from US$0.4 million in 2004. This decrease in severance expenses was
primarily due to the expected reduction of personnel that occurred in connection with our
reorganization and merging of the customer service and loss reduction departments in 2004, that
was not duplicated in 2005.
46
Provision for doubtful accounts. Our provision for doubtful accounts for non-payment of
electricity sales increased approximately US$1.0 million, to US$1.5 million in 2005 from
US$0.5 million in 2004 due to an increase in the number of our terminated customers, which
include those customers for whom, after 90 days of being disconnected, a full provision for
overdue amounts is made in our books.
Repair and maintenance. Repair and maintenance expense increased US$0.3 million, or 15.1%,
to US$2.6 million for the year ended December 31, 2005 compared to US$2.2 million for the prior
period in 2004. Increases in repair and maintenance expense were primarily due to the expansion
of our distribution network in 2005 from that in 2004 and our growth in the number of
customers we service.
Professional services. In 2005, our professional services expenses (i.e., payments to third parties)
relating to connection and reconnection, grid maintenance crew, security, meter reading,
customer service and wholesale electricity market consultants remained relatively stable in 2005
from that in 2004. Our expenses related to these third-party service providers remained at the
same level in 2005 and 2004 because our costs that increased due to our expanded customer base
and our network were offset by lower legal fees in 2005 and the realization of synergies from
our reorganization and merging completed in 2004.
Management fees. Management fees paid to CPI, Limited in 2005 increased US$0.2 million, or
10.6%, to US$1.9 million compared to US$1.7 million in 2004. This increase in management fees
expense was due to the increase in EBITDA, which is the benchmark used to calculate this fee. See
“Related Party Transactions—Management Agreements.”
US$1.0 million to US$11.9 million in 2005 compared to US$10.9 million in 2004. This increase was
attributable primarily to an increase in our property and equipment base (of US$13.2 million to
US$317.0 million in 2005 from US$303.8 million in 2004), which resulted from the US$19.5 million
capital expenditure program we implemented in 2005 which included US$10.8 million for
expansion of our network (including construction of our Geehan substation), US$3.9 million for
meter installation, US$2.1 million for improvements to the quality of our distribution network,
US$0.9 million for information technologies, US$0.7 million for installation of public lighting and
US$1.1 million for capitalized labor and interest costs.
Administrative and other expenses. Administrative and other expenses for 2005 were
US$7.5 million compared to US$8.2 million in 2004. The decrease of US$0.7 million is primarily
attributable to non-personnel related expenses associated with our reorganization and merging
of our customer service and loss reduction departments in 2004. In 2005, we also increased our
operating efficiencies as evidenced by our ratio of dollar per kWh invoiced, which was 1.46 cents/
kWh in 2005, compared with 1.58 cents/kWh in 2004. The decline in this ratio is the result of both
improved controls over our expenses and an increase in the volume of energy invoiced to our
customers.
Loss on sale of fixed assets. Our loss on sale of fixed assets in 2005 was US$1.0 million compared
to approximately US$57,000 in 2004. This US$0.9 million increase from the prior period related to
our disposal of meter reading equipment received from IRHE, the government-owned electricity
company prior to privatization of the Panamanian electricity industry, which we eliminated in
order to comply with the quality requirements of the ERSP regulations.
47
The following table reflects other income (expense) for the years ended December 31, 2005 and
December 31, 2004:
2005
2004
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 196,350 $ 138,630
(7,639,719) (4,440,820)
Total other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(7,443,369) $(4,302,190)
Interest income. In 2005, our interest income relating to interest received on our treasury
management increased approximately US$57,720 to approximately US$196,350 as compared to
approximately US$138,630 in 2004. Consistent with our policy to mitigate against interest risk,
we place our surplus funds in interest-bearing bank deposits with prime financial institutions in
Panama. In 2005, due to a greater amount deposited into our severance fund for employees as
required by law, as well as amounts in our US$2.5 million reserve account/collateral account
established in connection with our Syndicated Long-Term Loan, we generated the additional
amount of interest income reflected in 2005.
Interest expense. Our interest expense for 2005 was US$7.6 million compared to US$4.4 million
in 2004. The increase of US$3.2 million was primarily related to the costs associated with our
Syndicated Long-Term Loan, which was incurred during the fourth quarter of 2004 to refinance
an earlier credit facility. See “—Indebtedness—Long-Term Indebtedness.” The interest under our
Syndicated Long-Term Loan increased to US$7.0 million in 2005 from US$4.0 million in 2004, due
to the fact that our prior loan was for an aggregate principal amount of US$40.0 million.
Additionally, the interest rate applicable to our interest payments in 2005 increased to 6.8%
under our Syndicated Long-Term Loan, compared to an interest rate of 5.5% applicable to our
earlier loan due to the increase in the LIBOR rate.
Income taxes
Our effective income tax rate was 30.8% in 2005 and 29.1% in 2004. In 2005, our total income
tax expense amounted to US$8.6 million compared to US$8.0 million in 2004. This US$0.6 million
net increase reflects a US$5.9 million decrease in current income tax and a US$6.5 million increase
in deferred income tax. Our income taxes in 2005 were primarily affected by an increase in the
fuel component adjustment of US$15.6 million, which decreased current income tax expense by
US$4.7 million and increased deferred income tax expense by US$4.7 million when compared to
fiscal 2004. See Note 9 to our audited financial statements included elsewhere in this offering
memorandum for additional information related to our current and deferred income taxes.
Net income
As a result of the above, we recorded net income of US$19.2 million, or 6.7% of revenues, in
2005, compared to net income of US$19.6 million, or 9.0% of revenues in 2004.
48
Year ended December 31, 2004 compared to the year ended December 31, 2003
Revenues
The following table depicts revenues for the years ended December 31, 2004 and December 31,
2004
2003
Net energy sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$217,615,046 $204,302,420
7,773,157
7,203,380
$225,388,203 $211,505,800
151,822,767
147,830,142
$ 73,565,436 $ 63,675,658
Net energy sales. Our net energy sales increased to US$217.6 million in 2004 from
US$204.3 million in 2003. This increase was due in part to an increase in the number of customers
we provided electricity to and the larger volume of units of energy invoiced to our customers for
the year ended December 31, 2004, which were 1,800 GWh in 2004, compared to 1,714 GWh in
2003. In 2004, the average number of customers increased by 19,818, or approximately 8.0%, to
266,837 average customers, as compared to 247,019 average customers in 2003 primarily due to
the growth in the Panamanian economy and the expansion of our distribution network. Another
factor for this increase was that the distribution margin, or the VAD component of our tariff, for
the year ended 2004 increased an average of only US$0.34 per MWh, to US$48.52 per MWh,
compared to the VAD in 2003.
reconnection charges, collections from uncollectible accounts and other income, increased in
2004 by approximately US$0.6 million, or approximately 7.9%, to US$7.8 million, as compared to
2003. This increase was due in large part to the increase in wheeling charges we received from
electricity generators and other electricity distributors who use our distribution network to
service their customers, which increased approximately US$0.5 million, or 19.7%, to
US$2.7 million, as compared to 2003, primarily due to increased use by Metro Oeste and other
unregulated customers of our network. In 2004, we also rented out more of our poles, which
generated moderately higher revenues than 2003.
Purchase of energy and transmission charges, net. In 2004, our purchase of energy and
transmission charges, which are net of our fuel component adjustment, increased US$4.0 million,
or 2.7%, to US$151.8 million compared to US$147.8 million in 2003. The increase in purchase of
energy and transmission charges was primarily due to the increase in our energy purchases in
2004 to 2,106 GWh from 2,065 GWh in 2003, which were due to both the expansion of our
distribution network and an increase in customers from the prior period. The average overall cost
of energy in 2004 was US$72.09 per MWh, an increase of 0.7% from US$71.59 per MWh in 2003.
This stability in our average overall cost of energy in 2004 was due to our purchasing 75% of our
energy needs from hydroelectric generators (whose prices are fixed) and only 25% from thermal
electricity generators and in the spot market as compared to our purchases in 2003. In 2003, with
approximately 51% of our contracted electricity coming from thermal electricity generators and
from the spot market, our expenses were greater due to the fact that contracted prices under
these arrangements were higher due to the rise in bunker fuel prices.
49
purchase of energy and transmission charges, increased US$9.9 million, or 15.5%, to
US$73.6 million in 2004 as compared to US$63.7 million in 2003. This increase resulted from more
units of energy invoiced to our customers in 2004 than in 2003, as well as our improved energy
recovery program. In 2004, we reduced our total percentage of energy loss to 13.9%, down from
16.4% in 2003.
Operating expenses
The following table reflects our operating expenses for the years ended December 31, 2004 and
December 31, 2003:
2004
2003
Labor and other personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Severance expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repair and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on sale and disposal of fixed assets . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,115,038 $ 8,510,224
358,756
223,759
524,429
1,561,358
2,237,051
1,833,165
8,506,837
7,751,629
1,756,246
2,012,000
10,909,897
10,182,773
8,180,320
7,937,159
56,989
(73,152)
$41,645,563 $39,938,915
Labor and other personnel. Our labor and other personnel expenses increased approximately
US$0.6 million, or 7.1%, to US$9.1 million in 2004 from US$8.5 million in 2003. The increase in
our labor and other personnel expenses was attributable primarily to an increase in salary
adjustments made in 2004 in order to bring local wages in line with market levels as well as a
slight increase in headcount in 2004.
Severance expenses. In 2004, our severance expenses increased approximately US$0.2 million, or
approximately 60%, to US$0.4 million from US$0.2 million. This increase in severance expenses
was primarily due to a headcount replacement in 2004, which was implemented to improve our
operating quality standards and efficiencies.
Provision for doubtful accounts. Our provision for doubtful accounts for non-payment of
electricity sales decreased approximately US$1.1 million, to US$0.5 million in 2004 from
US$1.6 million in 2003. In 2004, based on the analysis of our delinquent customer portfolio, we
believed that our provision for doubtful accounts was sufficient.
Repair and maintenance. Repair and maintenance expense increased US$0.4 million, or 22.0%,
to US$2.2 million for the year ended December 31, 2004 compared to US$1.8 million for the same
period in 2003. Increases in repair and maintenance expense were primarily due to the expansion
of our distribution network in 2004 from that in 2003 and our growth in the number of
customers we service.
Professional services. In 2004, our professional services expenses related to connection and
reconnection, grid maintenance crew, security, meter reading, customer service and wholesale
50
electricity market consultants increased approximately US$0.8 million, or 9.7%, to US$8.5 million
compared to US$7.8 million in 2003. This increase in 2004 was primarily the result of an increased
use of third-party service providers, an increase in the number of customer inspections to lower
energy losses as well as legal expenses to prosecute fraud cases.
Management fees. Management fees paid to CPI, Limited in 2004 decreased US$0.3 million, or
12.7%, to US$1.7 million compared to US$2.0 million in 2003. This decrease in management fees
was due to our decrease in EBITDA, which is the benchmark used to calculate this fee. See
“Related Party Transactions—Management Agreements.”
US$0.7 million to US$10.9 million in 2004 compared to US$10.2 million in 2003. This increase was
attributable primarily to an increase in our property and equipment base (of US$8.8 million to
US$303.0 million in 2004 from US$295.0 million in 2003), which resulted from the US$17.8 million
capital expenditure program we implemented in 2004 which included US$8.2 million for
expansion of our network, US$3.8 million for meter installation, US$3.5 million for improvements
to the quality of our distribution network, US$0.6 million for information technologies, US$0.7
million for installation of public lighting, US$0.9 million for capitalized labor and interest costs
and US$0.1 million for loss reduction.
Administrative and other expenses. Administrative and other expenses for 2004 were
US$8.2 million compared to US$7.9 million in 2003. The increase of US$0.3 million is primarily
attributable to the US$0.2 million we invested and fees associated with the implementation of
our voluntary enhanced internal controls program.
Loss on sale of fixed assets. Our loss on sale of fixed assets in 2004 was approximately US$57,000
compared to a gain in 2003 of approximately US$73,000. The loss in 2004 was primarily the result
of costs related to the disposition of deteriorating fixed assets.
The following table reflects other income (expense) for the years ended December 31, 2004 and
December 31, 2003:
2004
2003
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 138,630 $
98,656
(4,440,820) (3,886,642)
Total other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(4,302,190) $(3,787,986)
Interest income. In 2004, our interest income relating to interest received on our investments
increased approximately US$40,000 in 2004 to approximately US$140,000 from US$100,000 in
2003. Consistent with our policy to mitigate against interest risk, we place our surplus funds in
interest-bearing bank deposits with prime financial institutions in Panama. In 2004, due to a
greater amount deposited into our severance fund for employees, as well as amounts in our
US$4.3 million reserve account/collateral account as of October 2004, which we later reduced to
US$2.5 million in fiscal 2004 in connection with our Syndicated Long-Term Loan, we generated
the additional amount of interest income reflected in 2004.
51
Interest expense. Our interest expense remained relatively stable in 2004 from that in 2003. At
the end of 2004, we refinanced our prior loan with our Syndicated Long-Term Loan. Debt
issuance costs of US$0.7 million relating to our then existing syndicated long-term loan was
written off in fiscal 2004 due to this refinancing. The interest payments on our earlier loan in
2004 and 2003 were stable during this two-year period.
Income taxes
Our effective income tax rate was 29.1% in 2004 and 30% in 2003. In 2004, our overall income
tax expense amounted to US$8.0 million compared to US$6.0 million in 2003. Our income tax
expense in 2004 was comprised of current income tax of US$8.7 million and a deferred income
tax benefit of US$0.6 million. Our deferred income taxes were primarily associated with the
investment tax credit that represented a benefit of US$2.8 million and the fuel component
adjustment that represented a negative effect of US$2.2 million. See Note 9 to our audited
financial statements included elsewhere in this offering memorandum for additional information
related to our current and deferred income taxes.
Net income
As a result of the above, we recorded net income of US$19.6 million, or 9.0% of revenues, in
2004, compared to net income of US$14.0 million, or 6.5% of revenues in 2003.
Liquidity and capital resources
Our primary source of liquidity are funds generated from operations, and to a lesser extent,
short-term financing lines with prime financial institutions in Panama. Our primary use of cash is
to purchase electricity from electricity generation companies for sale and distribution to our
electricity distribution customers and to invest in fixed assets for our distribution network. We
believe that our sources of liquidity are sufficient to satisfy our requirements.
We intend to use the net proceeds of this offering to repay our current indebtedness
outstanding. See “Use of Proceeds.”
As of March 31, 2006, we had cash and cash equivalents of US$89 thousand and outstanding
aggregate long-term indebtedness of US$93.8 million. As of December 31, 2005, we had cash and
cash equivalents of US$1.5 million and outstanding aggregate long-term indebtedness of
US$100.0 million. As of December 31, 2004, we had cash and cash equivalents of US$6.5 million
and outstanding aggregate indebtedness of US$100.0 million. As of December 31, 2003, we had
cash and cash equivalents of US$1.5 million and outstanding aggregate indebtedness of
US$54.7 million.
We currently have short-term credit facilities with an availability of up to US$50.3 million, which
we recorded an average usage of US$11.8 million in 2003, US$7.7 million in 2004 and
US$11.0 million in 2005. For these three years, our largest aggregate amount outstanding under
these facilities at any one point reached to US$15.0 million in 2005. In the first quarter of 2006,
we had an average usage of US$12.1 million under these short-term credit facilities, and the
largest aggregate amount outstanding under these facilities for this three-month period at any
point did not exceed US$20.0 million.
We paid no dividends in the first quarter of 2006 and US$12.4 in the first quarter of 2005.
52
More detailed information regarding our cash flow is set forth below.
Cash flows
The following table sets forth certain information about our cash flows for the years ended
December 31, 2005, 2004 and 2003 and for the three months ended March 31, 2006 and 2005:
Year Ended
December 31,
(US$ in millions)
2005
Cash flows from operating activities
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash adjustments to net income . . . . . . .
Changes in working capital . . . . . . . . . . . . . . .
2004
2003
$ 19.2 $ 19.6 $ 14.0
4.7
18.7
9.1
7.3
(10.5)
2.6
Three Months Ended
March 31,
2006
2005
(Unaudited) (Unaudited)
$ 3.1
(2.4)
0.3
$ 4.0
4.2
2.5
Net cash provided by operating activities . . . . .
31.2
27.8
25.7
1.0
10.7
Cash flows from investing activities
Acquisition of fixed assets . . . . . . . . . . . . . . . .
Proceeds from sales of fixed assets . . . . . . . . .
Withdrawal from trust fund . . . . . . . . . . . . . . .
(19.5)
0.2
—
(17.8)
0.3
1.8
(16.8)
0.3
(0.7)
(3.4)
0.1
—
(4.1)
0.1
—
Net cash used in investing activities . . . . . . . . . .
(19.3)
(15.7)
(17.2)
(3.3)
(4.1)
Cash flows from financing activities
Net (repayment) issuance of long-term
debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (repayment) issuance of short-term
debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital reduction . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5.0)
55.0
(7.7)
(1.3)
(1.3)
5.0
—
(16.9)
—
(9.7)
(35.5)
(16.3)
(0.6)
—
—
—
(0.6)
2.0
—
0.0
—
1.5
—
(12.4)
—
Net cash used in financing activities . . . . . . . . . .
(16.9)
(7.1)
(8.3)
0.8
(12.2)
$(1.5)
$ (5.5)
Net (decrease) increase in cash
.............
$ (5.0) $ 5.1
$ 0.2
Cash flows provided from operating activities was US$1.0 million for the three months ended
March 31, 2006 compared to US$10.8 million in same period in 2005. Our net income in the first
quarter of 2006 was US$3.1 million, or a US$0.9 million decrease, compared to the same period in
2005. Non-cash adjustments to net income were negative US$2.4 million in the first quarter 2006
compared to the US$4.2 million increase in the same period in 2005. This US$6.6 million decrease
in non-cash adjustments to net income was primarily due to a US$8.4 million deferred cost for
the fuel component adjustment that reflected changes in the cost of fuel in the first quarter of
2006 and an US$1.8 million increase in deferred income taxes that also related to the fuel
component adjustment.
Changes in operating assets and liabilities contributed US$0.3 million to our cash flows from
operating activities for the three months ended March 31, 2006 compared to the US$2.5 million
contributed in the same period of 2005. This US$2.2 million decrease in the amount of operating
assets and liabilities in the first quarter of 2006 was primarily due to a US$4.6 million decrease of
53
net in accounts payable obtained primarily from generation and transmission companies, a
US$0.8 million net increase on income tax payable or prepaid and a US$1.6 million increase in
accounts receivable from customers as a result of our collections on past due accounts.
Cash flows provided from operating activities was US$31.2 million in 2005 compared to US$27.8
million in 2004. Our net income in 2005 was US$19.2 million, or a US$0.4 million decrease,
compared to 2004. Non-cash adjustments to net income were US$4.7 million in 2005 compared to
US$18.7 in 2004. This US$14.1 million decrease in non-cash adjustments to net income was
primarily due to a US$15.6 million increase in the fuel component adjustment, for which a
related US$5.0 million deferred income tax liability was recorded. See Note 2 to our audited
financial statements included elsewhere in this offering memorandum for information related to
the fuel component adjustment.
Changes in operating assets and liabilities contributed US$7.3 million in 2005 to our cash flows
from operating activities compared to a negative impact of US$10.5 million in 2004. This increase
in the amount of operating assets and liabilities in 2005 was primarily due to an increase of
US$17.4 in accounts payable to generation and transmission companies due to increased fuel
prices in our power purchase agreements with thermal electricity generators, higher spot market
prices, consumption growth and new customers added to the distribution network. The increase
in accounts payable was partially offset by both a US$7.2 million increase in accounts receivable
and a US$5.0 million decrease in income taxes payable.
Cash provided from operating activities was US$27.8 million in 2004 compared to US$25.7 million
in 2003. Our net income in 2004 was US$19.6 million, or a US$5.6 million increase, compared to
2003. Non-cash adjustments to net income were US$18.7 million in 2004 compared to US$9.1
million in 2003. The increase in non-cash adjustments to net income in 2004 was primarily due to
the fuel component adjustment, which decreased by US$7.5 million compared to 2003. See Note
2 to our audited financial statements included elsewhere in this offering memorandum for
information related to the fuel component adjustment.
Changes in operating assets and liabilities had a negative impact of US$10.5 million on our cash
flows from operating activities in 2004 compared to a contribution of US2.6 million in 2003. This
decrease in operating assets and liabilities in 2004 was primarily the result of a US$3.8 million
increase in accounts receivable associated with increased customer consumption and growth, a
decrease in prepaid expenses primarily related to the US$0.8 million write-off in debt issuance
costs under our prior syndicated loan, a US$1.2 million increase in materials, supplies and spare
parts inventory, a US$2.9 million decrease in trade accounts payable and other liabilities, a
US$1.3 million decrease in net income tax and a US2.5 million decrease in related company
accounts payable related to fees paid to CPI.
Cash used in investing activities was US$3.3 million for the three months ended March 31, 2006
compared to US$4.1 million in the same period in 2005. This decrease of US$0.8 million was
primarily due to less investment on information technology office automation software of
approximately US$0.4 million and fewer meter reading equipment installations of approximately
US$0.4 million.
54
Cash used in investing activities was US$19.3 million in 2005 compared to US$15.7 million in 2004.
This increase of US$3.6 million was primarily due to the acquisition of fixed assets to
accommodate customer growth, the expansion of our distribution network as part of our capital
expenditure plan and substation construction. See Note 3 to our audited financial statements
included elsewhere in this offering memorandum for additional details related to the acquisition
of property, plant and equipment.
Cash used in investing activities was US$15.7 million in 2004 compared to US$17.2 million in 2003.
The US$1.5 million decrease was primarily the result of US$1.0 million of fixed assets acquisitions
related to our customer growth and the expansion of our distribution network, as well as a
US$1.8 million refund from the trust account under our Syndicated Long-Term Loan, which was
paid upon the refinancing of our prior syndicated loan which had required a greater funding
then our Syndicated Long-Term Loan.
Cash used by financing activities was US$0.8 million for the three months ended March 31, 2006
compared to negative position of US$12.2 million for the same period in 2005. This
US$13.0 million increase was primarily due to a US$12.4 million dividend payment made to the
Panamanian Government in the first quarter of 2005 and our receipt of US$0.5 million under our
short-term credit facilities.
Cash used by financing activities was US$16.9 million in 2005 compared to US$7.1 million in 2004.
The US$ 9.8 million increase in 2005 was primarily due to the US$16.9 million dividend payment
to our shareholders. We also received proceeds of US$5.0 million from the Nova Scotia Credit
Facility and repaid US$5.0 million of long-term debt associated with our Syndicated Long-Term
Loan.
Cash used by financing activities was US$7.1 million in 2004 compared to US$8.3 million in 2003.
The US$2.1 million variance in 2004 was due to the:
• repayment of the old syndicated long-term loan balance of US$45.0 million;
• receipt of US$100.0 million in proceeds from the Syndicated Long-Term Loan;
• net decrease of US$9.7 million in the usage of our short-term credit facilities;
• capital reduction of US$35.5 million to the accumulated value of our common stock;
• payment of US$16.3 million in dividends; and
• and payment of US$0.6 million for the 4% tax payable on undistributed corporate profits as
required by Panamanian law as well as the repurchase of our common stock held by our
current and former employees.
The above-mentioned capital reduction occurred in October 2004, whereby the majority of our
shareholders resolved to reduce the accumulated value of our common stock by US$35.0 million.
Prior to this reduction, the accumulated value of our common stock was US$142.0 million. Our
shareholders considered the US$100.0 million minimum tangible net worth covenant within our
Syndicated Long-Term Loan and decided, based on the equity then outstanding, to leverage our
stockholders’ equity by reducing the share capital to a approximately US$106.6 million.
55
Indebtedness
Our principal sources of liquidity are available cash, cash flows from operations and borrowings
under our (i) Syndicated Long-Term Loan and (ii) revolving credit facilities that we have with
Banco Bilbao Vizcaya Argentaria (Panama), S.A., Citibank, N.A., Bank of Nova Scotia and Banco
General, S.A., which total to an aggregate credit line of US$50.3 million. Our Board of Directors,
in December 2003, limited our ability to use our revolving credit lines up to an aggregate amount
of US$26.4 million, which was an amount set by our Board based on our working capital needs at
that time.
As of March 31, 2006, our total outstanding indebtedness, excluding related party debt with
respect to accounts payable and operational expenses owed to CPI, Limited, was
US$102.2 million, consisting of US$7.0 million of short-term indebtedness, US$5.0 million
representing the current portion of long-term indebtedness, US$88.8 million of long-term
indebtedness and US$1.4 of interest payable on that long-term indebtedness.
Short-term indebtedness
Our short-term indebtedness, including the current portion of long-term indebtedness, increased
to US$12.0 million for the three months ended March 31, 2006 from US$10.0 million as of
December 31, 2005, primarily as a result of the US$2.0 million increased borrowings under our
short-term credit facilities for an aggregate principal amount of US$7.0 million and
US$5.0 million in amortization payments due under the Syndicated Long-Term Loan in the first
quarter of 2006.
We maintain revolving credit lines with prime local banks. We have an aggregate credit line of
US$50.3 million under our four revolving credit facilities. In the three months ended March 31,
2006, our short-term indebtedness totaled US$7.0 million, which consisted of US$2.0 million
under the Citibank Credit Facility and US$5.0 million under the Banco Bilbao Credit Facility. In
January 2006 we increased our Banco Bilbao Credit Facility to US$10.0 million, and in November
2005, we renewed our credit facility with the Bank of Nova Scotia, which allows us to borrow
US$20.0 million. We also maintain a credit line with Banco General, S.A., in the amount of US$7.8
million. As of March 31, 2006, we had no borrowings outstanding with the Bank of Nova Scotia
or with Banco General, S.A. As of March 31, 2006, each of these credit lines applied interest of
LIBOR plus rates ranging between 1.20% and 1.50%, and our borrowings under each these four
credit facilities are unsecured.
We use our short-term credit facilities for the issuance of promissory notes or the issuance,
negotiation and refinancing of letters of credit with a maximum tenor of up to one year. As of
March 31, 2006, we had US$7.0 million in borrowings under our short-term credit facilities and
approximately US$5.0 million in letters of credit to guarantee our payment obligations to ETESA.
Certain of our short-term credit facilities contain customary affirmative and negative covenants
for unsecured credit facilities of this type, including, but not limited to, the provision of financial
statements and compliance certificates, limitations on granting guarantees and the transfer of
our stock.
In addition, certain of our credit facilities require that we meet and maintain certain financial
ratios and tests, including a funded debt to EBITDA ratio of no higher than 3.0 to 1; a debt
service coverage ratio of at least 1.2 to 1; an interest coverage ratio of at least 5 to 1 through the
56
fiscal year ending December 31, 2014; a leverage ratio of at least 1.5 to 1 through December 31,
2013; and a minimum tangible net worth of at least US$100.0 million. The definition of EBITDA
for purposes of our short-term credit facilities’ financial tests is different from our definition of
EBITDA that is used elsewhere in this offering memorandum. There are also limitations, including
a limitation that no dividends may be paid whenever the debt service coverage ratio immediately
preceding the date of the proposed dividends and immediately following the proposed dividend
payment, as estimated by us, is projected to be less than 1.5 to 1, and a limitation that dividends
not be declared or paid more than semi-annually.
Since January 1, 2003, we have been in compliance with all of our financial covenants under our
outstanding indebtedness. Our ability to comply with these covenants and to meet and maintain
such financial ratios and tests may be affected by events beyond our control, such as those
described under “Risk Factors.” If we do not meet and maintain these financial ratios, we may
not be able to borrow and the lenders could accelerate all amounts outstanding to be
immediately due and payable which could also trigger a similar right under other agreements,
including our Syndicated Long-Term Loan.
Certain of our short-term credit facilities contain customary events of default, including, but not
limited to, failure to pay principal, interest or fees, failure to observe any covenant, failure of any
representation or warranty to be true in all material respects when made or deemed made,
defaults under other debt instruments, changes in the regulatory environment that materially
hinder our ability to make payments on time, loss of a permit or license required to do business,
and government seizure of substantially all of our assets.
We believe that both the funds available under our short-term credit facilities, as approved by
our Board of Directors, and the funds generated by our operations will be sufficient to finance
our working capital needs based on current market conditions.
Long-term indebtedness
On October 19, 2004, we entered into our Syndicated Long-Term Loan in an aggregate principal
amount of US$100.0 million. We used part of the proceeds to fully repay the outstanding balance
of our previous syndicated long-term loan agreement.
To guarantee our obligations under our Syndicated Long-Term Loan, we have granted the
lenders a first mortgage for an amount up to US$65.0 million consisting of specified property and
real estate we currently own, as well as future real and personal property we may acquire. The
mortgaged property consists of distribution substations, land, building, vehicles, technology
hardware and other related fixed assets, which, as of March 31, 2006, comprised approximately
10.8% of our total fixed assets, and the mortgaged real estate consists of land and buildings. We
have also granted the lenders a lien on our pending and future receivables. As to the mortgaged
real property, we have entered into a trust agreement assigning to a trustee certain assets
including our reserve cash account, account for payments received, customer accounts receivable,
lessee accounts receivable and our insurance policies. Both the mortgage and the trust
agreement will terminate upon the satisfaction or repayment of all our obligations under our
Syndicated Long-Term Loan as contemplated in connection with the issuance of the Notes.
Borrowings bear interest at base, plus an interest rate equal to sum of the Eurodollar Rate, as
such term is defined in the Syndicated Long-Term Loan, plus 3.5% per annum and, beginning in
the first quarter of fiscal 2005, the Syndicated Long-Term Loan must be repaid in quarterly
57
installments. Voluntary payments of principal amounts outstanding are permitted at any time
upon the giving of proper notice, and no premium or penalty will apply except that payments
made before October 19, 2006 are subject to a prepayment penalty of 1% of the amount of such
prepayment. All prepayments require covering any losses of the lenders.
Our Syndicated Long-Term Loan requires that we meet and maintain certain financial ratios and
tests, including, a funded debt to EBITDA ratio to be no higher than 3.0 to 1; a debt service
coverage ratio to be at least 1.2 to 1; an interest coverage ratio of at least 5 to 1, through the
fiscal year ending December 31, 2014; a leverage ratio to be at least 1.5 to 1 after December 31,
2005 through December 31, 2013; our consolidated tangible net worth must be no less than
US$100.0 million. The definition of EBITDA for purposes of our Syndicated Long-Term Loan’s
financial tests is different from our definition of EBITDA that is used elsewhere in this offering
memorandum. There are also limitations on our ability to pay dividends including, a limitation
that no dividends may be paid whenever the debt service coverage ratio immediately preceding
the date of the proposed dividends and immediately following the proposed dividend payment is
projected to be less than 1.5 to 1; and dividends may not be declared or paid more than
semi-annually.
Our Syndicated Long-Term Loan contains customary events of default, including, but not limited
to, non payment of principal or interest when due, failure to meet certain financial ratios, certain
cross-defaults, violation of other covenants subject to a grace period, failure of any
representation or warranty to be true in all material respects when made or deemed made,
commencement of a bankruptcy or similar proceeding by or on behalf of a credit party,
judgments not discharged or stayed within a grace period; and material adverse changes in our
financial condition.
We will use the proceeds of this offering to repay all outstanding amounts due under our
Syndicated Long-Term Loan and, to the extent there are amounts remaining, our short-term
credit facilities and for general corporate purposes. See “Use of Proceeds.”
Contractual commitments and capital expenditures
Contractual commitments
The following table summarizes significant contractual obligations and commitments as of
December 31, 2005:
Less
than
One
Year
(US$ in millions)
Long-term debt(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management fee(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities(5) . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total contractual obligations . . . . . . . . . . . . . . . . . . . . . . . .
$ 5.0
0.2
0.5
41.1
2.6
7.8
$57.2
Payments Due by Period
More
One to
Three
than
Three to Five
Five
Years
Years
Years
$10.0
0.2
0.0
69.2
0.0
14.6
$94.0
(1) Represents principal indebtedness under our Syndicated Long-Term Loan.
(2) Operating leases related to our vehicle fleet and our information technologies hardware.
58
Total
$20.0 $ 60.0 $ 95.0
0.0
0.0
0.4
0.0
0.0
0.5
31.7
112.7
254.7
0.0
0.0
2.6
12.8
13.3
48.5
$64.5 $186.0 $401.7
(3) Pursuant to the Management Consulting Agreement with CPI, Limited, CPI, Limited receives a management fee of 4% of our
earnings before interest, taxation, depreciation and amortization until 2008, at which time the rate will be negotiated. See
“Related Party Transaction—Management Agreements.”
(4) Represents purchase commitments for electricity capacity pursuant to binding obligations with electricity generators. The
applicable purchase prices for purchases of capacity under our power purchase agreements include “take-or-pay” provisions.
The amount of our obligations above do not include our commitments for energy purchased from these generators, as these
amounts depend on customer consumption as well as the then current fuel price. Due to our ability to pass through energy
costs to our customers, we have consistently met our obligations to pay electricity generators, whether pursuant to our power
purchase agreements or when we purchase electricity in the spot market.
(5) Other long-term obligations include the amount of customer deposits plus accrued interest to be refunded to those
customers with eligible accounts based on good payment records as defined by the ERSP.
(6) Represents estimated interest expense related to our Syndicated Long-Term Loan. These amounts are based on an estimated
LIBOR rate ranging from 4.9% to 5.5% plus a fixed spread of 3.5% per annum.
On a pro forma basis, after giving effect to our proposed offering and the application of
proceeds from our proposed offering, long-term debt obligations would have totaled US$100.0
million, which would have been payable in more than five years. Estimated interest payments on
this long-term debt would have totaled US$107.6 million, US$3.6 million of which would have
been payable in less than one year, US$14.9 million of which would have been payable in one to
three years, US$14.9 million of which would have been payable in three to five years and US$74.2
million of which would have been payable in more than five years. Interest expenses listed above
will be cancelled. All other contractual commitments would have remained the same as shown in
the table above.
Capital expenditures
Capital expenditures are primarily comprised of projects to expand our distribution network to
meet the demand for additional customer connections and reduce energy losses and, to a lesser
extent, distribution network reinforcement projects intended to improve network reliability and
quality of service.
Prior to undertaking any capital expenditures, we model the impact that each proposed capital
expenditure would have on network reliability and quality of service measures and make those
capital expenditures that would most enhance network reliability and quality of service at the
least cost. All our capital expenditures are individually analyzed and assessed and are reviewed
and approved by our controlling shareholder, PDG, prior to being undertaken.
Our capital expenditures for the three months ended March 31, 2006 and March 31, 2005 were
US$3.4 million and US$4.1 million, respectively. Our capital expenditures were US$19.5 million,
US$17.8 million and US$16.8 million for the years ended December 31, 2005, 2004 and 2003,
respectively. Our principal capital expenditures projects during 2003 through 2005 and for the
three months ended March 31, 2006 and 2005 were:
(US$ in millions)
2005
reduction(1)
Loss
.................................
Expansion(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reliability improvements(3) . . . . . . . . . . . . . . . . . . . . . . . .
Safety and public lighting(4) . . . . . . . . . . . . . . . . . . . . . . .
Billing and management systems(5) . . . . . . . . . . . . . . . . .
Meter installation and relocation(6) . . . . . . . . . . . . . . . . .
Capitalized labor and interest . . . . . . . . . . . . . . . . . . . . .
Total Capital Expenditure . . . . . . . . . . . . . . . . . . . . . . . . .
59
Year Ended Three Months Ended
December 31,
March 31,
2004
2003
2006
2005
$ 0.0 $ 0.1 $ 1.0
10.8
8.2
7.4
2.1
3.5
2.5
0.7
0.7
1.1
0.9
0.6
0.4
3.9
3.8
3.5
1.1
0.9
0.9
$19.5 $17.8 $16.8
$ 0.0
2.2
0.1
0.1
0.1
0.6
0.3
$ 3.4
$ 0.0
1.6
0.5
0.2
0.5
1.1
0.2
$ 4.1
(1) Represents projects focused on recovering non-technical energy losses, such as installing special conductors, protecting meters
from tampering, and replacing transformers and cables.
(2) Represents investments associated with the addition of new customers (residential, commercial or industrial) and new
substations.
(3) Represents investments targeted at improving the quality of our distribution network.
(4) Represents installation of new streetlights as consequence of new projects and customers within our concession area and also
includes the replacement of damaged streetlights.
(5) Represents investment in information technologies, such as new hardware and software.
(6) Represents installation of meters for new customers, as well as the relocation of pre-existing meters.
The Concession Contract does not require us to make any specific level of capital expenditures or
investments other than for remedial environmental work and for certain electrification projects.
The remedial work is described in the environmental report by the Panamanian Government’s
consultants, Golder Associates, or Golder. Although not required, a significant proportion of our
capital expenditure program is designed to improve the service quality required under the
Concession Contract and related regulations. Expenditures are also focused on expanding our
distribution grid at a pace that accommodates the increasing customer base.
We have spent US$3.4 million in capital expenditures during the first quarter of 2006 and have
US$15.0 million budgeted for the remainder of 2006 primarily for the expansion of our
distribution network and meter installations and relocations. We have budgeted US$18.3 million
in 2007 for capital expenditures. The capital expenditure budget for 2006 and 2007 includes
approximately US$21.1 million for the expansion of the distribution system, approximately
US$5.3 million for modernization of our distribution system, and approximately US$1.4 million
for upgrades to our information technology systems.
Our business plan calls for capital expenditures of approximately US$18.4 million in each of the
years between 2008 and 2010. The business plan includes more than US$10.7 million in each of
these years for the expansion of our distribution system, US$3.6 million in each year for
renovation of our distribution system and substations, and US$0.2 million in each year for
investments in information systems.
Off-balance sheet arrangements
In the normal course of business, we are a party to certain off-balance sheet arrangements. These
arrangements include guarantees and financial instruments with off-balance sheet risk, such as
bank letters of credit and performance guarantees. No liabilities related to these arrangements
are reflected in our balance sheets, and we do not expect any material adverse effects on our
financial condition, results of operations or cash flows to result from these off-balance sheet
arrangements.
Our Concession Contract requires us to secure our obligations with a US$8.0 million performance
guarantee in favor of the ERSP throughout the term of our concession. We typically secure these
obligations by using yearly renewable performance guarantees, each an off-balance sheet
instrument because they are from third-party providers as required by our Concession Contract
under unsecured reimbursement obligations. The use of performance guarantees is less expensive
for us than the alternative of posting an all cash guarantee. As of March 31, 2006, we had an
outstanding performance guarantee totaling US$8.0 million in favor of the Panamanian
Government to comply with our Concession Contract. Under our power purchase agreements, we
are required to provide an annual performance guarantee equal to the value of our average
monthly consumption at the contracted average overall price. As of March 31, 2006, we had an
60
outstanding performance guarantee totaling US$14.9 million in favor of the generators to
comply with our PPAs. We also use letters of credit to guarantee payments for the transmission
charges to ETESA and to guarantee payment of our regional and spot market energy purchases.
As of March 31, 2006, we had US$5.0 million in letters of credit to guarantee our payment
obligations to ETESA.
Quantitative and qualitative disclosure about market risk
We are exposed to specific risks in the conduct of our business and the business environment in
which we operate. These risks include, or have historically included, exposure to derivative,
liquidity, interest rate, inflation, regulatory tariff reset, and customer credit risks arising in the
normal course of our business. Generally, our overall objective is to ensure that we understand,
measure and monitor these various risks and take appropriate actions to minimize our exposure
to such risks. Our policies for managing each of these risks are described below.
Derivative transactions
It has been our practice not to enter into or trade in derivatives or hedging contracts for
speculative purposes. Since privatization we had never entered into a derivative type of
transaction until the fourth quarter of 2005 when we entered into a hedging arrangement
exclusively as a tool to lock in an interest rate for the issuance of bonds in this offering in order
to minimize our interest rate risk. This “T-Lock” was entered into with Citibank, N.A. for a
120-day period. We renewed this arrangement in April 2006 for another 90-day period.
Liquidity risk
We have adopted liquidity risk management practices that are intended to maintain sufficient
cash and liquid financial assets. We maintain short-term financing lines with prime financial
institutions in Panama that provide us with the required operational flexibility to comply with
our electricity purchase and other obligations. For more information see “—Liquidity and Capital
Resources.”
Because we reinvest our operating funds to support our yearly capital expenditure program, we
do not have significant amounts of cash on a surplus basis for additional investments.
Interest rate risk
In order to minimize the impact of interest rate movements on our cash flows, we have a practice
of negotiating spreads with our preferred banking institutions. Over the past two years, we have
been able to reduce the spreads with respect to our short-term unsecured credit facilities from
1.50% to 1.20%. Historically, we have not used interest rate swaps and similar derivatives to
hedge our exposure to interest rate risks.
The interest rate on our Syndicated Long-Term Loan is a floating Euro Dollar-based three month
interest rate plus a fixed 3.5% spread. The Syndicated Long-Term Loan is our only significant
borrowing with a floating interest rate. It is our policy to invest surplus funds in interest-bearing
bank deposits with prime financial institutions in Panama at overnight rates. We estimate that, if
the average yearly variable interest rate under our Syndicated Long-Term Loan increased by 1.0%
during the year ended December 31, 2005, without hedging this exposure, we would incur an
additional US$1.0 million of interest expense over a one-year period.
61
Regulatory tariff reset risk
Our maximum permitted tariff levels for our distribution and customer service charges, which are
a significant determinant of our operating results, are set by the ERSP, every four years in a
transparent process with participation of the electricity distributors. Our current tariff was
originally scheduled to expire on June 30, 2006 but, as a result of the ERSP’s recent resolution,
will be extended beyond this expiration date. The current VAD tariffs will remain in effect until
December 31, 2006. As a consequence, we expect the new formulas for the VAD tariff reset
period will become effective January 1, 2007 and remain in place for a four-year period. On
June 9, 2006, the ERSP issued Resolution No. AN-065-Elec. announcing its initial proposal for the
permitted pre-tax rate of return to be applied during the next four-year regulatory period and
commencing the public process for interested parties to respond to the proposal before the ERSP
issues its final resolution. Our maximum tariff levels include amounts for operating, maintenance,
administrative and commercial expenses, a standard level of distribution energy losses and a
reasonable return on our invested capital. Each of these costs and rate of return is determined by
the ERSP based on the expenses and returns of comparable companies. If we exceed the ERSP’s
assumptions and our future operations and maintenance expenses and capital expenditures are
lower than the amount included in the tariff charges, we may generate a higher return on our
net fix assets but, if our future cost is higher, then we may generate a lower return on our net fix
assets. Furthermore, if our projected VAD is set at an amount greater than our actual costs for
that VAD tariff reset period, we could be subject to customer credits. See “Overview of the
Panamanian Electricity Industry—Recent Developments.”
We minimize our regulatory risk by working with the Panamanian Government and our
regulators to ensure that the regulatory framework is transparent and allows full cost recovery
and a satisfactory return on our investments to the greatest extent possible. To achieve favorable
regulatory outcomes, we promote efficiency and work closely with our regulator on pricing and
consumer-related issues. We also proactively manage our consumers and seek their feedback on
pricing and services.
We meet regularly with Panamanian Government officials and regulators to share information
with respect to our business. The objective of this close working relationship with the
Panamanian Government is to encourage the adoption of policies that allow us to earn a
reasonable return on invested capital and maintain predictable cash flows. We intend to
continue to work with the ERSP to attain reasonable maximum tariffs for our distribution and
customer service charges upon each regulatory reset of the maximum tariffs.
Customer credit risk
Our customer credit risks are managed in large part by requesting the equivalent of one month’s
invoicing as a security deposit for all new clients. Existing clients with good payment history may
open additional accounts without this security deposit. We have no significant concentration of
credit risk with respect to non-governmental third parties.
Our industrial, commercial and temporary customers generally provide deposits or bank
guarantees equivalent to one month of estimated service cost in order to connect to electricity
services. These deposits or guarantees can be offset against past due accounts for this group of
customers. Government past due accounts vary depending on the budget approval processes of
each government entity. These accounts tend to be paid after the initial due date, usually due to
procedural complications within the government’s account payable process. We collect interest
62
during these payment delays. However, once these budgets are approved and the process is
completed, we are generally able to collect all past due government receivables. In 2005,
approximately 12.2% of our net energy sales were to government customers and such customers
represented 16.5%, or US$5.7 million, of our account receivables. As of March 31, 2006,
approximately 11.6% of our net energy sales were to government customers and such customers
represented 20.7%, or US$8.0 million, of our account receivables.
The 1997 Electricity Law permits electricity distribution companies to terminate service to any
customer whose bill is not paid within 60 days after invoicing. Our policy is to actively contact
commercial, institutional and industrial clients whose bills are past due. If no satisfactory
arrangement can be made, service is suspended until payment or satisfactory arrangements are
obtained. We routinely order cut-offs for our smaller clients after they have been given a
termination notice in a subsequent invoice, a letter of notification, a phone call or any other
means of notification available to us to inform them of their pending termination of service.
The majority of cut-offs are reconnected after the customer pays the past due bill or signs a
financing agreement. The 1997 Electricity Law permits electricity distribution companies to
charge interest on outstanding amounts starting 30 days after invoicing. We currently charge a
regulated interest rate based upon the average rate available in local banks. We restore service
upon payment of the amount and interest expense due, with a reconnection charge being added
to the next invoice. Regular monitoring of accounts receivable and daily service cuts are used to
limit the risk of continuing service to non-paying clients.
Foreign currency risk
Our audited financial statements are expressed in U.S. dollars. Our revenues and borrowings and
other obligations are denominated in U.S. dollars. We do not face any foreign currency risk due
to the adoption of the U.S. dollar as legal tender in and the functional currency of Panama and
the use by us of the U.S. dollar in all of our operations and transactions. We do not use foreign
currency swaps to hedge against foreign currency risks.
Inflation risk
Inflation in Panama is measured by the CPI, which is computed by the National Bureau of
Statistics and Census (Direccíon General de Estadistica y Censos) a specialized unit within the
Comptroller General office, using a standard basket of goods and services. The basket uses the
December 1992 price level as the basis for determining the CPI and is affected by the prices of
food staples (fruits and vegetables, basic grains such as corn, rice and beans and others), which
comprise 31.8% of the total weight of the basket.
The following table sets forth the rate of inflation in Panama as measured by the CPI for the
periods presented.
Inflation
For the year ended
December 31,
2003
2004
2005
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.0%
0.5%
We believe that these levels of inflation do not materially affect our results of operations or
financial position.
63
3.3%
Business
Overview
volume distributed, number of customers and area served. We hold an exclusive concession under
a concession contract with the Panamanian Government, or the Concession Contract to operate
the electricity distribution network in the northern and eastern part of Panama, including the
eastern part of Panama City, the port city of Colón and the Gulf of Panama. As of March 31,
2006, our operations covered a territory of approximately 29,200 square kilometers that included
approximately 1.3 million inhabitants, or 41% of Panama’s total population including three of
Panama’s main economic centers. As of the same date, we had a market share of approximately
43% of the customers and approximately 40% of total energy sales in Panama. In 2005, we had
total energy sales of 1,916 GWh to an average of 288,321 customers. Of our 2005 customers,
approximately 92.2% were residential customers, 7.1% were commercial and industrial customers
and substantially all of the remaining were government customers. Of our total 2005 energy
sales (1,916 GWh), approximately 34.9% of our sales were to residential customers,
approximately 50.1% were to commercial and industrial customers and approximately 14.8%
were to government customers. For the three months ended March 31, 2006, we had total
energy sales of 485 GWh to an average of 299,233 customers. As of March 31, 2006,
approximately 92.2% of our customers were residential customers, 7.0% were commercial and
industrial customers and substantially all of the remaining were government customers. For the
three months ended March 31, 2006, approximately 34.0% of our 485 GWh gross energy sales
were to residential customers, approximately 52.0% were to commercial and industrial customers
and approximately 14.0% were to government customers.
As of December 31, 2005, our electricity distribution network was comprised of approximately
7,212 kilometers of distribution and transmission lines, twelve key substations, approximately
19,000 transformers and related equipment. We own 7,212 kilometers of distribution lines, which
are composed of approximately 7,030 kilometers of overhead cable circuits and 182 kilometers of
underground cable circuits. Our service territory is relatively dense with twelve key substations
and a load factor, which is the ratio of average load to peak load, of approximately 74%,
reflecting a good balance between residential load profile and the daytime air conditioning and
lighting requirements of the commercial sector.
As of December 31, 2005 and March 31, 2006, we had, respectively, a peak demand of
345.24 MW and 342.38 MW, revenues of US$272.5 million and US$71.2 million and earnings
before interest, taxation, depreciation and amortization, or EBITDA, of US$47.3 million and
US$9.5 million.
We have achieved significant operational improvements and productivity gains since our
privatization in 1998 through the implementation of improved industry best practices and our
capital investment of over US$151.2 million in our facilities and systems, US$57.5 million of which
was made from January 2003 through March 2006. Our investments were mainly concentrated in
modernizing and optimizing our distribution network and improving our information technology
and billing and collection systems.
64
Our business strategy
Overall, we seek to maintain strong cash flow generation and profitability by ensuring highly
efficient operations, increasing service quality and improving customer satisfaction. Key elements
of our strategy include:
Providing our customers with affordable, high-quality service. Electricity distribution companies
in Panama are monitored by the ERSP to assure compliance with concession contracts based on
service quality parameters such as the frequency and duration of service interruptions and
customer satisfaction. We monitor compliance with, and meet or exceed, the established
regulatory benchmarks for network reliability and quality of service. To continue improving our
service quality and customer satisfaction levels, we plan to expand current systems to enhance
remote monitoring of our network performance, improve customer relationships through our
call center operations, improve responsiveness to customers’ demands and inquiries, and enhance
preventive maintenance efforts to reduce risks and electricity failures.
Cost-effectively operating and maintaining our distribution network. Since December 1999,
employee productivity has increased from 255 customers to 526 customers per employee, and our
energy sales per employee have also increased from 2,092 MWh per employee to 3,398 MWh per
employee through December 2005. As of March 31, 2006, the number of customers per employee
has increased to 549 and, for the three months ended March 31, 2006, the energy sales per
employee were 883 MWh. We intend to continue maintaining high levels of operating
efficiencies by improving employee productivity through additional training, process
improvement, further upgrading and automating our operations and information systems and
improving our billing and collection processes. In total, we have invested over US$151.2 million in
our facilities and systems since our privatization in 1998, US$57.5 million of which was made from
January 2003 through March 2006.
Training and developing our team. We believe that enhanced employee technical training not
only improves employee skills and the efficiency of our maintenance and repair crews, but also
supports our philosophy of promoting and providing an accident-free environment for our
employees, contractors and customers, and the public at large. We have developed, and intend
to continue to develop, training programs for our employees in a variety of areas including
vehicular safety, electric utility operations and repairs, customer service, and administrative and
financial expertise.
Making strategic and precise capital expenditures. We closely coordinate and evaluate all
proposed capital expenditures across our operations in order to allocate available resources for
projects associated with service expansion, specific improvement and line extension projects, and
enhancements of the reliability and quality of service. We also consider on an ongoing basis,
specific improvement and line extension projects. Prior to undertaking any capital expenditure,
we model the impact of each proposed capital expenditure and only make those expenditures
that we believe will most enhance network reliability and quality of service while maintaining
costs within our budget. The potential improvement in network reliability and quality of service
that results from each capital expenditure is also modeled and analyzed to improve capital
performance throughout our distribution networks.
Keeping electricity losses at or below current low levels. Our loss reduction program has
resulted in a decrease of total electricity losses from approximately 24% in 1998 to approximately
12.5% in 2005. Since the privatization in 1998, we have converted approximately 101,000 illegal
connections into regulated customers, approximately 80,500 of which were converted from
65
January 2003 through March 2006. Even though the cost associated with electricity loss is part of
our electricity distribution cost, only a standard electricity loss level is recognized as a
pass-through to our customers. We intend to improve upon our current levels of electricity losses
by continuously updating our distribution network, performing regular targeted inspections and
meter replacements, strengthening our internal meter reading and billing processes, and
developing a strong corporate communications program directed at users with illegal
connections so that losses can be lowered and revenues increased by converting such users into
regulated customers.
Insulating our customers from fluctuations in the cost of electricity through an actively managed
power purchase program. In accordance with Law No. 6 dated February 3, 1997, or the 1997
Electricity Law, we are required to enter into power purchase agreements with electricity
generators to cover the demands of our regulated customers. In order to mitigate the volatility
of these agreements (and limit any associated energy costs), we have developed a comprehensive
purchasing program that anticipates possible electricity capacity problems over the next several
years, higher energy costs such as the limited generating capacity to cover increasing demand,
the availability of hydroelectric and efficient thermal generating plants and the expected
availability of water to power hydroelectric plants. Our power purchasing program, which favors
medium and long-term power supply arrangements with electricity generators, supports existing
electricity distributors to develop additional capacity and encourages new generators to enter
into the market in order to meet our projected electricity needs.
Competitive strengths
We believe we owe our success in growing and developing our business to our competitive
strengths. The combined effect of these competitive strengths have resulted in predictable cash
flows from year to year and strong operating results.
Disciplined, forward-looking strategy. Our strategy is focused on providing our customers with
affordable, high-quality service, cost-effectively operating and maintaining our installations,
keeping electricity losses at or below current low levels, training and developing our team,
protecting our customers from fluctuations in the cost of electricity through an actively managed
power purchase program, and making strategic and precise capital expenditures.
Established and transparent regulatory regime with incentives for efficiency gains. The 1997
Electricity Law created a market-oriented framework for the country’s electricity distributors,
which allows us to retain the financial benefits derived from efficiency gains during each
four-year regulatory period. The VAD portion of our tariffs relating to our permitted rate of
return is subject to maximum amounts set every four years by the ERSP in consultation with us
and based on our future operating and capital expenditures as estimated by the ERSP. Under the
1997 Electricity Law, we are able to pass through to our customers the cost of electricity and
capacity we purchase from electricity generators. Additionally, we are allowed to retain the
benefit from operating and capital efficiencies, which provides incentives to earn higher returns
through efficient operating and capital expenditures.
Attractive service area and strong market position. Our service area encompasses some of the
most densely populated and economically active regions in Panama, including a significant
portion of Panama City, the Canal Area and the port city of Colón, three of Panama’s main
economic centers. As of March 31, 2006, our operations covered a territory of approximately
29,200 square kilometers that included close to 41% of Panama’s population and represented
approximately 40% of all energy sales in Panama.
66
Stable economic environment. Panama has experienced low inflation and strong growth in its
Gross Domestic Product, or GDP, averaging approximately 6.1% per year since 2003 with the GDP
in 2005 reaching 6.4%. As a result of the combined effect of reducing our technical and
non-technical losses of electricity and Panama’s growing GDP, our sales have increased from
1,714 GWh in 2003 to 1,916 GWh in 2005. Expectations are that Panama’s GDP growth and
inflation rates will continue at these approximate levels during 2006. In addition, Panama’s
monetary system recognizes the U.S. dollar as legal tender, which eliminates foreign exchange
controls and foreign exchange risks.
Controlling shareholder assistance and experienced management team. Our controlling
shareholder is indirectly owned by AEI. AEI, through CPI, Limited, provides management and
technical expertise and assistance to us. In addition, our management team includes executives
with extensive experience in electricity distribution, the wholesale energy market, electricity
industry regulation and the business sector in Panama. See “Related Party Transactions—
Management Agreements.”
History and background
In connection with the process of privatizing the Panamanian electricity sector, we were
incorporated on January 22, 1998 and, through a Sale and Purchase Agreement (Contrato de
Compraventa de Acciones) dated October 30, 1998, 51% of our common stock was sold to the
Panama Distribution Group, S.A., or PDG with the remaining 49% retained by the Panamanian
Government.
PDG was and remains a holding company incorporated in Panama. At the time of the sale,
Constellation Power International Investments, Ltd., or CPII, a Cayman Islands exempted company
with limited liability, owned 80% of the outstanding shares of common stock of PDG and Primer
Grupo Energético, a Panamanian company, owned the remaining outstanding shares. In
September 2005, CPII purchased Primer Grupo Energético’s minority interest in PDG, and CPII’s
parent, Constellation Power, Inc., sold its 100% interest in CPII to certain investment funds
managed by Ashmore Investment Management Limited, or Ashmore. This resulted in these funds
owning, through their ownership of CPII, all of the outstanding shares of the common stock of
PDG. At the time of this sale, CPII underwent a name change and is now known as CPI, Limited.
At present, 51% of our common stock is owned by PDG, 48.25% is owned by the Panamanian
Government, and the remaining amount is owned by employees or held as treasury stock. The
shares of our common stock held in treasury are shares that were originally sold to our
employees, which we have since repurchased at their fair value.
As part of a corporate restructuring at the Ashmore level, the investment funds that own CPI,
Limited and that are managed by Ashmore contributed their collective ownership of CPI, Limited
to Ashmore Energy International LLC, or AEI Delaware, a Delaware limited liability company and
a wholly-owned subsidiary of Ashmore Energy International Limited, or AEI, a Cayman Islands
exempted company with limited liability. In exchange for their contribution, these funds have
been issued shares in AEI. These investment funds are the controlling shareholders of AEI, which
now owns 100% of PDG, through AEI’s indirect ownership of CPI, Limited. See “Principal
Shareholders.”
Pursuant to a Management Consulting Agreement dated November 16, 1998, as amended (the
“Management Consulting Agreement”), CPI, Limited provides us with management and
67
consulting services, including, but not limited to, strategic and operating advice, the preparation
of an annual business plan, business development and contract review. Under the Management
Consulting Agreement, CPI, Limited is entitled to a management fee of 4% of our earnings
before interest, taxation, depreciation and amortization. See “Related Party Transactions—
Management Agreements.”
Our business
General
Our business consists of the distribution of electricity in Panama to regulated and unregulated
customers within our concession area. Regulated customers purchase their electricity through our
distribution network and pay a regulated tariff to us. Unregulated customers purchase their
electricity directly through electricity generators and pay only a regulated distribution charge to
us. The electricity that we distribute is generated by unrelated third party electricity generation
companies and transmitted to us by ETESA, a government-owned transmission company. Our
electricity distribution network serves Panamanian industrial, commercial and residential
customers in our concession area.
We are the second largest distributor of electricity in Panama in terms of electricity volume
distributed, number of customers, and area served. In 2005, we distributed 1,916 GWh of
electricity to our customers, representing approximately 40% of the total electricity distributed in
Panama during the year. As of March 31, 2006, we provided electricity distribution services to
approximately 43% of the total electricity distribution customers in Panama. In 2005, we
distributed electricity to an average of 288,321 Panamanian customers consisting of regulated
and large users and, during the first three months of 2006 we distributed electricity to an
average of 299,223 customers. Our service area covers 29,200 square kilometers, comprising 39%
of the geographic area of Panama.
Our distribution network is comprised of network control centers, poles, distribution cables
(overhead or underground), distribution substations and switching equipment, distribution
transformers, meters, and interconnections with ETESA transmission network. As of December 31,
2005, our distribution network included facilities comprising 7,212 kilometers of distribution
lines, twelve key substations and 1,244 MVA of transforming capacity.
The table below provides a summary of our operational information for the periods and as of the
dates indicated:
Three Months
Ended March 31,
2006
Energy Purchases (GWh)(1) . . . . . . . . . . . . . . . . . . . . .
Energy Sales (GWh)(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Employees(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average number of customers(2) . . . . . . . . . . . . . . . .
Customers at end of period . . . . . . . . . . . . . . . . . . . .
Customers/Employee(2) . . . . . . . . . . . . . . . . . . . . . . . . .
Sales (MWh)/Employee(1) . . . . . . . . . . . . . . . . . . . . . . .
Energy losses (%)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Represents the number as of the date indicated.
(2) Represents the average for the period ended as of the date indicated.
68
2005
2004
2003
570
2,277
2,193
2,135
485
1,916
1,800
1,714
549
564
568
563
299,223 288,321 266,837 247,019
301,316 296,681 276,560 255,960
549
526
487
455
883
3,398
3,168
3,044
12.0
12.5
13.9
16.4
Our concession
Our distribution operations are governed by our Concession Contract with the ERSP. Pursuant to
this contract, we have a defined concession zone in Panama and have exclusive rights to provide
electricity distribution services to regulated and unregulated customers within this area. With the
exception of certain sections along the border of Empresa de Distribución Eléctrica Metro Oeste,
S.A.’s concession area and our concession area in Panama City and the Panama Canal area, our
concession zone extends 500 meters to 3 kilometers from our existing distribution network and
from any new lines under construction. Apart from the Panama Canal Authority, only we have
the right to build or operate electricity distribution lines within the concession area, although the
Concession Contract also authorizes Metro Oeste (Union Fenosa from Spain) to operate certain
high-tension lines serving its concession zone, which pass through ours. The Panama Canal
Authority only distributes electricity to canal operations and does not distribute to any other
customers.
Pursuant to terms of the Concession Contract, we are obligated to provide electricity distribution
service to any end user within 100 meters of our existing network at our fixed connection tariffs
with no contribution from the end user. Those end users located farther than 100 meters from
our existing network that seek electricity distribution service may be required to cover the
additional connection costs. Within the limits of our concession area there, is an additional “zone
of influence,” that extends between 5 and 10 kilometers beyond the concession zone, within
which we have certain preferential rights with respect to new electrification projects in rural
areas where, without government subsidies, distribution projects would not be developed. When
new electrification projects arise outside our concession zone, the right to provide service is
awarded through a competitive bid process by the ERSP. In the case of rural electrification
projects supported by subsidies from the Office for Rural Electrification, the distributor with the
closest network is given the initial opportunity to provide service where such service can be
achieved at the lowest price through the extension and development of an existing network.
Otherwise, when no subsidies are provided, such projects are awarded through a competitive bid
process. Since the privatization in 1998, we have connected 14 communities to our distribution
network for a total of 912 customers and received a total subsidy of US$770,000.
Our concession has a 15-year term and expires in October 2013. One year prior to the expiration
of the concession period, the ERSP will hold an open competitive tender offer for the sale of the
51% of our shares currently owned by PDG. PDG has the right to set the asking price for the
shares it owns (to reflect, among other things, capital improvements made during the
concession), by making its own bid, and will only be required to sell its shares if a higher offer is
made, in which case PDG will be entitled to retain the sale proceeds. If no higher offer is made,
PDG will retain the concession for another 15-year term, subject to the same renewal procedure
thereafter with no requirement to make any payment to the Panamanian Government. PDG does
not have the ability to match a subsequent bid if a higher offer is submitted by another party.
The Concession Contract requires that we abide by service obligations contained in Article 90 of
the 1997 Electricity Law, such as maintaining and monitoring the quality of supply, installing and
maintaining equipment for public lighting, allowing third-party access to our distribution lines,
promoting energy efficiency, complying with all applicable standards, legislation and regulations,
and submitting annual compliance, technical and financial reports to the ERSP. In addition, we
maintain an annually renewable US$8.0 million performance guarantee with the ERSP
throughout the concession period. We are also required to give the ERSP notice of certain
69
outages, our emergency action plan, and verification of our compliance with the ERSP’s metering
standards. The Concession Contract requires us to comply with Panamanian environmental
regulations, take the necessary measures for effective environmental monitoring, and comply
with the findings of the Golder environmental report prepared as part of the privatization
process.
The Concession Contract permits us to grant a lien over the concession with the ERSP’s and our
majority shareholders’ prior consent. We have not granted and do not plan on granting such a
lien over our Concession Contract. We are also permitted to suspend service to regulated
customers whose unpaid bills are more than 60 days old or who have committed fraud by
stealing electricity through illegal connections or otherwise.
The Panamanian Government retains the right to rescind the concession in case of war, grave civil
unrest, or other urgent public interest. In these circumstances, it will follow the expropriation
procedures of the Judicial Code and pay our shareholders compensation at a 10% premium of its
market value as agreed between the parties, determined by independent experts or set by
arbitration. The ERSP can terminate the concession if we declare bankruptcy, enter into a general
assignment for the benefit of our creditors, suspend payments, go into liquidation, or in the
event of repeated, material breaches of legal obligations governing public electricity distribution
or if the terms of the concession are not remedied within 150 days after notice from the ERSP. In
the event of termination, our shareholders are entitled to receive compensation at a discount of
10% to the market value as determined above.
Following the recent developments regarding the Energy Commission, the Commerce
Commission and the ERSP, we have not received any information to indicate that any such
recommendations or actions will directly affect our concession or any of our existing contracts
relating to the operation of our electricity distribution business. In addition, we believe that if
any additional changes are made to the regulatory structure or operation of the electricity
industry, they would likely be made effective only after notice to and consultation with the
participants in the electricity sector.
70
Concession area
Our concession area lies within an area of approximately 29,200 square kilometers that covers
approximately 39% of Panama’s territory and includes approximately 1.3 million inhabitants, or
41% of its total population. The area includes the eastern side of Panama City (including El
Dorado, Santa María, Río Abajo, Parque Lefevre, Panamá Viejo, Chanis, Costa del Este, Tocumen,
Chepo and parts of Betania), the province of Colón, and the isolated distribution systems serving
Darién, San Blas and the Gulf of Panama (including the resort islands of Contadora and Taboga).
Approximately 58% of the population of Panama City lives within our concession area. The
following map illustrates the location of the concession area within Panama.
71
For commercial purposes, our concession area is divided into 12 districts. Details with respect to
number of customers and energy sales for the three months ended March 31, 2006 and the year
ended December 31, 2005 are set forth below:
Three Months Ended March 31, 2006
Year Ended December 31, 2005
Total Customers
Unit Sales Total Customers
Unit Sales
Average
% Average
% Average
%
MWh
%
District
Panamá . . . . . . . . . . . . . . . . .
San Miguelito . . . . . . . . . . . .
Colón . . . . . . . . . . . . . . . . . . .
Chepo . . . . . . . . . . . . . . . . . .
Portobelo . . . . . . . . . . . . . . .
Chagres . . . . . . . . . . . . . . . . .
Santa Isabel . . . . . . . . . . . . . .
Donoso . . . . . . . . . . . . . . . . .
161,651
73,522
46,062
6,620
2,086
971
807
334
54.0
24.6
15.4
2.2
0.7
0.3
0.3
0.1
228,174
85,029
89,317
5,847
1,378
525
290
99
59.4 154,374
17.5 71,280
18.4 45,335
1.2
6,091
0.3
1,986
0.1
989
0.1
815
0.0
304
53.5 1,122,248
24.7
352,533
15.7
352,193
2.1
22,054
0.7
5,273
0.3
2,176
0.3
1,161
0.1
385
58.6
18.4
18.4
1.1
0.3
0.1
0.1
0.0
Sub-Total . . . . . . . . . . . . . . . .
292,053
97.6
470,659
97.1 281,174
97.5 1,858,023
97.0
7,170
—
2.4
—
4,618
9,644
Systems(1)
Isolated
........
Public Lighting(2) . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . .
299,223 100.0
1.0
1.9
7,147
—
2.5
—
19,391
38,888
1.0
2.0
484,921 100.0 288,321 100.0 1,916,302 100.0
(1) Isolated systems service those customers who are not connected to the National Interconnected System for the transmission
and distribution of electricity. The isolated systems include data for Taboga, Balboa, Pinogana, Chepigana and San Blas. All
are districts in our concession area except for San Blas.
(2) Public lighting represents the provision of electricity to the public lighting within our concession area.
Distribution network
Distribution cables. Our distribution network comprises approximately 7,212 kilometers of high,
medium and low tension lines distributed in overhead and underground lines with 1,249 MVA of
transforming capacity, of which 590 MVA is provided by three-phase transformers and 659 MVA
by pole-mounted single-phase transformers. The standard primary voltage is 13.2 kV, especially in
the more densely populated areas of our concession zone. In the northern part of our concession
area, in particular the reverted areas around Colón, the distribution voltages are 12 kV, 4.16 kV
and 2.4 kV. The isolated systems in which we distribute electricity also have a limited amount of
three-phase and single-phase 34.5 kV (i.e., 19.92 kV) lines. Our electricity distribution cables are
comprised of copper, aluminum or steel cored aluminum conductors supported by poles (wood,
steel and concrete). Our distribution cables, as of December 31, 2005, were segmented into
approximately 131 circuits, which are further segmented into 1,813 sections. Segmentation of our
distribution networks into greater numbers of circuits and sections results in enhanced network
stability by containing the scope of any service outages to small portions of a network.
In addition, our network includes 53.7 kilometers of aerial 115 kV transmission lines, both single
and double circuit, and 11.4 kilometers of underground transmission lines feeding the
substations in Panama City. The 115 kV lines include a 15 kilometer link between ETESA’s Panama
II substation and our Cerro Viento substation which is used by electricity generators to supply
energy to customers outside of our concession area, for which we receive wheeling charge fees.
In addition, we own 8.1 kilometers of 44 kV line connecting our France Field substation with our
Mount Hope Colón substation. We also own 10.7 kilometers of 44 kV lines from our Bahía Las
Minas substation to support the ring formed by the Mount Hope and Colón substations. These
lines were shortened by 24.6 kilometers in 2004.
72
The table below provides a summary of the aggregate cable circuit length in kilometers of our
distribution cables by nature of line as of October 31, 1998 and December 31, 2005:
Line
October 31, 1998
Overhead Underground
December 31, 2005
Overhead Underground
115kV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44 kV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34.5/19.9kV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.8kV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
<13.8kV-2.4kV . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Up to 600V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.4
12.9
94.8
1,345.4
878.9
1,945.8
—
—
—
18.0
39.6
—
53.7
18.5
192.5
2,655.0
59.8
4,050.8
11.4
0.3
—
55.8
4.6
109.5
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,301.2
57.6
7,030.3
181.6
Distribution substations. Substations are facilities that step down electricity voltage between
transmission lines and distribution lines or among distribution lines. At distribution substations,
various circuits of an electricity distribution network are grouped together by high voltage
switching equipment. In the event of a network fault, this switching equipment automatically
disconnects transmission or distribution equipment in order to isolate and minimize damage to
network assets. The high voltage switchgear found at substations also permits the division of an
electricity distribution network into smaller sections, enabling maintenance to be carried out or
supply to be restored locally following a fault. As of December 31, 2005, our distribution network
included a total of twelve key substations.
Our electricity load is served from ETESA’s transmission system with three 115 kV substations. In
Panama City, the Panama and Panama II substations serve our distribution substations Cerro
Viento, Santa María, Monte Oscuro, Tocumen, Chilibre and Calzada Larga. On the northern side
of the concession area, our distribution substations at Bahía Las Minas, France Field, Colón and
Mount Hope are served from the Bahía Las Minas generator substations No. 1 and No. 2, the
connecting point for the larger thermal generating capacity located in the Atlantic Port City of
Colón. Our newly inaugurated Geehan substation is served from the Pedregal Power generating
facility. We are now developing several new distribution lines to satisfy an increasing demand for
power and a new 115/13.8 kV substation, the Tinajitas substation, in the San Miguelito area, that
will to accommodate five new 13.8 kV feeders, which became operational in the second quarter
of 2006.
Interconnections with ETESA’s transmission network. The transmission network operated by
ETESA interconnects to our distribution network at a total of four interconnection points
operating at various voltages.
73
The table below indicates the level of our energy off-takes by our 12 key distribution substations
for the three months ended March 31, 2006 and year ended December 31, 2005.
Substation
Three Months Ended March 31, 2006
Energy
% of Total
Off-Take (GWh)(1)
Off-Take
2005
Energy % of Total
Off-Take (GWh)(1)
Off-Take
Santa María . . . . . . . . . . . . . . . . . .
Cerro Viento . . . . . . . . . . . . . . . . .
Monte Oscuro . . . . . . . . . . . . . . . .
Tocumen . . . . . . . . . . . . . . . . . . . .
France Field . . . . . . . . . . . . . . . . . .
Chilibre . . . . . . . . . . . . . . . . . . . . . .
Colón . . . . . . . . . . . . . . . . . . . . . . .
Bahía Las Minas . . . . . . . . . . . . . .
Mount Hope . . . . . . . . . . . . . . . . .
Calzada Larga . . . . . . . . . . . . . . . .
Bayano . . . . . . . . . . . . . . . . . . . . . .
Geehan . . . . . . . . . . . . . . . . . . . . . .
112
102
80
55
78
71
0
31
0
09
1
18
20.4
18.6
14.6
10.0
14.3
13.0
0.0
5.6
0.0
0.0
0.1
3.4
458
413
329
284
326
252
0
102
0
0
3
8
21.1
19.0
15.1
13.1
15.0
11.6
0.0
4.6
0.0
0.0
0.1
0.4
Total . . . . . . . . . . . . . . . . . . . . . . . .
547
100.0
2,174
100.0
(1) Energy off-take amounts do not include transmission losses, isolated systems-service B.
Distribution transformers. A transformer is a device used to change electrical voltage level from
one to another to suit customers’ requested supply voltage. As of December 31, 2005, our
distribution network included approximately 19,000 transformers, primarily ranging from 1 kVA
to 2,500 kVA with a total of 1,249 MVA.
Meters. We own and maintain all of the meters used to measure the amount of electricity
consumed by our consumers. These meters are located at customers’ premises and are read
manually by our employees or by our contractors. As of March 31, 2006, we had more than
300,000 meters in place across our distribution networks. Most of our meters within our network
are electromechanical and some are digital. For larger customers, our meters take measurements
of capacity (kW), reactive power (kVAr) and energy consumption (kWh). In December 2004, our
meter shop obtained the formal certification ISO 9001-2000.
Public lighting. In addition to servicing the regulated and unregulated customers, we are
responsible for installing and operating all public lighting (alumbrado público) within our
concession area. Since the privatization of the electricity industry, public lighting has increased by
approximately 23,750 new units and we have replaced 19,709 streetlights for a total of 43,459
units installed as of March 31, 2006. From January 2003 through March 2006, we have installed
12,693 new units and replaced 9,694 streetlights for a total of 22,387 units. We will continue to
expand and upgrade public lighting on a gradual basis to meet and exceed the illumination
standards established by ERSP’s public lighting regulations. As of December 31, 2005, we were in
compliance with the ERSP’s requirements with respect to the number of new streetlights which
had to be installed by that date. We have fully complied with the ERSP requirements to install
and renovate streetlights within our concession area by April 2006.
Customer categories
As of December 31, 2005, our energy sales were 1,916 GWh, 6.5% higher than those of last year
and equivalent to approximately 40% of the total energy sales in Panama. During 2005, we had
74
an average of 288,321 customers consisting of regulated customers and large users, an 8.0%
increase over the previous year and representing approximately 41% of the Panamanian market.
During the first three months of 2006, we had an average number of 299,223 customers.
Regulated customer categories. Our regulated customer base is divided into four categories:
residential, commercial (i.e., retailers), industrial (i.e., plants and manufacturing facilities) and
government. Government agencies, such as municipalities and the Panamanian Government, as
well as public water plants and public lighting, are included in the “government” category. As of
March 31, 2006, regulated customers represented 100% of our total first quarter electricity sales,
and no single customer represented more than 10.0% of our business. The following table sets
forth the average number of our regulated consumers by category for the periods indicated.
Three
Months
Ended
March 31,
2006
Year Ended
December 31,
2005
Year Ended
December 31,
2004
Year Ended
December 31,
2003
Residential . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . .
Government . . . . . . . . . . . . . . .
276,142
20,827
196
2,058
265,963
20,149
204
2,005
245,799
18,911
205
1,923
227,039
17,918
212
1,850
8.2
6.0
(1.9)
4.1
Total . . . . . . . . . . . . . . . . . . . . . .
299,223
288,321
266,837
247,019
8.0
Customer Type
2003-2005
Average
Annual
Growth (%)
The following table sets forth the aggregate electricity sales to our regulated customers by
category for the periods indicated.
Three
Months
Ended
March 31,
2006
Year Ended
December 31,
2005
Year Ended
December 31,
2004
(GWh)
Year Ended
December 31,
2003
2003-2005
Average
Annual
Growth (%)
Residential . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . .
Government . . . . . . . . . . . . . . .
Public lighting . . . . . . . . . . . . . .
Internal consumption . . . . . . .
165
193
59
57
10
1
668
754
206
245
39
4
632
702
188
235
39
4
596
670
198
213
34
4
5.8
6.1
2.2
7.4
6.7
6.8
Total . . . . . . . . . . . . . . . . . . . . . .
485
1,916
1,800
1,714
5.7
Customer Type
Certain of our customers are serviced by our isolated systems, which are those distribution
systems not connected to the National Interconnected System for the transmission and
distribution of electricity. As of December 31, 2005, we served over 8,301 customers in the
isolated systems with a total consumption of 20,605 MWh, equivalent to 1.1% of total
consumption within our concession area.
Large (and potentially unregulated) customers. We also sell electricity to large users, which are
those customers with peak demand higher than 100 kW. Large users can choose whether to be a
regulated or unregulated customer. Large users are not obligated to purchase energy from the
distribution companies and become unregulated customers by purchasing energy directly from
generators. We are obligated to provide electricity generators with access to our network to
75
permit delivery to these customers provided the generators and unregulated customers pay us
regulated distribution charges known as wheeling charges. At year end, only 513 of our
customers qualified as large users, which represented approximately 38% of our total
consumption in 2005, and, as of March 31, 2006, a total of 530 of our customers qualified as large
users, which represented approximately 46% of our total consumption in the first quarter of
2006. As of March 31, 2006, only two of our large customers were unregulated and purchased
energy directly from generators. Initially, large users were those with peak demand higher than
500 kW but, since 2002, this requirement was gradually reduced. As of January 2005, large users
are those with peak demand greater than 100 kW. The following table sets forth the number of
large users and the aggregate electricity sold by us to these customers for the periods indicated.
Three Months
Ended March 31,
2006
Number of large users . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount of electricity sold (in GWh) . . . . . . . . . . . . . . . . . . . . . .
530
190
Year Ended
December 31,
2005 2004 2003
513
724
230
528
123
433
Others that use our distribution network. In addition, we are entitled to receive wheeling
charge fees from generators or distributors using our distribution networks to deliver energy to
unregulated customers purchasing directly from generator or the spot market. We also receive
rental income from the telephone company Cable & Wireless (Panama) S.A. and from the cable
TV company Cable Onda S.A. for their use of our poles. These two companies use our existing
distribution network to carry their respective services to their respective customers. We have also
entered into contracts with other companies and smaller Internet providers that rent pole space
from us.
Distribution tariffs
Network access charges are designed to be set at a level that allow distributors to achieve
sufficient revenues to cover the costs of their efficient investments, operating, maintenance
(including metering, billing and customer service), administrative and commercial expenses,
standard level of losses and a reasonable return on investment. Each of these costs and return on
capital is determined by the ERSP based on the expenses and returns of comparable companies.
Under the current tariff structure, all distribution system users and all regulated customers pay a
separate consumption-based charge within the tariff to cover the capital, energy and operational
costs of public lighting. Retirees (men age 62 or older and women age 57 or older) receive a 25%
discount on charges applied for the first 600 kWh of consumption. For any consumption above
the 600 kWh threshold, retirees pay full charges.
The permitted pre-tax rate of return, as determined by the ERSP, must be within a 2% range
above or below the average yield on the 30-year U.S. Treasury Bond in the year preceding the
setting of the tariff plus an 8% risk premium. For the current tariff structure, which will remain in
force until December 31, 2006 due to the recent resolutions by the ERSP, the pre-tax rate of
return was set at 13.24%. This rate is applied to the distributor’s net fixed assets in operation
during the tariff period based on historic accounting values at the start of the tariff period plus
the distributor’s efficient investment requirements during the tariff period. Once this rate is
applied to the assets and efficient investments, the distributor determines its maximum allowable
rate to charge customers.
76
Tariff options for customers include: (i) a simple kilowatt hour based tariff, restricted to
residential and other customers with an electricity demand of 15 kW or less, which demand level
was previously set at 12 kW or less; (ii) a demand-based tariff; and (iii) a time-of-day based tariff.
This last type is supplied to customers at any tension. As of March 31, 2006, only 53 customers
were supplied on a time-of-day tariff, including those who changed from a demand-based tariff
to a time-of-day tariff during the last year. Customers are allowed to change their tariff option
twice in a twelve month period without incurring a penalty. After the second change, the
customer will pay a penalty in the amount of 50% of the connection fee.
The VAD tariff structure remains in full force and effect for a four-year period. Historically, every
six months during the tariff period, the capacity and energy cost-components of the tariff are
adjusted to account for variances in actual and expected energy costs, and only 45% of the
distribution and commercial charges are adjusted for inflation based on the Panamanian CPI for
the prior two semesters. These energy-related component adjustments are applied starting the
following semester. Beginning July 1, 2006, we expect that these adjustments will occur on a
monthly basis, rather than semi-annual basis and will be applied to the next month’s bill. The
generation and transmission components of the tariff are adjusted based on the actual energy
purchased and the actual cost of transmission. Each of our customers agrees to purchase
electricity from us at one of several tariff rates offered.
Simple tariff (“BTS”). The simple tariff is a energy per kW hour tariff restricted to customers
with low tension lines (600 V or less) and with a demand of 15 kW or below, which demand level
was previously set at 12 kW or below. The simple tariff applies to all customers unless the
customer enters into an agreement to pay a specialized tariff. As of March 31, 2006, the simple
tariff applied to 98.5% of our customers. Consumption of electricity by customers under the
simple tariff accounted for 43.3% of the electricity we sold to our customers during the first
three months of 2006.
Low tension maximum demand tariff (“BTD”) and low tension time of use tariff (“BTH”). The
low tension maximum demand tariff and low tension time of use tariff are available to our
regulated commercial, industrial and residential customers that are connected at a voltage level
at or below 600 V and also have a predictable level of demand higher than 15 kW, which
demand level was previously set at 12 kW or above. These tariffs include a capacity or demand
component, an energy component and a fixed customer charge. The capacity and energy
components include a generation, transmission and distribution component. Prior to April 1,
2006, the capacity charge had been applied to the average of the three highest demand amounts
registered on a monthly basis during the prior six-month period, and the energy charge had been
applied to the electricity consumed. Under the ERSP’s March 31, 2006 resolutions, the capacity
charge is now based on the customer’s actual energy consumption.
Medium tension maximum demand tariff (“MTD”) and medium tension time of use tariff
(“MTH”). The medium tension maximum demand tariff and the medium tension time of use
tariff are available to customers that take delivery of electricity at a voltage level higher than
600 V and lower than 115 kV. These tariff charges have the same structure and operate in the
same manner as the low tension maximum tariff and the low tension time of use tariff.
High tension maximum demand tariff (“ATD”) and high tension time of use tariff (“ATH”). The
high tension maximum demand tariff and the high tension time of use tariff are available to
customers that take delivery of electricity at a voltage level higher than 115 kV. These tariff
charges have the same structure and operate in the same manner as the low and medium tension
maximum tariff and the low and medium tension time of use tariff.
77
Wheeling charges at low, medium and high tension. For unregulated customers purchasing
energy in the wholesale market directly from the generators or in the spot market, they must pay
the distribution company serving their location a capacity and energy charge, or a wheeling
charge, for the distribution and commercial tariff component.
Public lighting charges. Charges for public lighting, including a return on capital, operating and
maintenance expenses and energy consumption costs are built in to the customers’ regulated
tariff.
The following table sets forth the average number of our customers by applicable tariff for the
periods indicated.
Average Number
Three Months
Ended
March 31,
2006
Low tension
BTS—Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BTS—Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BTD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
2004
2003
275,956 265,806 245,660 226,935
18,904
18,246
16,884
15,847
4,106
4,078
4,180
4,148
50
29
10
3
Medium tension
MTD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200
3
157
3
100
3
84
3
High tension
ATD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
2
0
0
Public lighting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
299,223 288,321 266,837 247,019
The following table sets forth the aggregate electricity sales to our customers by applicable tariff
for the periods indicated.
Three Months
Ended
March 31,
2006
2005
2004
2003
(GWh)
Low tension
BTS—Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BTS—Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BTD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
164
46
40
1
662
186
609
3
628
172
642
1
594
160
640
Medium tension
MTD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
106
—
392
1
318
1
287
1
High tension
ATD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
Public lighting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
39
38
34
485
1,916
1,800
1,714
Total
78
The following table sets forth each of our applicable energy tariffs for the periods indicated.
April 1, January 1,
July 1, January 1,
July 1, January 1,
July 1, January 1,
2006 to
2006 to
2005 to
2005 to
2004 to
2004 to
2003 to
2003 to
December 31, March 31, December 31, June 30, December 31, June 30, December 31, June 30,
2006
2006
2005
2005
2004
2004
2003
2003
79
LOW TENSION TARIFFS
Simple Tariff (BTS)
Fixed charge for first 10 kWh . . . . . . . . . . . . . .
Energy charge for following 490 kWh . . . . . .
Energy charge for following kWh . . . . . . . . . .
Maximum Demand Tariff (BTD)
Fixed charge . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy charge . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum Demand charge . . . . . . . . . . . . . . . .
Time of Use Tariff (BTH)
Fixed charge . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy charge on Peak Period . . . . . . . . . . . . .
Energy charge off Peak Period . . . . . . . . . . . .
Maximum Demand charge on Peak
Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum Demand charge off Peak
Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MEDIUM TENSION TARIFFS
Maximum Demand Tariff (MTD)
Fixed charge . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy charge(1) . . . . . . . . . . . . . . . . . . . . . . . .
Energy charge for following hours . . . . . . . . .
Time of Use Tariff (MTH)
Fixed charge . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
HIGH TENSION TARIFFS
Maximum Demand Tariff(ATD)
Fixed charge . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy charge(1) . . . . . . . . . . . . . . . . . . . . . . . .
Energy charge for following hours . . . . . . . . .
Time of Use Tariff (ATH)
Fixed charge . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-1
*
B/. Client /month
B/. kWh
B/. kWh
1.58
0.16360
0.18008
1.56
0.15163
0.16795
1.56
0.15163
0.16795
1.55
0.13510
0.15004
1.53
0.12663
0.13840
1.50
0.12285
0.13146
1.50
0.12285
0.13146
1.50
0.12285
0.13146
B/. Client /month
B/. kWh
B/. kW / month
3.02
0.12609
12.78
2.98
0.11709
12.31
2.98
0.11709
12.31
2.96
0.10313
11.35
2.93
0.09514
9.93
2.88
0.09261
8.24
2.88
0.09261
8.24
2.88
0.09261
8.24
B/. Client /month
B/. kWh
B/. kWh
3.02
0.12645
0.10051
2.98
0.12241
0.09018
2.98
0.12241
0.09018
2.96
0.10891
0.07653
2.93
0.09309
0.07212
2.88
0.08408
0.07272
2.88
0.08408
0.07272
2.88
0.08408
0.07272
B/. kW / month
19.11
18.61
18.61
17.65
16.22
14.49
14.49
14.49
B/. kW / month
3.06
3.04
3.04
3.03
3.02
3.01
3.01
3.01
B/. Client /month
B/. kWh
B/. kWh
B/. kW /month
5.02
0.10396
0.10336
13.65
4.96
0.09526
0.09473
13.14
4.96
0.09526
0.09473
13.14
4.92
0.08215
0.08170
12.14
4.87
0.07559
0.07519
10.63
4.79
0.07408
0.07369
8.78
4.79
0.07408
0.07369
8.78
4.79
0.07408
0.07369
8.78
B/. Client /month
B/. kWh
B/. kWh
5.02
0.11924
0.09593
4.96
0.11535
0.08614
4.96
0.11535
0.08614
4.92
0.10266
0.07301
4.87
0.08760
0.06884
4.79
0.07937
0.06941
4.79
0.07937
0.06941
4.79
0.07937
0.06941
B/. kW / month
20.30
19.75
19.75
18.74
17.21
15.33
15.33
15.33
B/. kW / month
2.17
2.16
2.16
2.15
2.14
2.12
2.12
2.12
B/. Client /month
B/. kWh
B/. kWh
B/. kW / month
5.02
0.08576
0.08243
12.73
4.96
0.07720
0.07426
12.26
4.96
0.07720
0.07426
12.26
4.92
0.06425
0.06174
11.38
4.87
0.05756
0.05534
10.01
4.79
0.05601
0.05382
8.34
4.79
0.05601
0.05382
8.34
4.79
0.05601
0.05382
8.34
B/. Client /month
B/. kWh
B/. kWh
5.02
0.09947
0.07746
4.96
0.09574
0.06827
4.96
0.09574
0.06827
4.92
0.08376
0.05570
4.87
0.06929
0.05181
4.79
0.06177
0.05241
4.79
0.06177
0.05241
4.79
0.06177
0.05241
12.70
12.23
12.23
11.35
9.99
8.32
8.32
8.32
B/. kW / month
B/. kW / month
Reflects 255 hours of use.
Billing corresponding to customers of these tariffs with a consumption between 0 and 200 kWh/month will receive a credit in the Fondo de Estabilización Tarifaria in this
period.
Source: ERSP.
For the last several years, increases in rates resulting from the semi-annual rate adjustment
process were not fully passed through to distribution company customers in the form of tariff
increases, but were passed through directly to customers, in part, with the remaining amount
paid for by the Panamanian Government. In January 2006, the ERSP announced that the
previously approved rate increases for the period of January 1, 2006 to June 30, 2006 would be
suspended during a 90-day moratorium while the Energy Commission studied the tariff rate
increases and the electricity industry. In its March 27, 2006 report, the Energy Commission
recommended that a new rate be implemented for the period from April 1, 2006 through
December 31, 2006. The ERSP, in its March 31, 2006 resolution adopting many of the
recommendations of the Energy Commission, approved a rate adjustment for this nine-month
period based on our projected energy costs through December 31, 2006. The ERSP, in its
March 2006 Resolution, established that the tariff increase to our regulated customers for this
new rate period should not exceed 10.7%, as opposed to the 20.5% increase we had submitted.
However, the ERSP at the same time recognized that we should receive a subsidy of US$25.2
million which would include a US$0.5 million credit from previous subsidies granted, in order to
avoid a rate increase for all our customers with consumption levels under 200 kWh and limit the
10.7% rate increase to those customers above this consumption level. Together, the ERSP
established rate increase and the US$25.2 subsidy will compensate us for the increased energy
costs in our original 20.5% rate increase proposal. While this new rate adjustment only includes
our projected energy costs, we have been prohibited from passing through to customers our
accumulated energy cost component adjustment from prior tariff revision periods. However, the
Minister of the Presidency and the Minister of Finance and Economy have indicated to us that our
recovery of our accumulated energy cost component adjustments for the twelve-month period
from April 1, 2005 through March 31, 2006 will be recovered from the Panamanian Government
in the form of cash or a debt instrument rather than through our regulated tariffs. See
“Overview of the Panamanian Electricity Industry—Recent Developments.”
The following table illustrates the approved rate increases and the amount of government
subsidy we have received for the periods listed below.
Tariff adjustments applied to customer rates
Periods
January 1, 2003 to June 30,
2003 . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2003 to December 31,
2003 . . . . . . . . . . . . . . . . . . . . . . . . .
January 1, 2004 to June 30, 2004 . . .
2004 . . . . . . . . . . . . . . . . . . . . . . . . .
January 1, 2005 to June 30 2005 . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . .
January 1, 2006 to March 31,
2006(3) . . . . . . . . . . . . . . . . . . . . . . . .
April 1, 2006 to December 31,
2006(5) . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase
Govt
Govt
Increase
Increase
Increase Requested Subsidy
Subsidy Passed to Passed to
Requested
(US$ in Received
Received Customers Customers
(%)(1)
MM)(1)
(%) (US$ in MM)
(%)
($)(2)
6.0%
$
6.0
1.0%
$ 1.0
5.0%
$ 5.0
6.8%
6.2%
$
$
6.9
6.2
6.8%
6.2%
$ 6.9
$ 6.2
0.0%
0.0%
$ 0.0
$ 0.0
5.2%
8.3%
$
$
5.2
8.8
0.6%
1.0%
$ 0.6
$ 1.1
4.6%
7.3%
$ 4.6
$ 7.7
12.2%
$ 16.1
12.2%
$16.1
0.0%
$ 0.0
29.7%
$ 19.3
12.2%
$ 8.7(4)
0.0%
$ 0.0
20.5%
$ 44.6
11.5%
$25.2(6)
9.0%
$19.4
$102.5
80
$65.6
$36.7
(1) This is the total percentage and dollar increase the Company requested be passed through to customers under the existing
regulatory structure.
(2) Dollar amount charged to the customer through an increase in rates.
(3) Rate increase for this six-month period was not implemented and was suspended by the ERSP until March 31, 2006. For the
90-day suspension, we applied the tariff rates from the previous semester (July 1, 2005 to December 31, 2005) and also
received a subsidy of US$8.7 million from the Panamanian Government.
(4) We paid the US$10.6 million difference that was not subsidized by the Panamanian Government and not passed through to
our customers.
(5) Based on recommendations of the Energy Commission, a new rate increase was approved for the period April 1, 2006
through December 31, 2006.
(6) This amount includes a US$0.5 million credit from subsidies granted to us from prior periods. We have received our first
monthly government subsidy payment of US$2.7 million for April 2006.
Power purchases
We are required by law to provide contract coverage for our regulated customers’ contribution
to the peak demand of the system, Demanda Máxima de Generación, or DMG, and the associated
energy costs for the following 24-month period to limit fluctuations in energy costs. This requires
that we accurately estimate our customers’ needs while limiting the possibility of over
contracting. Our power purchase strategy of entering into medium and long-term contracts is
designed to protect our customers from fluctuations in the energy cost component of their tariff
and to avoid a strong dependence on the electricity spot market, whose prices can be subject to
greater fluctuation. Historically, we contract annually approximately 79% to 85% of our total
energy requirements through purchase agreements in the energy contract market. For the year
ended December 31, 2005, we purchased approximately 79% of our total energy requirements
through power purchase agreements, and we have contracted 100% of our energy needs
through the end of 2006. The initial power purchase contracts that were assigned to us during
the privatization process expired between September 2000 and December 2004 and, since
February 2002, we have been contracting our electricity needs through competitive bidding
processes. Purchase prices for these contracts are based on competitive bidding processes, and we
satisfy the balance of our energy requirements, including during peak demand periods, by
purchasing our additional electricity needs in the spot market.
Recent ERSP resolutions will change the way we calculate our contract coverage requirements. In
Resolution No. JD-5864, dated March 8, 2006, the ERSP modified its definition of regulated
customer to include large users, such customers were previously excluded from the calculation of
regulated customers. Additionally, in Resolution No. JD-5830, dated January 27, 2006, the ERSP
has proposed to change the criteria for determining the required periods of contract coverage
for future energy purchases. Under this resolution, we would be obligated to contract 100% of
the demand of our regulated customers (including large users) for the next two years, 90% for
the following third year, 85% for the following fourth and 80% for the following fifth year.
81
We currently have proposals extended to generators to purchase 100% of our expected 2007 and
2008 energy requirements. Prior to March 2006, we were not required to contract for our large
regulated customers, who are able to become unregulated and purchase directly from
generators. Currently, we must include large customers in our contract coverage, however, if a
large regulated customer elects to become unregulated, all of our purchase agreements allow us
to exclude from our contract the proportionate amount represented by that customer. The
following table summarizes the main features of our power purchase agreements as of March 31,
2006.
Generator
Initial
Month
Expiry
Month
Capacity O&M
Price Price
Capacity
MW US$/kW/month
Térmica del Noreste,
Output of
S.A. . . . . . . . . . . . . Jun 19, 2000 Jul 19, 2010
Facility
ESTI—AES . . . . . . . . . Nov 20, 2003 Nov 1, 2013
48.7
Bahía Las Minas . . . .
Jan 1, 2005 Dec 31, 2008
80.0
AES Panamá . . . . . . .
Jan 1, 2006 Dec 31, 2006
40.0
AES Panamá . . . . . . .
Jan 1, 2006 Dec 31, 2006
40.0
AES Panamá . . . . . . .
Jan 1, 2006 Dec 31, 2006
20.0
AES Panamá . . . . . . .
Jan 1, 2007 Dec 31, 2007
20.0
AES Panamá . . . . . . .
Jan 1, 2007 Dec 31, 2007
40.0
La Mina Hidro
Power . . . . . . . . . . .
Jan 1, 2008 Dec 31, 2015
28.0
AES Panamá . . . . . . .
Jan 1, 2008 Dec 31, 2008
60.0
Bontex . . . . . . . . . . . .
Jan 1, 2008 Dec 31, 2015
19.8
Paso Ancho . . . . . . . .
Jan 1, 2008 Dec 31, 2015
4
PANAM . . . . . . . . . . .
Jan 1, 2006 Dec 31, 2008
60
Pedregal . . . . . . . . . .
Jan 1, 2006 Dec 31, 2008
30
Pedregal . . . . . . . . . .
Jan 1, 2006 Dec 31, 2008 12, 5, 15
Fortuna . . . . . . . . . . .
Jan 1, 2009 Dec 31, 2012
80
Fortuna . . . . . . . . . . .
Jan 1, 2013 Dec 31, 2018
120
ACP(1) . . . . . . . . . . . . . Apr 1, 2006 Dec 31, 2006
0
Fortuna(1) . . . . . . . . . . Apr 1, 2006 Dec 31, 2006
0
AES Panamá(1) . . . . . . Apr 1, 2006 Dec 31, 2006
0
ACP(1) . . . . . . . . . . . . . Apr 1, 2006 Dec 31, 2006
0
Pedregal(1) . . . . . . . . . Apr 1, 2006 Dec 31, 2006
0
Fuel
Energy Price
O&M
Total
US$/kWh
36.74
7.95
12.70
17.00
2.80
2.80
2.80
2.80
— 0.08072
—
—
— 0.03475
—
—
—
—
—
—
—
—
—
—
0.11180
0.04000
—
0.02301
0.05700
0.05550
0.05700
0.05550
0.19252
0.04000
0.03475
0.02301
0.05700
0.05550
0.05700
0.05550
6.65
2.80
6.00
6.65
12.00
12.00
12.00
7.53
7.53
0
0
0
0
0
— 0.01536(2) 0.02304
—
—
0.05550
0.04179
0.04056
0.03719 0.01874
0.04122 0.01209
0.05797 0.01329
0.05487
0.05487
—
0.05667
—
0.06500
—
0.06500
0.05780
0.3006
0.05780
0.3620
0.03840
0.05550
0.04179
0.04056
0.05593
0.05331
0.07126
0.05487
0.05487
0.05667
0.06500
0.06500
0.08786
0.09400
(1) Following the Energy Commission’s March 31, 2006 recommendations, we replaced all of our spot market energy purchases
with contracts awarded through a competitive bid process to cover our energy needs from April 1, 2006 through
December 31, 2006. These contracts include the energy component but exclude the capacity component of our distribution
needs as our capacity requirements had already been assigned by the CND to certain generators.
(2) Price was adjusted for purchases made in the spot market.
The energy we purchased during 2004 had an average overall cost of US$72.10 per MWh. For
2005 and for the first quarter of 2006, our average overall cost of energy was US$87.90 per MWh
and US$97.24 per MWh, respectively, principally due to an increase in the amount of
thermoelectric and spot market energy purchased as a percentage of our total energy purchases
and also due to higher fuel costs.
We measure the energy delivered to us by the generators at our connection points to the
transmission grid. Once metered, the purchased energy is allocated to each contract on an hourly
basis in the proportion of the capacity contracted with each generator and our DMG. The ERSP
has recently ruled that energy supplied directly to large unregulated customers through our
network should be excluded from this allocation.
If any generator is unable to fulfill its capacity commitments to us, we are entitled to
compensation from the generator for the associated energy not supplied at three times its
82
contract value. Payment of this penalty does not exempt the generator from a compensation
claim by us for any fines that we may incur as a result of the capacity shortfall.
Payment for the purchased energy is due 30 days from invoicing, which, under our contracts, is
required to take place within the first five days of each month. As a guaranty for payment, each
of our power purchase contracts requires an annual performance bond equal to the value of our
average monthly consumption at the contracted average overall price. Likewise, generators issue
performance bonds in our favor to guarantee the supply of the contracted energy.
During the 90-day period ended March 31, 2006 during which our rates were suspended by the
ERSP, we have continued to pay the electricity generators under our power purchase agreements.
However, we have notified these electricity generators that the suspension of the tariff
adjustment by the ERSP is a force majeur event under our agreements and that the suspension
may impact our ability to pay our invoices as they become due.
The table below summarizes the composition of our energy purchases, including allocated
transmission losses, in the three months ended March 31, 2006 and the years ended December 31,
2004 and 2005:
Three Months
Ended
March 31,
2006
GWh
%
24.0
20.8
14.0
0.0
2.8
11.4
1.4
15.2
10.5
GWh
709.1
704.2
467.4
5.9
72.6
286.8
31.2
0.0
0.0
2005
2004
%
GWh
%
AES Panamá . . . . . . . . . . . . . . . . . . . . . . . . . .
Bahía Las Minas . . . . . . . . . . . . . . . . . . . . . . .
Spot Market . . . . . . . . . . . . . . . . . . . . . . . . . .
EGE Chiriquí-Bayano . . . . . . . . . . . . . . . . . . .
Transmission Losses . . . . . . . . . . . . . . . . . . . .
ESTI—AES Panamá . . . . . . . . . . . . . . . . . . . . .
Isolated Systems—Service B . . . . . . . . . . . . .
Panam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pedregal . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
136.8
118.7
80.0
0.0
15.8
65.2
7.7
86.6
59.6
31.1
30.9
20.5
0.3
3.2
12.6
1.4
0.0
0.0
970.6
119.5
314.6
305.7
86.9
303.9
29.2
62.4
0.0
44.3
5.4
14.3
13.9
4.0
13.9
1.3
2.8
0.0
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
570.4 100.0% 2,277.2 100.0% 2,191.8 100.0%
Under our Concession Contract, we are permitted to engage in generation activities, but such
activities cannot exceed 15% of our aggregate customer demand within our concession zone.
Currently we do not generate any of the distributed energy, although management is currently
evaluating possible opportunities to develop or acquire generation capabilities. In July 2000, we
divested all of our isolated system generating assets and replaced them with a power purchase
agreement. This enabled us to pass through the full cost associated with the isolated system
generation through the regulated customer tariff. The distribution system in the isolated areas
and associated commercial operations remain part of our obligation.
Construction, maintenance and operations
We are responsible for constructing and maintaining the electrical distribution grid within our
concession area. We perform these operations through existing outsourcing contracts with highly
experienced third parties. Grid construction requirements may originate from system expansion,
load increases within the served areas, reliability improvements, or quality of service related
improvements. All contracts with third parties are renegotiated upon expiration to guarantee
cost efficient execution of all construction projects.
83
System maintenance is similarly performed through qualified and experienced third party
contractors. We determine the scope, material and skills required, and the execution time for all
planned preventive and required corrective maintenance within the system.
We monitor our system operation on a 24-hour basis from a centralized load dispatch center
located in the Cerro Viento facility where we also maintain and dispatch necessary emergency
crews. We are currently working on upgrading our radio communication and supervisory control
and data acquisition system, or SCADA, used for controlling field operations and dispatch with
modern SCADA-DMS and distribution automation systems. Customers’ calls are received at a
24-hour call center. Service outages and emergency requirements are registered in the outage
management system and are immediately attended to by the dispatch center and third-party
service crews in order restore the electricity service within the shortest possible time.
Data processing systems
We are currently in full compliance with all applicable software licensing laws and regulations.
The main information systems are Oracle-based and include Oracle Financial and Oracle Spatial.
Our customer information system was provided and installed by Synergia, a well-known
specialized company in software applications for the energy industry, and our outage
management system was developed and installed by UTE, a public and fully integrated power
company in Uruguay. We also use, among others, AutoCAD-based applications. Our
state-of-the-art technology allows us to have a highly efficient operation, providing us with realtime monitoring of our deployed network and allowing us to reduce our energy losses.
We have a combination of company-owned and third-party owned fiber optic and data
transmission systems designed to support all of our operations. These include technical
operations for data communication between and among distribution substations and the
dispatch center, customer service center communications with the customer information system,
communications between company headquarters and various regional offices, third-party
contracted call center, and external collection agents (banks, supermarkets, hardware stores and
specialized collection companies). We have also entered into agreements local companies to
provide alternate processing centers, backup capabilities in the event of a system interruption,
remote data warehousing and critical information backup systems.
Metering and meter reading
All of our clients are currently metered through a company-certified electricity meter laboratory
in compliance with local, company and ANSI standards.
Our meter laboratory, meter reading and invoicing process all operate under an ISO9001-2000
certified quality control system and have been audited by local authorities, certifying agencies
and internal quality control personnel. All meters in service have been certified either by us or by
the manufacturer as meeting or exceeding required precision levels. All clients with demand
rates (low, mid-to-high tension), are metered with current generation electronic meters while all
major clients have advanced metering equipment that guarantees precise metering, quality
control data and provide time of use, load profile and other data useful to the client, system
planners and customer service personnel. All meters are read monthly, with data being registered
in hand held computers on the field and processed nightly for immediate invoicing.
84
Billing and collection procedures
One of our main priorities is to streamline invoicing and collection procedures in order to
improve our customers payment record and collection time. At the time of privatization
approximately 69% of our customers’ accounts had overdue bills by 60 days or more. As of
March 31, 2006, this number was reduced to 28% with a 76% larger customer base. We have the
right to suspend service when our customers’ accounts are more than 60 days overdue.
Following the privatization, new criteria were introduced for receivables provisioning. Currently,
we apply a 100% provision for all inactive accounts (150 days without any consumption), a 50%
provision to disconnected customers (more than 60 days without payment by customers whose
service has been disconnected), a 47% provision against overdue accounts (more than 60 days
without payment by customers whose service has not been disconnected), and a 25% provision to
accounts subject to payment settlements. For all other accounts (60 days or less without
payment), a 1% provision is applied. In accordance with these criteria, we made a US$15.1 million
provision against our receivables outstanding at the time of privatization as part of the closing
audit.
During 2005, we wrote off some doubtful accounts that were considered uncollectible and made
a provision in order to represent on the balance sheet the necessary allowance for doubtful
accounts based on the analysis of the accounts receivable at year end and using the criteria
described above.
We continue to adopt new measures in order to improve billing and collection efficiencies,
including the installation of a new commercial management system, use of external collection
agents such as supermarkets and financial institutions, and stricter enforcement of disconnection.
The reading and billing cycles have been re-engineered in order to make them much more
efficient and to further reduce the commercial cycle. We are also promoting lower cost payment
mechanisms including electronic funds transfer and direct debit, where appropriate.
Our customers incur interest charges at an average rate equal to the previous six months’ rate for
commercial deposits on all amounts outstanding after 30 days from the billing date. We require
that customers provide security deposits for an amount equal to the estimated consumption for
one month. These customer deposits held by us accrue interest at an average rate equal to the
applicable six-month commercial deposit rate for the previous six-month period and are refunded
to the customer after one year, if by then, the customer has established a good payment record
according to the ERSP’s criteria. As of March 31, 2006, the balance related to customer’s deposits
was US$11.5 million, net of US$0.4 million that was reimbursed in fiscal 2005 to those customers
who met the ERSP’s good payment record criteria.
Customer service
As of March 31, 2006, we operated six customer service agencies distributed throughout Panama
City and the City of Colón. These agencies collect payments, set up new contracts, disconnect
service, address customer complaints and provide general information services to the general
public and to our clients.
We also offer a 24-hour call center to address most commercial services, outage reports, invoicing
inquires, general information requests, public lighting requests and other services. This operation
has been outsourced to an experienced call center operator with international experience and
high level knowledge.
85
Additionally, as part of the loss reduction campaign, our crews and trained personnel are sent to
the field to identify illegal consumers, advise them as to the dangers and risks inherent with
energy theft, and allow them to contract as a paying customer on the spot. These measures have
significantly improved our relations with the community and provided significant results in our
efforts to reduce illegal connections within our service area.
Electricity losses
We experience technical and non-technical electricity losses. Technical electricity losses are those
that occur in the ordinary course of our distribution operations, or those resulting from the
specific characteristics of our distribution network. Non-technical electricity losses are those that
result from illegal connections, fraud or billing errors. In 2003, electricity losses were
approximately 16.4% of our total distributed electricity, of which 8.8% was technical and 7.6%
was non-technical. At the time of our privatization in 1998, energy losses within our concession
area were approximately 24%. Our average losses in 2005 were 12.5%, of which 7.7% was
considered technical losses and the remaining 4.8% theft or fraud from regular customers
(mostly residential and commercial) and illegal connections in economical marginal sectors. Since
the privatization in 1998, we have reduced our total overall losses by approximately 48.0%.
We continue to implement a well-defined and thorough loss reduction program which includes
replacing obsolete consumer meters, improving of customer consumption monitoring as well as
improving our internal process, using power loggers to identify illegal connections, migrating
illegal users into regulated clients in new low income urban developments, installing shielded
cable to reduce theft and improving error detection through the installation of digital metering
at the substation and grid connection level.
Additionally, we have implemented a strong corporate communications program aimed at
migrating illegally connected residential users to regular paying customers and seeking to raise
awareness within the community about the safety hazards generated by illegal connections.
During the last two years, energy theft has been gradually recognized as an act punishable by
law. Under this new interpretation of the law, we have brought before the Panamanian courts a
significant number of energy theft cases, primarily against commercial and residential customers.
The combination of a strong corporate communication program and the prosecution of
commercial and residential customers has contributed to changing the perception that energy
theft is acceptable, especially among low income residential consumers. Since the privatization,
approximately 101,000 illegal connections have become regulated customers, of which
approximately 80,500 were converted from January 2003 through March 2006.
Migration of illegal connections into regulated customers
The following table summarizes the total number of customers that were converted from illegal
connections into regulated customers during the periods indicated.
Three Months
Ended March 31,
2006
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
2004
2003
Total
6,133 24,843 23,209 26,249 80,434
86
Our technical division has also undertaken specific programs, including replacing and installing
additional transformer capacity known as the TLM program with 776 pole-mounted transformers
installed during 2004 and 2005 (this program also contributes to improve the quality of voltage).
Overloaded feeders are being re-arranged and new feeders are being installed to distribute the
load in an efficient way. A new substation, Geehan, commenced operations in the fourth quarter
of 2005 and a second substation, Tinajitas, will be in operation in the second quarter of 2006. We
believe that these substations will not only contribute to reduce technical losses, but will also
improve our service quality and the continuous distribution of electricity.
The following table summarizes our technical and non-technical losses for the periods indicated.
Three Months
Ended March 31,
2006
Technical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-technical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.6%
4.4%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
2004
2003
7.7%
4.8%
8.15%
5.75%
8.80%
7.60%
12.0% 12.5% 13.90% 16.40%
Minimum service requirements
We are required to comply with reliability, quality of supply and customer service standards set
out in regulations published by the ERSP, in accordance with a timetable included in the
Concession Contract.
System reliability. The main indicators used to measure reliability are frequency and duration
of service interruptions. The regulatory timetable for reliability improvements included two
stages of implementation. During the first stage, July 2000 to June 2004, all indicators were to be
measured on a “global” or system-wide basis in terms of the average annual frequency of
interruptions per customer (SAIFI), total annual interruption time per customer (SAIDI), average
length of interruption (CAIDI) and average system availability (ASAI). During the second stage of
this timetable, July 2004 to June 2008, all indicators are to be measured on an individual basis.
Different requirement have to be met with respect to urban and rural areas within our
concession area. Urban and rural areas are determined by the National Comptrolling Office based
on density of population and availability of public service. The following table shows the
reliability level that distributors had to meet for each indicator on a global basis for urban areas.
Regulatory timetable for reliability improvements in urban areas
July 2005 to
March 2006
July 2004 to
June 2005
July 2003 to
June 2004
July 2002 to
June 2003
4.5
6.57
6
8.76
6
8.76
8
17.52
SAIFI (number per year) . . . . . . . . . . . . . . . . . . .
SAIDI (hours per year) . . . . . . . . . . . . . . . . . . . . .
We installed an Incident Management System in April 1999 to improve outage management and
to facilitate performance measurement in this area. The system known as the MGI (Módulo de
Gestión de Incidencias) was completely upgraded in June of 2004 in order to allow performance
measurements for the distribution grid on an individual customer basis.
87
The following table summarizes the average annual frequency and duration of interruptions per
customer under the parameters in urban areas of our concession area for the periods indicated.
Urban SAIFI statistics
July 2005 to July 2004 to July 2003 to July 2002 to
March 2006
June 2005
June 2004
June 2003
(number of interruption per year)
Cumulative 12 Months . . . . . . . . . . . . . . . . . .
Last Month . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Target . . . . . . . . . . . . . . . . . . . . . .
2.21
3.28
4.48
6.61
0.28
0.41
0.32
0.80
0.50/month 0.50/month 0.50/month 0.67/month
Urban SAIDI statistics
July 2005 to July 2004 to July 2003 to July 2002 to
March 2006
June 2005
June 2004
June 2003
(number of interruption per year)
Cumulative 12 Months . . . . . . . . . . . . . . . . . .
Last Month . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Target . . . . . . . . . . . . . . . . . . . . . .
2.82
3.98
5.99
9.03
0.37
0.62
0.46
1.08
0.73/month 0.73/month 0.73/month 1.46/month
Since July 2004, similar reliability metrics are applied on an individual basis. From July 2004 to
June 2005, we had 3.28 average interruptions per customer in urban areas compared to the 6
average interruptions per customer, the maximum allowable urban SAIFI level for the 12-month
period. The total time of interruptions, on a per average customer basis, was 3.98 hours,
compared to 8.76 hours average per customer, the maximum urban SAIDI level.
Quality of Supply. Other efficiency parameters apply to voltage levels, harmonic distortions and
other aspects of technical service quality.
As an incentive for distributors to invest in improving system reliability, the ERSP imposes
penalties for supply interruptions that exceed regulatory limits based on a deemed cost for
energy not supplied of US$1.50 per kWh. These penalties are paid in the form of discounts on
subsequent invoices. Our power purchase agreements with generators typically specify
corresponding penalties at 3 to 5 times the contract price of energy for supply interruptions
attributable to that distributor. In addition to these recoverable penalties, we are also allowed to
claim from that generator additional compensation to cover penalties payable to our customers
as a result of supply interruptions attributable to the generator. Distributors are obligated to
perform voltage reading to 1% of their customer base every semester and report such results to
the regulators. The regulator has set targets that more than 95% of readings must be within the
voltage deviation regulated range. Since deregulation and through March 31, 2006, our global
quality of supply indexes have been maintained under regulatory targets as shown in the table
below.
Voltage—% within the allowed range
Actual . . . . . . . . .
Regulatory . . . . .
July 1, 2005
to March 31,
2006
January 1, 2005
to June 30,
2005
July 1, 2004
to December 31,
2004
January 1, 2004
to June 30,
2004
July 1, 2003
to December 31,
2003
96.8%
95.0%
96.7%
95.0%
97.6%
95.0%
99.0%
95.0%
98.5%
95.0%
88
Customer service. Separate regulations cover standards of metering and customer service,
including connection and reconnection speed, information on planned outages, percentage of
total billing based on estimated consumption and response times for dealing with billing
questions and/or claims. In addition to the penalties under ERSP’s supply quality and customer
service regulations, we can also be found liable and must pay compensation when a customer’s
personal equipment, such as computers, televisions, refrigerators or stereo systems, is damaged
as a result of defects and sudden changes in the electricity supply. The following table shows the
overall compliance with the principal customers service regulated indicators, specifically,
connection time, reconnection time and estimated bills:
Customer service indicators
Three
Months
Ended
March 31,
2006
Year Ended
December 31,
2005 2004 2003
Modification Connection (Working Days)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.4
3.0
1.9
3.0
1.6
3.0
2.5
6.0
Reconnection (Hours)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.5
24.0
14.5
24.0
12.0
24.0
20.9
36.0
Estimated Bills (Percentage)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.9
5.0
0.9
5.0
1.2
5.0
1.9
9.0
Non-compliance with technical and customer service regulated indicators is compensated to the
individual customer effected by such non-compliance. Our compensation payments from 2003
through March 2006 are shown in the following table:
Three Months
Ended March 31,
2006
Damaged Equipment . . . . . . . . . . . . . . . . . . . . . .
Voltage Level Fluctuations . . . . . . . . . . . . . . . . . .
Interruptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public Lighting . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,057
13,719
5,060
0
7,488
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31
2005
2004
2003
131,452
62,297
71,302
0
10,363
130,933
10,706
30,783
3,910
6,883
112,749
209,803
9,216
11,283
19,829
$37,324 $275,414 $183,215 $362,880
(1) Includes compensation for claims of delay on connection and reconnection, meter malfunctioning and other.
We are engaged in investments and improvements aimed at minimizing future exposure to
service penalties. In addition to the incidence management system referred to above, other
initiatives include investment in network upgrades, installation of a new SCADA system, and
streamlining operating and management structures and procedures in operational areas.
89
Employees
The following table shows the composition of our employees by functional area at the end of
each year through 2005 and at the end of the first quarter 2006.
As of
March 31,
2006
As of December 31,
2005 2004 2003
Distribution Engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance and Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Human Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss Reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase & Logistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
139
302
31
22
12
0
22
27
147
303
32
18
13
0
25
26
138
315
55
20
14
0
0
26
135
268
56
17
11
47
0
29
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
549
564
568
563
We also employ independent contractors to perform many of our activities not related to our
core business, such as providing equipment maintenance and security for our internal
communication network.
As of March 31, 2006, 236 of our 549 employees were unionized as members of the Sindicato de
Trabajadores de la Industria Eléctrica y Similares de la República de Panamá, or SITIESPA. Terms
and conditions of employment are governed by the Panamanian Labor Code as supplemented by
a collective bargaining agreement (convención colectiva) between us and SITIESPA. A new fouryear collective bargaining agreement with the SITIESPA was successfully negotiated and signed in
October of 2003 and will remain valid through October 2007 or until a new collective bargaining
agreement is negotiated and signed replacing the existing arrangement. We believe we have a
positive relationship with our employees and have not been affected by any work stoppages.
According to Panamanian labor law, employees serving in the public utility sector are prohibited
from work stoppages or strikes that affect the delivery of utilities services.
The annual average cost per employee for the year ended December 31, 2005, excluding
severance payments, was US$16,623, of which US$536 was attributable to overtime. The main
components included in this cost, in addition to normal monthly salary and related overtime, are:
• A thirteenth month additional salary payable in three installments in April, August and
December, as required under the Panamanian Labor Code;
• A supplementary payment under our collective bargaining agreement increasing the
December portion of the thirteenth month entitlement so employees receive an amount equal
to two months’ salary in December; and
• Statutory employer contributions at the following rates:
• Social Security (Caja de Seguro Social, or CSS) at 11.0%;
• Education tax (seguro educativo) at 1.5%;
• Accident insurance (riesgos profesionales) at 3.64%;
• Non-contributory life insurance coverage of US$1,000 per employee plus additional life
and accident coverage for those working in high risk areas; and
• Medical insurance for managerial and other non-unionized employees.
90
In addition, under Law 44 dated August 14, 1995, we make contributions every three months into
an independently managed trust to finance future severance liabilities. The contribution rate is
1.92% of the total salary to cover length of service entitlements and 0.327% of the total salary to
cover compensation payments for unjustified terminations or justified resignations.
In 2005, overtime rates averaged 5.7% of an employee’s base salary depending on the amount of
overtime worked within a particular period and include a premium rate for working on
weekends.
Under the most recent agreement with SITIESPA, all of our employees are entitled to a 50%
discount in their electricity bills. Similar discounts are granted to employees in other privatized
electricity companies. We are entitled to collect the amount of the discount received by other
electric companies’ employees living within our concession area. Likewise, we must reimburse
other distributors for the 50% discount granted to employees living within their concession
zones.
Since the privatization of the electricity industry, we have implemented several programs to
increase our productivity levels such as changing our organizational structure and increasing
outsourcing to provide services and activities such as maintaining street lights and trimming
trees, delivering customer invoices, performing connections and reconnections, and providing
personnel at payment agencies.
Under the Panamanian Labor Code, upon termination of employment, with or without cause,
employees are entitled to an amount reflecting length of service (prima de antigüedad), which is
calculated by according to such employee’s average weekly salary over the previous five years, or
the period of employment if less, and on the basis of one week’s salary for every year of service.
If termination is without cause, the employee is also entitled to an amount for indemnification
based on the employee’s commencement date, length of service and the greater of the average
weekly salary for the previous six-month period or the previous one-month period.
Under the October 2003 collective bargaining agreement with SITIESPA, any employee whose
employment is terminated without cause, in addition to receiving the indemnification
contemplated under the Labor Code, is entitled to receive a special indemnification payment
based on the employment commencement date, as summarized below:
Years of Service
Special Indemnity Amount
Workers with two to three years of services . . . . . . . . . . . . . . . . . . . . . . . .
Workers with four to five years of services . . . . . . . . . . . . . . . . . . . . . . . . . .
Workers with five or more years of services . . . . . . . . . . . . . . . . . . . . . . . . .
1.5 weeks of salary
2.5 weeks of salary
3.5 weeks of salary
The following table sets forth the evolution of the customer-to-employee ratio resulting from
the measures that we have already taken to reduce employment levels:
As of
March 31,
2006
Number of Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customers per Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91
2005
As of December 31,
2004
2003
301,316 296,861 276,560 255,960
549
564
568
563
548
526
487
455
Property
Our principal properties consist of transmission lines and distribution lines, poles, distribution
substations, transformers, and rights of way located in the northern and eastern part of Panama
including the eastern part of Panama City, the port city of Colón and the Gulf of Panama. Apart
from the distribution and distribution lines, no single asset produces a significant impact on our
total revenues. Our corporate headquarters building is approximately 2,099 square meters and is
located in Panama City. We also own five administrative and operational properties located in
Panama and Colón. We own all of the real property used in our operations except for our
corporate office building, the building where our head of commercial operations is located and
two parcels of land where two of our substations are located. See “Business—Distribution
Network.”
As of December 31, 2005 and March 31, 2006, respectively, our property, plant and equipment
consisted of:
As of
December 31,
2005
Poles, towers and accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electric transformers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underground conductors and ducts . . . . . . . . . . . . . . . . . . . . . . .
Consumer services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overhead conductors and accessories . . . . . . . . . . . . . . . . . . . . .
Substation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer meters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public lighting equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation and communication equipment . . . . . . . . . . . . .
Office furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of March 31,
2006
US$ 77,431,920 US$ 77,248,000
36,336,355
36,506,901
48,493,512
48,884,218
25,279,049
25,231,666
21,020,729
21,946,085
43,373,192
43,527,968
19,412,171
19,233,986
11,789,783
11,931,055
11,153,615
11,110,103
7,386,476
7,288,983
13,189,788
13,718,596
2,303,688
2,308,092
2,706,536
2,706,536
13,840,455
14,427,850
US$333,717,269 US$336,070,039
To guarantee our obligations under our Syndicated Long-Term Loan, we have granted the
lenders a first mortgage for an amount up to US$65.0 million consisting of specified property and
real estate we currently own, as well as future real and personal property we may acquire. The
mortgaged property consists of distribution substations, land, building, vehicles, technology
hardware and other related fixed assets, which, as of March 31, 2006, comprised approximately
10.8% of our total fixed assets, and the mortgaged real estate consists of land and buildings. We
have also granted the lenders a lien on our pending and future receivables. As to the mortgaged
real property, we have entered into a trust agreement assigning to a trustee certain assets
including our reserve cash account, account for payments received, customer accounts receivable,
lessee accounts receivable and our insurance policies. Both the mortgage and the trust
agreement will terminate upon the satisfaction or repayment of all our obligations under our
Syndicated Long-Term Loan as contemplated in connection with the issuance of the Notes.
92
Insurance
We face the risk of losses in our operations arising from a variety of sources, including, among
others, risks arising from the failure of assets to operate and perform properly, intentional
vandalism, and risks related to catastrophic events (such as a major accident or incident at a third
party’s electricity generation plant, a major incident affecting a third party’s transmission
network to which our distribution network is connected, or major natural disasters such as fires,
earthquakes or floods). Although constructed, operated and maintained to withstand certain of
these occurrences, our network assets may not operate and perform adequately in all
circumstances. We carry adequate insurance against certain of these risks for a fixed amount,
including third-party property liability.
Our insurance policies are underwritten by an established Panamanian insurer, Compañia
Panameña de Seguros, S.A and Assicurazioni Generali S.p.A. Sucursal de Panamá. We currently
carry a broad range of insurance policies designed to protect our assets against a range of perils
during their construction and operational periods, as well as in the event of certain business
interruptions. Our key assets are insured at their replacement value.
Competition
We are the only company licensed to operate an electricity distribution system in the northern
and eastern part of Panama, including the eastern part of Panama City, the port city of Colón
and the Gulf of Panama. As a result, we do not compete for regulated customers in our service
area. Clients that choose to participate in the wholesale market must use our distribution
network to access the generators or the transmission grid, and these clients must pay the
distribution component of the corresponding regulated tariff.
The ERSP has granted a permit to a large customer within our concession area to construct a
transmission line to connect directly to the transmission grid. We believe that the capital cost of
constructing such line will prevent other customers from bypassing the distribution system. We
have filed an appeal with the Supreme Court contesting this permit granted by the ERSP.
Capital expenditures
Prior to the privatization, our assets and our overall system condition reflected the low levels of
capital expenditure and inadequate maintenance. We took early action to correct these
deficiencies and, between 2003 through the first quarter of 2006, invested US$57.5 million to
grow and maintain our network and other system improvements, of which approximately
US$3.2 million corresponds to capitalized labor expenses and interest expense. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Contractual Commitments and Capital Expenditures.”
Environmental matters
The Panamanian legal framework governing environmental matters was enacted through the
1998 Environmental Law, which created a national environmental authority, Autoridad Nacional
del Ambiente, or ANAM. Since entering into the Concession Contract, we have been in
compliance with applicable existing environmental regulations and have not been subject to any
penalty or sanction.
93
Under the Sale and Purchase Agreement governing the privatization, PDG is also required to
comply with the recommendations of an environmental audit that was conducted by Golder on
behalf of the Panamanian Government as part of the privatization process. Similar obligations
apply to us under our Concession Contract.
Golder was commissioned to produce a baseline environmental study for each of the generation
and distribution companies being privatized and identify corrective measures to be undertaken
within two years of the privatization. In the case of sites allocated to us under the privatization,
Golder recommended corrective measures with an estimated cost between US$560,000 and
US$935,000, of which, a high percentage related to the isolated systems generation units. Under
the Sale and Purchase Agreement, the Panamanian Government has indemnified PDG against the
cost of any additional corrective measures that may be required by ANAM or any other
governmental entity in Panama for issues that took place before the privatization.
In addition to expenditures for corrective measures, we have developed and implemented our
own environmental management program and adopted our own environmental health and
safety policies. In particular, we have established procedures for hazardous waste control and oil
management, identified and audited local recycling facilities, eliminated the use of chlorinated
solvents, implemented an identification, labeling and control program for polychlorinated
biphenyls, or PCB’s, and expanded facilities for hazardous waste storage. We also contracted a
French company to package and transport materials containing PCB to France for final treatment
and disposition.
Since the Golder report was based on site visits covering only a portion of our assets, PDG
commissioned Environmental Consulting and Technology, Inc., or ECT, to conduct a more
comprehensive baseline study involving environmental site assessments for all of our locations.
We provided ANAM with a copy of sampling data from the ECT site visits identifying oil and PCB
contamination and risk data so that ANAM can determine any action to be taken. Although we
have received no notification from ANAM of any requirement for additional remedial efforts,
any such requirement in relation to site contamination existing prior to privatization would be
subject to the indemnification provisions under the Sale and Purchase Agreement.
We undergo periodic environmental audits performed by the consulting firm ECT and our
environmental officer and related personnel in our operations units.
Legal proceedings
We are involved in routine litigation and other proceedings in the ordinary course of business. In
the opinion of our management, based on consultation with legal counsel, the liability, if any,
under these proceedings is either adequately covered by insurance or would not have a material
adverse effect on our overall financial condition, results of operations or cash flows.
In connection with the ERSP’s suspension of the approved tariff rate adjustment for the
six-month period starting January 1, 2006, on March 31, 2006, in order to preserve our rights
relating to this matter, we filed a complaint in the Third Chamber of the Supreme Court of
Justice seeking a declaration of illegality of the ERSP’s Resolution No. JD-5806 issued on
January 23, 2006, which ordered us to suspend the previously approved tariff adjustments for the
first six months of 2006, which were scheduled to become effective January 1, 2006. The Third
Chamber of the Supreme Court of Justice is reviewing the admissibility of this complaint for
procedural compliance.
94
On April 11, 2006, the ERSP stated in Resolution No. JD-5956 that, aside from the maximum
allowable income we were permitted to recover during the four-year regulatory period from July
2002 to June 2006, we received additional income in excess of our actual costs. The ERSP
attributed this supposed excess income to variations in our projected and actual number of
customers and our sales in the different rate categories during this tariff period and has ordered
us to credit or reimburse our customers an aggregate of approximately $4.0 million beginning
May 1, 2006 until December 31, 2006. We are currently challenging this determination as we
believe that the Concession Contract and the resolutions instituting the VAD do not permit the
ERSP to modify previously approved tariffs where our actual income exceeds our projected
maximum allowable income charged to customers, and the methods used to determine our
maximum allowable income is favorable to us. These customer credits have been suspended
while our motion for reconsideration is pending.
95
Overview of the Panamanian electricity industry
Introduction of Panamanian electricity usage
Panama has a mixed hydro-thermal electricity system with a current installed generating capacity
of approximately 1,253.7 MW (62% hydro and 38% thermal), with a peak demand of 946 MW,
supplying approximately 680,162 customers as of December 31, 2005, an increase of 33,810
customers from December 31, 2004. In 2005, with an average hydrology, approximately 70% of
gross generation output came from hydroelectric capacity. Over 41% of the generating capacity
is located in the west of the country, close to the Costa Rican border, where the majority of
Panama’s hydroelectric resources are located. A 430-kilometer transmission line links these plants
to the load center in the Panama City-Colón corridor. Panama’s thermal generating plants
currently rely on imported oil, although the possibility of using natural gas and/or coal from
Colombia to supply the Panamanian electricity market is currently under evaluation.
The electricity system in Panama is interconnected with that of Costa Rica, and plans exist for
increased regional energy exchanges by establishing what is known as the Central American
interconnection system, Sistema de Interconexión de los Países de Central America, or SIEPAC.
Since 2002, electricity sales have been growing at an average of approximately 5.7% per year and
in 2004 totaled 4,595 GWh, of which 31% is residential, 45% is commercial, 5% is industrial, 16%
is used by the public sector including street lighting and 2% is from unregulated customer
consumption. This is equivalent to a monthly consumption rate of approximately 592 kWh per
customer (208 kWh for residential customers only). Over 76.1% of the population in 2004 was
served by electricity, including approximately 1% supplied by isolated systems in the Darien
region between Panama City and the Colombian border and in other remote areas (Archipielago
de Las Perlas and San Blas Islands).
Regulatory entities
The organizations that participate in the regulation of the electricity sector in Panama are:
Ministerio de Economía y Finanzas (the Ministry of Economy and Finances). The electricity sector
is under the jurisdiction of the Ministry of Economy and Finances. Within the Ministry of
Economy and Finances, the Comisión de Política Energética, or the Energy Policy Commission,
establishes the Panamanian Government’s policies for the energy sector. Such policies are
formulated with the collaboration of other government agencies, such as the Public Services
Regulator, the Asamblea Nacional, or the National Assembly, and the ETESA Planning Unit.
Ente Regulador de Servicios Públicos (the Public Services Regulator or ERSP, whose name changed
in April 2006 to Autoridad Nacional de los Servicios Publicos or the National Authority of Public
Service). The Public Services Regulator regulates power generation, transmission,
interconnection and distribution activities in the electric power sector; approves generation and
transmission programs; and promotes competition within the different areas of the energy sector
so that economically efficient and high quality energy services are provided. Its responsibilities
include: (i) evaluating the efficiency of the provision of services; (ii) establishing the tariff
structure for services; (iii) establishing the tariff structure for access to and use of the grids and
dispatch charges; (iv) classifying which consumers of electricity are subject to tariff regulation;
and (v) determining the rules for the planning and coordination of the National Interconnected
System.
96
Unidad de Planificación de ETESA (the ETESA Planning Unit). The ETESA Planning Unit is a
special administrative unit of ETESA and is responsible for the National Energy Plan and National
Reference Expansion Plans. The ETESA Planning Unit is also responsible for forecasting the overall
energy requirements of Panama and determining ways to satisfy such energy requirements,
including developing alternative sources of energy and establishing programs to conserve and
optimize the use of energy. Utility companies are required to prepare and submit business plans
to the ETESA Planning Unit.
Centro Nacional de Despacho (the National Dispatch Center or CND). The CND is operated by
ETESA. The CND is responsible for the planning, supervising and controlling the integrated
operation of the National Interconnected System and for ensuring its safe and reliable operation.
The CND is also responsible for (i) coordinating the operation of the National Interconnected
System with regional dispatch centers; (ii) compiling information and defining generation
programs for each generator; (iii) receiving offers from generators that participate in the energy
exchange market; (iv) developing daily demand forecasts and managing dispatch; (v) determining
the hourly energy spot prices in the exchange market and the amounts of electricity sold;
(vi) managing the transmission network and the auxiliary services required for the proper
operation of the National Interconnected System; and (vii) providing settlement values on a
monthly basis with respect to the division of energy between suppliers and producers.
History
Prior to the 1998 privatization of the Panamanian generation and distribution sectors, the
electricity sector in Panama was under the management of the state-owned integrated electrical
utility, Instituto de Recursos Hidráulicos y Electrificación, or IRHE. IRHE was created in 1961,
initially to provide service in areas not served by the existing private sector utilities and, in
general, to promote the development of electricity services in Panama.
Thereafter, IRHE gradually took over the assets and operations of the existing private sector
utilities. Beginning in the mid-1970s, it significantly expanded the capacity of the system with the
commissioning of new hydroelectric plants, particularly in the west of Panama, and introduced a
national dispatch center to optimize system operation and allow electricity interchange with the
Panama Canal Commission and other Central American countries.
Re-introduction of private capital into the sector followed the enactment in 1995 of legislation
permitting private electricity generation. This was followed by the Public Services Regulatory
Agency Law in January 1996 and the 1997 Electricity Law in February 1997. Modifications to the
1997 Electricity Law were made in February 1998 under Decree Law No. 10 of February 26, 1998,
and ancillary regulations were introduced by presidential decree in the form of the Executive
Decree No. 22 of June 19, 1998.
In 1998, the Panamanian Government divided IRHE’s assets and operations, other than
transmission, into four generation companies and three distribution companies for purposes of
privatization. The 51% shareholdings in the distribution companies, including Elektra, were sold
by the Panamanian Government in September 1998. This was followed in November 1998 by the
sale of 49% shareholdings in the hydroelectric and thermal generation companies and a 51%
shareholding in the main thermal generation company. Under the parameters established by the
Panamanian Government, at least 25% of each bidding consortium had to be held, either directly
or through an affiliate, by a company with the required level of generation or distribution
97
experience. In the case of generation this included having an equity base of at least
US$500 million, over five years of generating experience and control of at least 500MW of
generating capacity. In the case of distribution, it included a minimum equity base of
US$250 million, over three years of distribution experience and at least 350,000 distribution
customers. In each case, the minimum equity base could include that of other consortium
members in proportion to their shareholdings. The results of these privatizations were as follows:
Privatization of IRHE’s distribution and generation businesses
Distribution
Company
1997 Unit
Sales
(GWh)
1997
Customers
%
Sold
Amount
Bid*
1,993
1,282
260,066
166,375
51
51
$212
$ 89
%
Sold
Amount
Paid*
Metro Oeste and EDE Chiriquí . . .
Elektra . . . . . . . . . . . . . . . . . . . . . . .
*
Buyer (Principal Investors)
Unión Fenosa
Panama Distribution
Group (Constellation)
US$ in millions. Excluding post-bid adjustments.
Generation
Company
Type
Installed
Capacity
(MW)
EGE Fortuna . . . . . . . . . . . . . .
Hydro
300 49%
EGE Bahía Las Minas . . . . . . .
EGE Chiriquí and EGE
Bayano . . . . . . . . . . . . . . . .
Thermal
253 51%
Hydro-Thermal
283 49%
*
Buyer (Principal Investors)
$118 Americas Generation
Group
(Coastal/Hydro-Quebec)
92 Enron
92 AES
US$ in millions.
Twelve months before the date of privatization, the Government reserved up to 10% of the
shares of the privatized companies for sale to employees at a discount of 6% to the privatization
price. Under the 1997 Electricity Law, the government can sell its remaining shares by public
auction or through the stock exchange, subject in each case, to each purchaser being limited to
acquiring no more than 5% of the company concerned.
The ERSP
Established under the 1996 Public Services Regulatory Agency Law, the ERSP is an autonomous
government agency with responsibility for regulating water, telecommunications, electricity and
natural gas. It is headed by a three-member Board of Directors, whose appointment is subject to
ratification by the Legislative Assembly.
The Board elects one of its members as President for a two-year term, which may be renewed.
The current President of the Board of Directors of the ERSP is José Galán Ponce, who was
appointed in October 2004 and is scheduled to remain in office until December 2008. The two
other members are Carlos Rodríguez, appointed in January 2002, scheduled to remain in office
until December 2006, and Nilson Espino, appointed in October 2004, and remained in office until
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December 2005. The ERSP, now known as the National Authority of Public Service, has been
restructured, and Dr. Victor Urrutia has been appointed as the General Administrator. Mr. Espino
will remain in office until the Executive appoints his replacement.
ERSP’s responsibilities include:
• Ensuring compliance with sectoral laws and regulations and applying sanctions;
• Issuing concessions and licenses;
• Monitoring quality of service standards;
• Verifying fulfillment of expansion and system improvement targets as required by law,
regulation or under the terms of specific concessions or licenses;
• Promoting competition and investigating monopolistic or anti-competitive practices;
• Determining efficiency criteria for evaluating the performance of regulated companies;
• Establishing the principles and methodologies for tariff regulation;
• Determining information to be provided by public service providers;
• Arbitrating conflicts between operators, government agencies, municipalities and consumers;
and
• Authorizing land expropriation and rights of way for service expansion.
The ERSP is financed from various sources, including a fee payable by all providers of electricity
services. This fee, which is payable monthly and is not recoverable from consumers, may not
exceed on an annual basis 1% of gross sector revenues in the preceding year. On an individual
company basis the applicable percentage is applied to revenues from regulated and
non-regulated customers less amounts paid by the company to other service providers to cover
energy or transmission costs. The fee for 2003, 2004 and 2005, was set at 0.96%, 0.98% and
0.79%, respectively. In 2006, this fee has been set at 0.67%.
The Energy Commission and the Commerce Commission of the Panama National Assembly have
been studying the possible restructuring of the Energy Policy Commission and of the ERSP. Based
on these recommendations, by Decree Law No. 10 of February 22, 2006, the ERSP was
restructured and renamed and, as of April 25, 2006, is now known as the National Authority of
Public Service. The National Energy Authority, is responsible for establishing policies to be used
by the ERSP. See “Overview of the Panamanian Electricity Industry—Recent Developments.”
The 1997 electricity law
The 1997 Electricity Law was introduced to improve operation efficiencies, reach reliable quality
of service, guarantee a good quality of supply through the promotion of competition and private
sector participation and to keep the cost of the service at reasonable prices. Key provisions
include:
• Establishing a ministerial Energy Policy Commission (Comisión de Política Energética) with
responsibility for the development of energy policy;
99
• Defining the duties and obligations of electricity service providers including continuity of
supply and provision of open access in transmission and distribution;
• Dividing the generation, transmission and distribution operations of IRHE into separate
companies and the establishment of requirements for management and accounting separation
of generation, transmission and distribution activities;
• Restricting participation by distribution companies in generation and in transmission and by
generation companies in the control of distribution companies;
• Establishing procedures for privatization of the sector other than ETESA, the company formed
to hold IRHE’s transmission assets, which was to remain wholly state-owned;
• Establishing procedures for the granting of concessions and licenses subject to limitations on
the market shares of individual generators and distributors;
• Defining the role of ETESA and procedures for management of central dispatch;
• Providing for large customers with maximum demand of over 500 kW to purchase directly from
generators and other suppliers. For 2005, the regulating entity reduced this limit to 100 kW.
• Establishing principles of tariff-setting for price-regulated services.
The Energy Commission has no authority to amend the 1997 Electricity Law or to adopt
additional laws or regulations relating to the electricity industry. However, the Commerce
Commission does have the authority to initiate for the consideration of the Panama National
Assembly, changes in existing legislation or the adoption of new legislation relating to the
electricity industry. This initiation and support could lead the Panama National Assembly to
amend the 1997 Electricity Law or adopt new legislation relating to the electricity industry. In
addition, the Executive Branch can also promote legislative changes.
Concessions and licenses
Under the 1997 Electricity Law, concessions are required for the construction and operation of
hydroelectric or geothermal plants and for the provision of transmission or distribution services.
Concessions are awarded by the ERSP and have the following time limits:
• Hydroelectric and geothermal generation
50 years
• Transmission
25 years
• Distribution
15 years
When a distribution concession reaches the end of its term, the ERSP is required to conduct a
competitive bid process for the sale of a minimum 51% shareholding in the company holding the
existing concession, following which a new 15-year concession is granted. The owner of the
shareholding can participate in the bidding and will only be required to sell (and transfer control
of the concession) if its price is below that of another bidder. In the absence of a higher bid the
owner can retain the shares without making any payment. If outbid, the owner receives the
proceeds and the successful bidder takes over control of the concession. Thermal generation
plants must be licensed by the ERSP but do not require a concession.
Under its concession contract, each distributor has a defined concession zone within which it has
exclusive rights both to install, own and operate a distribution network and the obligation to
100
supply energy to end customers other than large customers who opt not to be served as
regulated customers. Large customers are currently defined as those with peak demand on a
site-by-site basis of over 100 kW, and can choose to buy energy directly from other sources
including generators, other distributors or from the spot market (mercado ocasional).
Apart from certain sections of the border between Metro Oeste and Elektra in Panama City and
the Canal Area, each distributor’s concession zone extends for a distance of between 500 meters
and 3 kilometers from its existing network and from any new lines under construction.
Distributors are obliged to provide service to any end user within 100 meters of their existing
lines on the basis of their standard connection tariffs. Anyone located further from the existing
network can be required to make a contribution to cover the additional costs of connection
based on amounts per meter subject to approval by the ERSP. In addition to the concession zone,
each distributor is granted a zone of influence extending between 5 kilometers and 10
kilometers beyond its concession zone.
When new electrification projects arise outside the concession zone, the right to provide service
is awarded on a competitive basis by the ERSP. Where this arises within the zone of influence, the
competition is conducted on a basis granting preferential rights to the existing distributor. In the
case of rural electrification projects supported with subsidies from the Office for Rural
Electrification, or OER, the nearest distributor has a first option to provide service where this can
be achieved at least cost through an extension of an existing line. Otherwise, projects are
awarded by competitive tender to the bidder requiring the lowest subsidy.
Under their concession contracts distributors are required to comply with the standards and
technical requirements established by the ERSP and the CND, in particular those relating to
quality and reliability of supply and customer service parameters, customer metering and the
operation of the national integrated system. In addition, distributors are required to provide
public lighting within the concession area in accordance with standards defined by the ERSP.
Under the 1997 Electricity Law, the cost of this service is recoverable from end customers in
proportion to their consumption.
The concession contracts contain timetables for achieving improvements in quality of service,
metering and public lighting. If required standards are not met, customers are entitled to tariff
rebates at levels defined by the ERSP. Concession contracts may also impose obligations to extend
continuity of supply within isolated systems and complete designated rural electrification
projects.
No distributor or its shareholders may participate, directly or indirectly, in the control of
generation assets with an aggregate capacity representing more than 15% of its total customer
demand within its concession zone. Within this limit distributors may only engage in generation
activities on condition that there is adequate management and accounting separation. Similar
requirements apply to involvement in transmission.
System operation
The Electricity Law provides for the operation of the system and administration of the wholesale
market to be managed by the CND, a unit within ETESA with separate accounting records. The
wholesale market consists of a bilateral contract market between operators for the provision of
capacity and/or energy with competitive prices from bid processes; and a balancing spot market
101
with hourly prices (mercado ocasional) for settling transfers of electricity for uncontracted
capacity and energy.
Distributors are required to obtain long-term contracts to cover the capacity requirements of
their regulated customer base and the associated energy. The amount of contract cover required
is based on a month-by-month analysis submitted to the ERSP by the CND each year using
forecasts supplied by the distributors (Informe Indicativo de Demanda). The amount of contract
cover provided by an individual generator may not exceed its own firm capacity and any such
capacity acquired from other generators under reserve contracts. For hydroelectric plants firm
capacity is calculated by the CND based on the characteristics of the plant after taking account of
hydrological risks.
The CND dispatches plants in merit order by reference to their variable costs subject to system
security, operating constraints and the operational regulations approved by the ERSP
(Reglamento de Operación), using a dispatch model incorporating stochastic dynamic
programming to calculate the opportunity cost of water. The hourly spot price is based on the
variable cost of the marginal plant dispatched. Transmission losses are valued at the spot price
and charged separately to distributors based on loss factors applicable to their connection points
on the ETESA grid.
Variances between a generator’s actual dispatch and contracted energy volumes are settled
through the spot market. Out of merit plants dispatched by CND to maintain real time system
stability (generación obligada) receive an additional payment to cover the difference between
their variable costs and the hourly spot price. The CND is also responsible for the coordination of
auxiliary services (servicios auxiliares) and their remuneration through additional charges to the
system.
Details of the average monthly spot price in the mercado ocasional since January 1999, excluding
capacity costs, are set out below.
Average monthly spot price (energy only)—January 1999—March 2006
102
Industry segments
Generation
At present, installed generating capacity in Panama is 1,253.7 MW. Initially, the system was
mostly thermal but became gradually more mixed with the commissioning of the hydro plants at
Bayano, La Estrella, Los Valles and Fortuna between 1976 and 1984 and Esti in November 2002.
Panama has substantial undeveloped hydroelectric resources with potential projects identified by
IRHE totaling approximately 2,400 MW. The composition of its current generating capacity is set
out below.
Generating capacity on the interconnected system in Panama (December 2005)
Plant
Maximum
Effective
Capacity (MW)
Operation
Started
Date
Commissioned
Fortuna . . . . . . . . . . . . . . . . . .
300.0 1984 /1993 Sept. 18, 1998
Bayano . . . . . . . . . . . . . . . . . .
La Estrella . . . . . . . . . . . . . . . .
Los Valles . . . . . . . . . . . . . . . .
Antón . . . . . . . . . . . . . . . . . . .
Others(1) . . . . . . . . . . . . . . . . .
ESTI . . . . . . . . . . . . . . . . . . . . .
260.0
42.0
48.0
2.8
11.0
120.0
Total Hydro . . . . . . . . . . . . . .
783.8
Bahía Las Minas
BLM—2 . . . . . . . . . . . . . . . . . .
BLM—2 . . . . . . . . . . . . . . . . . .
BLM—2 . . . . . . . . . . . . . . . . . .
Combined Cycle . . . . . . . . . .
40.0
40.0
40.0
160.0
Pan Am . . . . . . . . . . . . . . . . . .
Petroeléctrica . . . . . . . . . . . .
Copesa . . . . . . . . . . . . . . . . . .
Panama substation . . . . . . . .
Pedregal . . . . . . . . . . . . . . . . .
Owner
(Principal Investors)
1976
1979
1979
Sept. 18, 1998
Sept. 18, 1998
Sept. 18, 1998
Oct. 4, 2002
Hydro Quebec/
Gobeleq
AES Panama
AES Panama
AES Panama
Hidro Panama, S.A.
2003
Nov. 1998
AES Panama
1968
1970
1973
1999
Dec. 14, 1998
Dec. 14, 1998
Dec. 14, 1998
Dec. 14, 1998
Prisma
Prisma
Prisma
Prisma
96.0 1998
July 19, 1998
0.0
44.0 1998
0.0
49.9 2003
Total Thermal . . . . . . . . . . . .
469.9
Total . . . . . . . . . . . . . . . . . . . .
1,253.7(2)
IGC-ERI Pan-Am
Terminals Generating
Limited
April 24, 1998
Petroeléctrica de
Panama, S.A.
March 17, 1998 Proquimsa
Dec. 14, 1998
AES Panama
Sep. 28, 2001
Globeleq
(1) Others include Union Fenosa Self-Genration, La Yeguada, Macho de Monte and Dolega.
(2) Amount does not include 42.8 MW of generation capacity of TG Panama.
The Panama Canal Authority, or PCA, formerly the Panama Canal Commission, also has 173.5 MW
of installed capacity with connections to the transmission system including a 58.5 MW
hydroelectric plant, a 59 MW steam turbine plant, a 38 MW gas turbine plant and a 18 MW
103
Bunker C fuel-fired plant. This capacity is primarily used to serve the needs of the Panama Canal,
but in conditions of high hydrology surplus, energy may be available to supply the national
system.
Under the 1997 Electricity Law, generation companies will not be granted new concessions if they
would thereby account, directly or indirectly, for more than 25% of national electricity
consumption. The percentage may be increased by the Government, subject to the opinion of the
ERSP, where justified by competitive conditions. The percentage was increased to 40% as of
November 2005. This provision does not apply to licenses for thermal generation.
The following table sets out the gross and net generation by type of generation in the
Panamanian system for each year from 2002 to 2005.
Generation by type (GWh)
2005
2004
2003
2002
Annual
Growth
(2002-2005)
Hydroelectric
Gross generation . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,875.5 3,891.7 2,915.6 3,291.6
69.9% 71.7% 55.5% 66.4%
8.5%
Thermal
% of total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,670.9 1,533.8 2,336.0 1,668.4
30.1% 28.3% 44.5% 33.6%
0.1%
Total
Own consumption . . . . . . . . . . . . . . . . . . . . . . . . . .
5,546.4 5,425.5 5,251.6 4,960.0
(4.8)
(6.8)
(4.9)
(5.8)
5.7%
Net generation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,541.6 5,418.7 5,246.7 4,954.2
5.8%
104
Transmission
Set forth below is a map of ETESA’s transmission system showing the location of the principal
generating plants and substations.
In 2005, the transmission system in Panama, comprised approximately 601 kilometers of single
and double circuit 230 kV lines linking the main generation facilities to the system load center at
Panama City, 288 kilometers of single and double circuit 115 kV lines and a total of twelve
substations with a total capacity of 1,504 MVA.
Transmission system
Source: ETESA.
The system is owned and operated by ETESA, which is responsible for expanding and upgrading
the network to meet the requirements of demand growth and system stability. It is currently
engaged in an investment program, the main components of which are:
• Approximately 391 kilometers of additional double circuit 230 kV lines between Chiriquí and
Panama City in support of the Estí project with associated substation capacity, which will
support the SIEPAC project; and
• A new substation (Panamá II) to receive the load from Estí that was built and inaugurated in
2002.
Under the 1997 Electricity Law, ETESA is responsible for producing an annual expansion plan for
the interconnected system in line with quality and reliability standards and development
objectives set by the Energy Policy Commission. This is based on projections of expected growth
in demand and energy consumption over the next 20 years, which market participants are
required to submit by June 30 each year. The plan is mandatory for Transmission projects and an
indicative purpose for Generation projects. ETESA is obliged to carry out all projects included in
the Transmission Expansion Plan, as approved by the ERSP, and all related construction work
must be contracted on the basis of competitive bidding. The network expansion must be
105
financed by ETESA, however ETESA can choose whether or not to financed the connection of
generators or distributors to the transmission network in return for a reimbursable contribution.
Average losses of energy in transmission over the period from 2002 to 2005 have been as follows:
Annual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
2004
2003
2002
2.8%
3.4%
2.9%
3.7%
The changes in the percentage of the transmission losses reflect, in part, the configuration of the
system with over 41% of installed capacity located approximately 430 kilometers from the load
center. Losses drop due to the installation of new thermal generating plants (PanAm and
Pedregal) very close to system load center (Panama City) and occasionally increase with the
hydrology that drives the actual hydroelectric generation. Transmission losses in 2005 dropped in
part due to the integration of the double circuit 230 kV between Chiriquí and Panama City. The
cost of transmission losses is allocated directly to distributors on the basis of loss factors reflecting
their location on the system. At present, almost 84% of transmission losses are charged to
distributors taking delivery at Panama City and Colón substations.
The 1997 Electricity Law provides for open access to transmission subject to a regulated tariff for
connection and use of system charges. The current tariff, which was approved by the ERSP in
Resolution JD-5351 and JD-5352 in June 2005, is due to remain in force until June 30, 2009.
The transmission tariff is designed to cover the capital, administrative and operational costs of
the system on an economically efficient basis so as to provide an expected rate of return before
tax on net fixed assets that is within a 2% range above or below the average yield on the 30-year
U.S. Treasury Bond in the year preceding the setting of the tariff, plus a risk premium of 7%. For
the initial tariff in 1998, the rate of return for transmission was set at 13.45% based on a 6.45%
average for the 30-year U.S. Treasury Bond. The rate of return for the second tariff period was set
at 12.24% and the actual tariff period was set at 9.98%. Every year within the tariff period
one-third of the transmission charges are inflation-adjusted and revised for compliance with
authorized investment programs. Delays in such investment programs lead to a reduction in the
transmission charges.
ETESA’s use of system charges are differentiated by zone and may be positive or negative for
each zone depending on the extent to which the user is increasing or reducing network load.
Generator charges are calculated by reference to installed capacity available for use in the
system, while distributor and large customer charges are determined by reference to their peak
demand. ETESA’s tariff for 2005 is summarized below.
Zonal use of system charges (US$/kW/Year)
Geographical
Area
Zone (with approximate description)
1.
2.
3.
4.
5.
From the Costa Rican border to Progreso and
Concepción
From Mata de Nance to Concepción, San Juan, Dolega
and Pozos Termales de Gualaca
From Caldera to Dolega and from Fortuna to Pozos
Termales de Gualaca
From the Chiriquí-Veraguas border to San Juan and
the area between Sona and Santiago
From Llano Sánchez to the Coclé-Panama border and
the area between Sona and Santiago
106
Generator
Charges
Distributor
Charges
West
27.91
(35.63)
West
48.18
0.71
West
51.49
3.35
Central
25.65
(20.51)
Central
10.55
3.64
Zonal use of system charges (US$/kW/Year)
Geographical
Area
Zone (with approximate description)
6.
7.
8.
9.
10.
From Chorrera to the Coclé-Panama border and
where the 230 kV line crosses the Canal
From Panama City to where the 230 kV line crosses
the Canal, the Colón-Panama border and Chepo
From Bayano to Chepo and the Panama-Darién
border
From Bahía Las Minas to the Colón-Panama border
From the Chiriquí-Bocas del Toro to
Chiriquí-Changuinola
Generator
Charges
Distributor
Charges
Central
(0.16)
6.19
Metropolitan
(4.17)
16.33
East
Colón
0.59
(0.93)
1.08
11.85
West
0.0
0.0
In addition, ETESA levies monthly charges to cover the cost of system operation, including central
dispatch and hydro-meteorology. These are currently set at US$0.1835/kW for generators and
US$0.2402/kW for distributors and large customers.
Distribution
Following the privatization of the distribution operations of IRHE and subsequent corporate
modifications, the Panamanian distribution network was split between Elektra and two other
companies under common management, Metro Oeste and Empresa de Distribución Chiriquí S.A.,
or EDE Chiriquí. Metro Oeste serves the western side of Panama City and the central region of
the country and EDE Chiriquí serves the area close to the Costa Rican border. Further details of
their number of customers and business mix are contained in the following table.
Distribution companies—2004 summary information
Distributor
Metro Oeste . . . . . . . . . . . . . . .
EDE Chiriquí . . . . . . . . . . . . . . .
Elektra . . . . . . . . . . . . . . . . . . .
Annual
Average
Customers
284,111
86,110
276,560(1)
Market
Share
Unit Sales
(GWh)
High
Tension
43.9
13.3
42.8
2,312
385
1,800
0.0%
4.7%
0.0%
Consumption Supplied at
Medium
Tension Low Tension(2)
13.6%
20.8%
17.7%
86.3%
74.5%
82.3%
(1) The Ministry of Economy calculated our annual average number of customers based on our number of customers at year end.
(2) Public lighting is included in low tension consumption.
Demand
Maximum peak demand in the Panamanian system in 2004 was 925 MW. In 2004, the average
load factor for the system, inclusive of transmission losses, is estimated to have been
approximately 70.1%. Set forth below is a table showing the development of annual maximum
demand in the system from 2002 to 2005.
Demand
2005
Maximum Demand (MW) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
107
2004
2003
2002
946
925
882
857
2.27% 4.87% 2.92% 2.14%
Consumption
Electricity sales to end consumers in Panama was 4,595 GWh for 2004, an increase of 6.7% over
2003. Over the last two years growth in sales has averaged 5.7% annually compared to an
average of 5.9% annual growth in GDP. The most recent Informe Indicativo de Demanda issued
by the CND contains a forecast of 3.4% average annual sales growth for the period 2006-2014.
Electricity demand growth vs. GDP growth
Consumption Growth . . . . . . . . . . . . . . . . . . . . .
GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
2003
2002
Average Annual
Growth (2002-2004)
6.7%
7.6%
4.7%
4.2%
4.5%
2.2%
5.7%
5.9%
The table below shows electricity sales by customer category over the same period.
Sales to end consumers by customer category (GWh)
2004
2003
2002
Average Annual
Growth (2002-2004)
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public lighting . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internal consumption . . . . . . . . . . . . . . . . . . . . .
Block sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,437.8
2,065.2
336.8
635.8
106.8
0.0
0.0
1,341.2
1,947.9
321.7
589.9
94.9
0.0
0.0
1,261.0
1,733.6
438.7
581.3
79.2
0.0
0.0
6.8%
9.1%
(12.4)%
4.6%
16.1%
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,595.1
4,306.9
4,113.1
5.7%
The table below shows the number of end consumers by customer category over the same
period.
Number of end consumers by customer category (annual average)
2002
Average Annual
Growth (2002-2004)
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
575,133 543,583 512,436
61,681
59,916
59,305
1,391
1,406
1,369
8,147
7,926
7,865
5.9%
2.0%
0.8%
1.8%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
646,352 612,831 580,975
5.5%
2004
2003
The table below summarizes the energy balance for the Panamanian electricity industry for the
period from 2002-2004.
Year
2002 . . .
2003 . . .
2004 . . .
Net
Generation
4,954
5,247
5,419
Net
International
Exchange
(10)
(178)
(129)
Other
Generation
Energy
Supplied
To Grid
81
99
95
5,025
5,168
5,385
108
Losses
Transmission Distribution
3.7%
2.9%
3.4%
15.1%
14.2%
11.8%
Sales to End
Consumers
4,113
4,307
4,595
International interconnections
Panama has agreements with the electricity companies in Costa Rica (Instituto Costarricense de
Electricìdad), Nicaragua (Empresa Nicaragüense de Electricidad) and Honduras (Empresa Nacional
de Energia Electrica) for the exchange of electricity using the existing 230 kV link between
Progreso in Panama and Río Claro in Costa Rica. The following table summarizes import and
export activity from 2002 to 2005.
Electricity exchanges with Central American countries (GWh)
2005
Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% net generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% net generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
2003
2002
54.93
78.0
2.3
0.99
1.4
0.0
106.29 206.6 180.2
1.9
3.8
3.4
35.1
0.7
45.2
0.9
Generators may enter into import and export contracts with counterparts in other countries
subject to appropriate disclosure of contract information to the CND and its equivalent in the
country concerned.
SIEPAC
The SIEPAC project, sponsored by the Governments of Panama, Costa Rica, Nicaragua, Honduras,
El Salvador and Guatemala, envisages the gradual creation of a Central American regional
electricity market. This is intended to promote the development and growth of the regional
electricity industry, encourage greater private sector participation in the sector, improve
interconnection between the national grids of the sponsor countries and establish a transparent
and non-discriminatory regulatory framework for the operation of the regional market.
A framework treaty, providing for the establishment of a regulatory entity and operating
structure for the regional network, was ratified by the participating countries in 1998. As
currently defined, the project involves the establishment of a single circuit 230 kV transmission
link from Panama (Veladero, Chiriquí) to Guatemala (1,800 kilometers) with 15 substations with a
peak transfer capability, following reinforcement of the existing national networks, of 300 MW
(240 MW from Costa Rica to Panama). The project is estimated to cost approximately
US$320 million and is likely to require approximately four years to complete. The project is to be
funded by the Inter-American Development Bank (IDB), the Spanish Government’s
Quincentennial Fund and the Empresa Propietaria de la Red, the entity designated to be the
owner and operator of the network by the six regional governments, shares in which may also be
offered to private investors. Currently, the bids placed by the prequalified companies for the
construction of the network are under evaluation. The notice to proceed with the construction is
expected to be given by July 2006 at the latest. Construction is scheduled to begin the line by the
end of 2005 and the project is expected to be completed by March of 2008. Depending on the
development of the market, regional transmission capacity could be increased to 600 MW within
five years of the completion of the initial project through the construction of a second 230 kV
line.
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Electric energy rationing
The Commercial Rules provide that energy rationing should be simulated on a daily basis during
the planning sessions with the SDDP and the resources scheduling models. Programmed rationing
(unidad de falla 1) is simulated as a demand of 5% of the total national demand with a price 1.15
times the highest thermal plant; the second step of energy rationing (unidad de falla 2) is
simulated as a demand of 10% of the total national demand with a price 1.45 times the highest
thermal plant; and the third step of energy rationing is simulated as a demand of 30% of the
total national demand with a price 2.35 times the highest thermal plant and a maximum of
US$600 per MWh for the balance.
If emergency rationing occurs, the CND will determine the amount of energy to be rationed
according to the characteristics and implications of the emergency. The Commercial Rules provide
the methodology for calculating the amount of energy to be withheld in the case of
programmed and emergency rationing, and set forth the parameters for the distribution of the
rationed energy to consumers. While energy rationing is in effect, the spot market ceases to
function and generators are only required to satisfy their contractual obligations, unless the
Commercial Rules then in effect provide otherwise. Once emergency rationing ends, the spot
market is reactivated and to the extent that certain contract provisions were temporarily
suspended pursuant to the Commercial Rules they will be reinstated.
Environmental regulation
In July 1998, the Panamanian Government enacted Law 41, which created ANAM. Law 41 also
sets out the legal framework for the protection of the environment through the sustainable use
of natural resources. ANAM is responsible for implementing Panama’s environmental policy with
the collaboration of other government entities created by, and which are under the supervision
of, ANAM, such as the Consejo Nacional del Ambiente and the Comisión Consultativa Nacional
del Ambiente, among others. ANAM has the ability to impose all applicable environmental
sanctions and fines. Under Law 41, ANAM may impose fines of up to US$10.0 million for any
violation of Law 41, including the improper use of water concessions or water resources without
having the applicable concession.
Investments stability act
The Panamanian Government enacted Law No. 54 of July 22, 1998, which is further regulated by
Executive Decree No. 9 of February 22, 1999 (the “Investments Stability Act”). The Investments
Stability Act provides for certain stability measures in favor of companies engaged in electricity
generation, distribution and transmission activities, among others, that meet certain
qualifications and register with the Ministry of Commerce and Industry.
Tariff structure
Under the 1997 Electricity Law, the ERSP is required to establish tariff methodologies to regulate
connection, use of system charges for distribution services and to approve tariff structures for the
sale of energy to regulated customers. In general, the 1997 Electricity Law provides that tariffs
should be set sufficiently high to cover the costs of providing the required level of service on the
assumption that anticipated productivity gains are shared between distributors and their
customers.
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The 1997 Electricity Law states that distribution charges should be set at a level which, based on
estimates at the start of the tariff period, should allow the distributor to achieve revenues to
cover its recognized costs of distribution or VAD. These are defined as the costs which an
efficient distributor operating in that concession area would incur in terms of administration,
operation and maintenance (including metering, billing and customer service), standard losses
and depreciation plus a reasonable return on investment.
The allowed rate of return before tax for each distributor is set by the ERSP, taking into account
such factors as efficiency levels, quality of service and expected investment requirements. Under
the 1997 Electricity Law, this rate of return must be within a 2% range of the average yield on
the 30-year U.S. Treasury Bond in the year preceding the setting of the tariff, plus a risk premium
of 8%. For purposes of the prevailing tariffs that were established in 2002 and that will remain in
effect until December 31, 2006, the rate of return used was 13.24%. This rate of return is applied
to the distributor’s net fixed assets in operation during the tariff period based on historic
accounting values at the start of the tariff period and the ERSP’s estimate of the distributor’s
efficient investment requirements during the tariff period.
Under the 1997 Electricity Law, for the purpose of determining appropriate levels of efficiency,
the ERSP is required to analyze each distributor’s concession zone in terms of up to three
representative areas according to density, based on the recent performance of actual companies
in Panama or elsewhere operating in similar areas. The ERSP determines efficiency parameters by
selecting comparable companies for each representative area.
The ERSP published its detailed tariff methodology for distribution and commercialization in
December 2001 (Resolution JD-3116) based on research performed by its external consultants on
the performance of selected distribution companies in the U.S. This research identified one
hundred separate companies operating in areas with different levels of consumption density and
established target cost and standard loss parameters for each density level. These were then used
to establish ideal performance parameters for the Panamanian distributors using weighted
averages reflecting the density profile within their concession zones.
Based on these parameters, on the Panamanian distributors’ perceived cost structure and
investment requirements and on an assumed period of transition towards improved efficiency,
the ERSP calculated a maximum permitted income in net present value terms as a basis for the
distribution and commercialization charges of each distributor (Resolution JD-3230). This was
then used to calculate each distributor’s distribution access and use of system charges and
regulated customer tariffs, after incorporating expected costs of generation and transmission,
together with an allowance for standard energy losses.
The current tariff structures, which we developed, include a simple low tension tariff based on
kilowatt-hour metering only, limited to customers with estimated demand of 15 kW or below,
which demand level was previously 12 kW or below, together with demand-based and
time-of-day tariffs for customers with demand metering. Once a customer selects a particular
tariff option, it must give 30 days notice for any intended change and is subject to additional
charges if changes more than twice within 12 months after selecting a particular tariff option.
Distributors’ energy cost is calculated based on the weighted average of the distributor’s
purchase costs under competitively awarded contracts and those of its spot market purchases.
The VAD tariff structure remains in force for four years and the current tariff will expire on
December 31, 2006, as a result of a recent resolution of the ERSP extending the application of
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this current tariff past its scheduled expiration date of June 30, 2006. As a consequence,
electricity distributors will be required to publish their proposed new tariffs by November 1, 2006
based on maximum permitted income levels set by the ERSP. On June 9, 2006, the ERSP issued
Resolution No. AN-065-Elec. announcing its initial proposal for the permitted pre-tax rate of
return to be applied during the next four-year regulatory period and commencing the public
process for interested parties to respond to the proposal before the ERSP issues its initial
resolution. In setting these new levels for maximum permitted income, the ERSP will review the
original efficiency parameters based on the performance of the distributors’ current tariff period
and on forecasts for the next four years. The ERSP is free to select different comparison
companies from those used for the initial tariff. See “Overview of the Panamanian Electricity
Industry — Recent Developments.”
Currently, during each semester within the tariff period the capacity and energy cost components
of the tariff are adjusted to account for variances in actual and expected energy costs, and only
45% of the distribution and commercial charges are adjusted for inflation based on the
Panamanian CPI for the prior two semesters. Beginning July 1, 2006, we expect that these energyrelated components will be adjusted on a monthly basis rather than on a semi-annual basis to
include our actual costs during the third month prior to the month in which the adjustment is
made. The result is that our actual costs for April 2006 will be included in the July 2006
adjustment. We expect that beginning January 1, 2007, the procedure for adjusting the fuel
component in the tariff will return to the previous procedure that includes six months of actual
fuel costs, plus six months of estimated fuel costs. Under the Reglamento de Operación, the CND
is required to provide a regular analysis for the ERSP of the actual and expected generation and
transmission costs of each distributor for use in the tariff calculation. Since January 1, 2000,
customers with low levels of consumption (below 100 kWh) have a discount of 20% in their bills.
This discount is charged to customers with consumption above 500 kWh. Approximately 74,000 of
our customers received this benefit.
Under the current tariff structure, all users of the distribution system and all regulated and
unregulated customers pay a separate consumption based charge within the tariff to cover the
capital and operational costs of public lighting. The energy costs associated with public lighting
are recoverable as part of the overall generation costs passed through to regulated customers
under the tariff.
From January 1, 2003 through December 31, 2005, increases in rates for customers of electricity
distribution companies resulting from the semi-annual rate adjustment process required under
the regulatory structure for the electricity industry were not fully passed through to customers in
the form of tariff increases. Rather, the rate adjustment process during this period, as approved
by the ERSP, resulted in a portion of the allowed rate increases being passed through directly to
customers and the remaining amount being paid to the distribution companies in the form of
subsidy payments from the Panamanian Government. In January 2006, the ERSP announced that
the previously approved rate increases for the six-month period of January 1 to June 30, 2006
would be suspended for 90 days ending on March 31, 2006. In its March 27, 2006 report, the
Energy Commission recommended that a new rate be implemented for the period from April 1,
2006 through December 31, 2006. The ERSP, in its recent resolution, approved a rate adjustment
for this nine-month period based on our projected energy costs through December 31, 2006. See
“— Recent Developments.”
Each month, retirees’ first 600 kWh consumption are entitled to a 25% discount. Discounts of 5%
and 50% also apply to farmers and the provincial offices of political parties, respectively. The
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1997 Electricity Law and the Regulations set limits on the provision of tariff subsidies by the
Government and require distributors to provide the Government with details of those customers
meeting the Government’s eligibility criteria.
Retiree discounts were taken into account for the purposes of calculating the maximum income
allowances underlying the current distribution use of system tariff.
In the absence of acceptable credit references distributors are entitled to require customers to
provide deposits equivalent to the amount of one monthly invoice. These deposits must be
returned after one year provided that the customer has established a good payment record.
During the term of the deposit the distributor must pay interest every six months at the average
rate of commercial fixed term deposits over the previous six months as documented by the
Superintendence of Banks. Interest is chargeable at the same rate on customer invoices that
remain unpaid 30 days or more after the invoice date.
Distributors are required to submit reports to the ERSP on a regular basis concerning outage
levels and other aspects of technical service quality and customer service, including metering and
public lighting. In addition, they must prepare and submit their financial accounts in accordance
with the ERSP’s regulatory accounting standards. These involve accounting separation within
each company activity such as generation, distribution and commercialization and between
regulated and unregulated customers.
Recent developments
The Energy Commission
On September 21, 2005, by Executive Decree No. 27, the Energy Commission was created to
present and implement a saving and rationing plan of energy in the public sector.
In December 2005, due to a marked increase in electricity distributors’ energy costs, the ERSP
approved, effective January 1, 2006 through June 30, 2006, a substantial increase in the rates
charged to customers of those distributors. Due to this high rate increase, on January 23, 2006,
the President of Panama issued Executive Decree No. 11 requesting that the ERSP suspend for 90
days the authorized rate increase of approximately 24% and directing the Ministers of the
Energy Commission to:
• present recommendations to the President of Panama to lower rates to the greatest extent
possible; and
• present recommendations to modify the law that creates the ERSP, within the authority given
to the President by the Panama National Assembly in Law No. 1 of January 3, 2006, to make
use of executive decrees to unilaterally adopt laws. This Law No. 1 was effective until
February 28, 2006 and, under this authority, the President adopted Decree Law No. 10
restructuring and renaming the ERSP.
On March 27, 2006, the Energy Commission issued a report of its findings relating to the
electricity industry and the tariff rate increases. The Energy Commission concluded that electricity
prices are distorted and have resulted in a disproportionate rate increase for customers. The
Energy Commission stated that this distortion is partially due to electricity distribution
companies’ failure to timely contract its electric energy supply thereby exposing customers to the
volatility of electricity spot market prices. The Energy Commission also detected distortions in the
prices offered by the electricity distributors and that there are anomalies in the calculation of the
demand charges paid by customers.
113
As set out in its report, the Energy Commission specifically recommended that:
• the previously approved rate increase scheduled to be effective January 1, 2006 be replaced
with a new rate effective April 1, 2006 (we requested an increase of 20.5% to the ERSP);
• the demand usage charge within the regulated tariff should be billed monthly to existing and
new customers with a demand greater than 15 kW, previously set at 12 kW, and that the
demand charge be applicable on actual demand meter reading, rather than the average of the
highest three demand meter readings over the previous six-month period.
• the ERSP demand that electricity distributors’ comply with their legal obligation to timely
contract their electricity consumption requirements;
• the electricity rate be based on justifiable costs such as the price of fuel used in generating
thermal energy, but in no event, should such costs for the period between April 1, 2006 and
December 31, 2006, be higher than 15%;
• the Panamanian Government should continue to subsidize the semi-annual rate adjustments
for those customers whose monthly consumption does not exceed 200 kWh;
• to avoid market speculation and energy shortages, the ERSP and the ANAM should demand
compliance with the periods established by law for existing hydroelectric concessions and, for
their failure to comply, the ERSP may proceed to cancel these concessions; and
• the President establish greater incentives for investors to develop energy projects based on
renewable natural resources.
Based on these recommendations, the Executive Branch issued Cabinet Resolution No. 22, dated
March 29, 2006, adopting the Energy Commission recommendations, and requesting the ERSP
implement these recommendations. As a consequence thereof, the ERSP issued Resolution No.
JD-5930, dated March 31, 2006, or the March 2006 Resolution, adopting several of the Energy
Commission recommendations. In accordance with this March 2006 Resolution, starting July 1,
2006, the ERSP will use a new methodology to adjust the energy cost component of our tariffs to
reflect fluctuations in energy costs. We expect that this new method will consider monthly
adjustments rather than semi-annual adjustments and, beginning July 1, 2006, the energy cost
component of our customer tariffs will be adjusted to include our actual costs during the third
month prior to the month in which the adjustment is made. The result is that our actual costs for
April 2006 will be included in the July 2006 adjustment. We also expect that beginning January 1,
2007, the procedure for adjusting the fuel component in the tariff will return to the previous
procedure that includes six months of actual fuel costs, plus six months of estimated fuel costs.
The ERSP also established that the VAD tariffs, which were last set on July 1, 2002, and scheduled
to be reset on July 1, 2006, will be extended beyond the expiration date. The current VAD tariffs
will be in effect until December 31, 2006. As a consequence, we expect the new formulas for the
VAD tariff reset period will become effective January 1, 2007 and remain in place for a four-year
period. Furthermore, in its Resolution, the ERSP approved, as of April 1, 2006, that the demand
charge to regulated customers cover those customers with a demand greater than 15 kW, instead
of the previous level of 12 kW, and that the demand charge will be applied to the actual demand
meter reading, rather than the average of the highest three demand meter readings over the
previous six-month period.
In its March 27, 2006 report, the Energy Commission recommended that a new rate be
implemented for the period from April 1, 2006 through December 31, 2006. The ERSP, in its
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Resolution, established that the tariff increase to our regulated customers for this new rate
period should not exceed 10.7%, which is less than the 20.5% increase we had submitted.
However, the ERSP at the same time recognized that we should receive a government subsidy of
US$25.2 million, which would include a US$0.5 million credit from previous subsidies granted, in
order to avoid a rate increase for all our customers with consumption levels under 200 kWh and
limit the 10.7% rate increase to those customers above this consumption level. Together, the
ERSP established rate increase and the US$25.2 million subsidy will compensate us for the
increased energy costs in our original 20.5% rate increase proposal.
Unlike prior rate adjustments in which we included both the difference between our projected
and actual energy costs incurred during the previous tariff revision period and our projected
energy costs for the following six-month period, the new rate adjustment only includes our
projected energy costs for the nine-month period through the end 2006. This change has meant
that we have been unable to pass through to customers and recover our accumulated energy cost
component adjustments from prior tariff revision periods through these new tariffs. The Minister
of the Presidency and the Minister of Finance and Economy have indicated to us that our
recovery of our accumulated energy cost component adjustments for the twelve-month period
from April 1, 2005 through March 31, 2006 will be recovered from the Panamanian Government
in the form of cash or a debt instrument rather than through our regulated tariffs.
On June 9, 2006, the ERSP issued Resolution No. AN-065 Elec. whereby the electricity distribution
companies and the general public were informed of the ERSP’s initial proposal for the permitted
pre-tax rate of return to be applied during the next four-year regulatory period, set to begin on
January 1, 2007. The ERSP has initially proposed that the electricity distribution companies be
permitted to recover a pre-tax rate of return of 10.59%. Based on this rate of return, when
applied to our net fixed assets and what we believe to be our efficient investments, our
maximum allowable income over the four-year period to begin January 1, 2007 would total
US$284.7 million. This would be an approximate 11.87% decrease from the maximum allowable
income we collected through the VAD component of our existing customer tariffs for the 2002
through 2006 VAD tariff reset period.
We intend to submit our responses to the ERSP’s initial proposal by July 10, 2006, the regulatory
deadline for providing comments. It is expected that public comments will be accepted during
the sixty-day period following the ERSP’s June 9, 2006 resolution. The final ERSP resolution for
the VAD rates for the four-year period set to begin January 1, 2007 must be published by
November 2006. While we believe it is possible that the ERSP may increase our maximum
allowable income above the rate initially proposed by them, the VAD rate reset process is
unpredictable and there can be no assurance that the ERSP will revise its initial proposal.
The Commerce Commission of the Panama National Assembly
Since 2003, the Commerce Commission has been reviewing and investigating, with input from
regulators, market participants and consumer organizations, matters relating to the generation,
rationing, cost, importation and tariffs in the electricity sector. On October 11, 2005, the National
Assembly issued Resolution No. 12 directing that the President of the Commerce Commission
present recommendations to address the high energy costs in the electricity sector. On
February 14, 2006, the Commerce Commission presented a written recommendation to amend
the current 1997 Electricity Law to replace the Commission of Energy Policy with the National
Energy Authority and integrate this entity with the Ministers of Economy, the Ministers of
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Commerce, the Ministers of Justice, the Comptroller, the ERSP, ETESA, the CND, the Comision de
Libre Competencia y Asuntos del Consumidor, or CLICLAC, ANAM, and an executive director. The
National Energy Authority would be responsible for:
• establishing policies for the electricity sector;
• establishing criteria for the long-term contracting of capacity and energy;
• establishing procedures for the approval of concessions and licenses;
• reviewing energy dispatching processes and the CND’s structure and responsibilities; and
• promoting the construction of generation plants by the Panamanian Government.
The National Authority of Public Service
On February 22, 2006, by Decree Law No. 10, the ERSP was restructured and renamed and, as of
April 2006, is known as the National Authority of Public Service. The National Authority of Public
Service has the same responsibilities and functions as was held by the ERSP but has one General
Administrator and one Executive Director, each appointed by the President of Panama and
ratified by the National Assembly, and has three National Directors under the Authority of the
General Administrator: one for the electricity and water sector, one for the telecommunication
sector and one for the customer service sector. National Directors are responsible for issuing
resolutions relating to their respective industry, and appeals from these resolutions are taken to
the General Administrator as the final stage of the administrative process.
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Management
Our Board of Directors consists of five members: two elected by the Panamanian Government
and three elected by PDG. If a vacancy occurs, a new director is elected, thereby preserving
representation of each constituent shareholder. As of March 31, 2006, the directors, officers and
executives listed below held the positions indicated opposite their names as of the date of this
offering memorandum. The most recent election of directors was held on October 3, 2005. Our
executive officers are appointed by the Board of Directors and hold office at the discretion of the
Board of Directors.
Under our Articles of Incorporation, so long as it retains at least a 25% shareholding, the
Republic of Panama has the right to (i) appoint two of our five board members and (ii) veto
amendments to the Articles of Incorporation and by-laws, any merger, proposed merger, or
dissolution, a change of domicile, the granting of security over the concession or any decision to
engage in activities not strictly connected to the distribution or sale of electricity.
The executive management team members supervise and coordinate the activities of the
Company in their respective areas of expertise.
Name
Age
Position
K. George Wasaff . . . . . . . . . . . .
52 Director, President and Chief Executive Officer
Ubaldino A. Real . . . . . . . . . . . . .
42 Director
Dilio Arcia . . . . . . . . . . . . . . . . . . .
57 Director and Treasurer
Johan C. Hattingh . . . . . . . . . . . .
52 Director
Robert B. Barnes . . . . . . . . . . . . .
53 Director
Carlos G. Cordero . . . . . . . . . . . .
57 Secretary
Javier Pariente . . . . . . . . . . . . . . .
50 Executive Vice President and Chief Operating Officer/
General Manager
Jaime A. Lammie . . . . . . . . . . . . .
52 Director of Wholesale Market Operations
Ramiro Troitiño . . . . . . . . . . . . . .
54 Director of Distribution and Engineering
Victor M. Inchausti . . . . . . . . . . .
35 Director of Customer Service
Eric Morales . . . . . . . . . . . . . . . . .
48 Director of Finance
Roque Ledesma . . . . . . . . . . . . . .
40 Director of Purchase and Logistics
Edwin R. Bustavino . . . . . . . . . . .
52 Information Systems Director
Beryl Bartoli . . . . . . . . . . . . . . . . .
44 Human Resources Manager
Margarita Aguilar . . . . . . . . . . . .
48 Quality Assurance Manager
Lorena V. Fabrega . . . . . . . . . . . .
34 Corporate Communications Manager
Mariel Jovane . . . . . . . . . . . . . . . .
28 Manager of the Legal Department
The following are summarized biographies of our directors, officers and executives.
K. George Wasaff (Director, President and Chief Executive Officer). Mr. Wasaff joined Elektra in
his current capacity in October 2005 concurrent with Ashmore’s acquisition of CPI, Limited from
Constellation Power, Inc. Mr. Wasaff is also currently a senior officer and executive with Ashmore
Energy Service Corp. (“Service Corp.”), and certain of its affiliates, where he has profit and loss
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accountability for energy investments and operations for companies affiliated with Service Corp.
Prior to joining us, from March 1986 to October 2005, Mr. Wasaff worked at Enron Corp. where,
during his tenure, was a senior executive and oversaw various aspects of expenditures and
restructuring during Enron’s bankruptcy. Mr. Wasaff was responsible for restructuring the supply
chain, property and facility services, real estate, aviation, corporate risk management, and
disposition of certain domestic and international holdings. Mr. Wasaff joined Enron Corp.’s
Transwestern Pipeline Company in 1986 as a senior marketing representative and has held
positions of increasing responsibility including, among others, Vice President of Marketing for
Transwestern Pipeline Company, Vice Chairman of the Board and Chief Executive Officer of
Transportadora de Gas de Sur S. A., a natural gas transportation company in Argentina, Interim
President of Elektro—Eletricidade e Servicos S.A., an electric distribution company in Brazil, and
Senior Vice President of Enron South America’s wholesale operations with profit and loss
accountability for natural gas transportation and power generation in Bolivia, Brazil, and
Argentina. Mr. Wasaff began his career in the energy industry in 1978 with El Paso Natural Gas
Company. Mr. Wasaff is a native of El Paso, Texas, holds a Bachelors degree in Business
Administration from the University of Texas at Austin and is licensed to practice public
accountancy in the State of Texas. Mr. Wasaff currently serves on the boards of directors of CPI,
Limited, PDG, AEI, and Ashmore International Utilities S.L. (Spain), the board of managers of AEI
(Luxembourg) S.a.r.l. and is the President of PDG. He is a U.S. citizen, and his e-mail address is
[email protected].
Ubaldino A. Real (Director). Mr. Real was appointed Minister of the Presidency in September
2004 where he serves as the Chief of Staff and Executive Authority overseeing the operation of
all public institutions. Prior to this appointment, from 1999 to 2004, Mr. Real was the President
and a Director of Millennium Holdings and was responsible for managing a portfolio of
businesses that includes real estate development projects, construction, reforestation and
financial consulting. From 1998 to 1999, Mr. Real was a Partner at KPMG Peat Marwick, and from
1995 to 1997, Mr. Real served as the Chief Financial Officer of Coral Gables Consulting Group.
Prior to joining Coral Gables Consulting Group, from 1989 to 1995, Mr. Real worked at IBM (USA).
Mr. Real has a Bachelors of Science degree in Industrial Engineering, a Masters of Science degree
in Industrial Engineering and an M.B.A. each from the University of Texas A&M. Mr. Real
currently serves on the boards of directors of Fortuna S.A., Empresa de Distribución de Chiriquí,
Empresa de Transmision Electrica S.A. and Cable & Wireless Panama, S.A. He is both a
Panamanian and U.S. citizen, and his e-mail address is [email protected].
Dilio Arcia (Director and Treasurer). Mr. Arcia has served as the Vice Minister of the Presidency.
From 2001 to 2004, Mr. Arcia served as Deputy Director of the Legal Advisory Office, and from
1995 to 1998, he served as the General Director of the National Lottery. Mr. Arcia has been our
Treasurer since September 2004. Mr. Arcia is an attorney and graduated from the Universidad
Complutense, Madrid, Spain with a Ph.D. in law. He currently serves on the boards of directors of
several other companies including Bahía Las Minas, Tocimer, S.A. and Cable & Wireless Panama,
S.A. He is a Panamanian citizen, and his e-mail address is [email protected].
Johan Hattingh (Director). Since 1999, Mr. Hattingh has served as an independent management
consultant and non-executive officer of various companies, providing advice on business strategy,
corporate growth and governance. Mr. Hattingh has over 20 years’ experience in global
merchant and investment banking having worked at institutions including Daiwa Europe Bank
plc and the Industrial Bank of Japan where he served as Head of Derivatives and Financial
Engineering, at NatWest Markets where he served as Managing Director of Fixed Income and
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Futures, and at the Australia and New Zealand Bank as Head of Global Capital Markets.
Mr. Hattingh holds Bachelors degrees in Industrial Psychology from the University of
Johannesburg and in Economics from the University of South Africa, a Master’s degree in
International Economics from the University of South Africa and a Ph.D. in Financial Management
from the University of Johannesburg. Mr. Hattingh currently serves on the boards of directors of
Intergrum, Ltd., Bradley & Kent Ltd. and Ticaret Menkul Degerler. He is a U.K. citizen, and his
e-mail address is [email protected].
Robert B. Barnes (Director). Mr. Barnes is a founding member and partner of Alchemy Partners,
LLP, a private equity advisory firm formed in 1997. Prior to his work with Alchemy Partners,
Mr. Barnes worked as a financial manager for financially distressed companies and as a Senior
Manager at Coopers and Lybrand, London. Mr. Barnes has a Chemical Engineering degree from
the University of Leeds, England and is a chartered accountant qualified both in the U.K. and
Canada. Mr. Barnes currently serves on the boards of directors of Blagden Group NV, C2C Pte
Ltd., Avingmen Ltd., New Horizon Youth Centre Ltd. and Alchemy Venture Partners Ltd. He is a
U.K. citizen, and his e-mail address is [email protected].
Carlos G. Cordero (Secretary). Mr. Cordero is a founding partner of Alemán, Cordero, Galindo & Lee,
our local Panamanian counsel, where he has been a practicing member since 1985. Mr. Cordero
currently serves as Secretary on our Board of Directors and has served in this capacity since October
1998. Mr. Cordero graduated from the University of Panama with a Bachelors of Law degree and a
Political Science degree. Mr. Cordero currently serves on the boards of directors of several other
companies including Cable & Wireless Panama, S.A., Alcogal International Management, Inc.,
Alemán, Cordero, Galindo & Lee Trust (BVI) Limited, Alemán, Cordero, Galindo & Lee (Bahamas)
Limited, Alemán, Cordero, Galindo & Lee Trust (Panamá), S.A., Alemán, Cordero, Galindo & Lee
(Belize) Limited, Parkdale Investment Inc., Meridional Properties, S.A., and Lansburg International,
S.A. He is a Panamanian citizen, and his e-mail address is [email protected].
Javier Pariente (Executive Vice President and Chief Operating Officer/General Manager).
Mr. Pariente joined us in October 1999 as Director of Finance and Administration and, in
April 2002, was promoted to Deputy General Manager as part of a corporate restructuring. In
December 2003, he was appointed as our General Manager, also known as the Chief Operating
Officer. Mr. Pariente is responsible for developing and overseeing the implementation of the
Company’s business plan, business mission and objectives in a profitable manner, ensuring the
Company’s economic and financial growth and quality service standards, and administering the
Company’s code of conduct and code of ethics. Mr. Pariente facilitates team integration, mentors
senior management and regularly evaluates management’s performance. Mr. Pariente’s is also
responsible for informing CPI, Limited and our Board of Directors of major developments,
including changes in laws and regulations that may affect the present and future of the
concession. He is also responsible for preparing and presenting quarterly reports to the Board of
Directors. Mr. Pariente is Elektra’s representative in civic organizations and when appearing
before governmental authorities and the ERSP. Before joining us, from June 1995 to October
1999, Mr. Pariente was the Executive Vice President of Importadora Ricamar, S.A., an importer
and wholesale supermarket chain. Prior to that time, Mr. Pariente worked as Finance Manager
for Productos Avícolas Fidanque, performing credit analyses for Chase Manhattan Bank and as a
credit officer for Citibank. During his professional career, he has participated in several civic
organizations and has served on the boards of directors of several local companies. Mr. Pariente
holds a Bachelor’s degree in Business Administration from Universidad Santa María La Antigua.
He is a Panamanian citizen, and his e-mail address is [email protected].
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Jaime A. Lammie (Director of Wholesale Market Operations). Mr. Lammie has been our Director
of Wholesale Market Operations since November 1998 and is responsible for managing our
contractual obligations in the wholesale energy market, tariff issues and various aspects of
regulatory compliance and negotiations with large customers. Before joining us in 1998, he was
an Industrial Engineer and Total Quality Advisor for the Engineering and Housing of the United
States Armed Forces—Panama Canal. Mr. Lammie also has 10 years of experience with IRHE
where he worked as the Manager of the Tariff Department, Tariff Analyst and Chief of the Tariff
Division. He has lectured for more than 20 years on finance and project evaluation at the
Universidad Tecnológica de Panamá and was a consultant for PDG during the privatization
process. Mr. Lammie holds a Master’s degree in Industrial Engineering from the University of
Panama. He is a Panamanian citizen, and his e-mail address is [email protected].
Ramiro Troitiño (Director of Distribution and Engineering). Mr. Troitiño has been our Director
of Distribution and Engineering since August 2002 and is responsible for our substations, the
distribution network’s operation and maintenance, capital expenditures, system optimization,
technical service quality and system reliability. Before joining us in August 2002, Mr. Troitiño was
the Project Manager at Sistemas Energéticos de Panama, S.A., an engineering and construction
company that specializes in mechanical and electrical works. Over the course of 16 years, he has
worked as the Commercial Manager for Guyana Electricity Company under a consulting contract
with the International Development Bank and at IRHE in various engineering and managerial
positions. Mr. Troitiño has a Bachelor of Science degree in Electromechanical Engineering from
the University of Panama and has additional training from the Advance School in Power System
Engineering in Pittsburgh, sponsored by Westinghouse Electric Corporation and Pennsylvania
State University. Mr. Troitiño currently serves on the boards of directors of Electrobras, S.A. and
Corp. Jorama, S.A. He is a Panamanian citizen, and his e-mail address is [email protected].
Victor M. Inchausti (Director of Customer Service). Mr. Inchausti has been our Director of
Customer Service since February 2002. Mr. Inchausti is responsible for providing proper and
timely attention to our existing and new customers’ requirements. He also supervises the design
and implementation of the meter reading cycle plan, customers’ monthly invoices, billing analysis
and validation, customer claims, commercial operations (inspections, new connections,
disconnections, reconnections), the loss program and the call center. His department assures that
the quality of service satisfies commercial regulations. From August 2000 to January 2002,
Mr. Inchausti was the Administrative Manager of Comercial Jaar S. de R. L, an automobile
distributor, where he supervised all operations. Mr. Inchausti holds a Bachelor of Science degree
in Civil Engineering from the University of Florida, Gainesville, and a Master’s degree in Civil
Engineering and a Master’s of Industrial Engineering from Texas A&M University. He is both a
Panamanian and U.S. citizen, and his e-mail address is [email protected].
Eric Morales (Director of Finance). Mr. Morales has been our Director of Finance since January 2003.
Mr. Morales is responsible for all aspects of our finance department including cash flow, our
relationship with financial institutions, capital and operational expenditures, budgets, financial
models, accounting, and premises management. Mr. Morales is also responsible for implementing
and testing financial reporting of internal controls. Before joining us, Mr. Morales was the Finance
Manager of Maersk Panama, S.A., the shipping agent representative of Maersk Sealand. During his
ten-year career at Maersk, he had the opportunity to work in Brazil and Mexico, occupying a similar
position. Previously, he worked as Finance Manager for DHL Panama and Venezuela and as an
auditor for KPMG. Mr. Morales holds a Bachelor’s degree in Accounting from Universidad Nacional de
Panama. He is a Panamanian citizen, and his e-mail address is [email protected].
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Roque Ledesma (Director of Purchase and Logistics). Mr. Ledesma has been our Director of
Purchase and Logistics since June 2005. He is responsible for procuring and our efficient use of
resources and services needed for our operations. Mr. Ledesma has also served as our Director of
Commercial Operations, overseeing the loss reduction program and commercial operations, as
part of our strategy to increase efficiency, and as our Director of Loss Reduction, Director of
Distribution and Engineering, and Director of Process Improvement. Before joining us,
Mr. Ledesma worked for Electroingeniería, an electromechanical construction company, as the
Project Coordinator for the La Rioja transformer station and the Aucayacu-Tingo María
transmission line in northeast Peru. Mr. Ledesma also served as the Chief of Technical Quality
Control for EDEFOR, S.A., the electricity distributor serving the province of Formosa, and EDECAT,
S.A., the electricity distributor serving the province of Catamarca. Mr. Ledesma studied electrical
and electronic engineering at the Universidad Nacional de Córdoba in Argentina and is currently
completing a managerial degree at the Universidad Latinoamericana de Ciencias y Tecnología in
Panama. He is an Argentine citizen, and his e-mail address is [email protected].
Edwin R. Bustavino (Information Systems Director). Mr. Bustavino has been our Information
Systems Director since November 1998. He is responsible for planning, organizing and developing
all aspects of automation and corporate information systems. He is also responsible for
overseeing our Business Continuity Program. Mr. Bustavino has an Industrial Engineering degree
from the University of Panama and postgraduate qualification in Industrial Administration from
the Universidad Santa María La Antigua. He is a Panamanian citizen, and his e-mail address is
[email protected].
Beryl Bartoli (Human Resources Manager). Ms. Bartoli has been our Manager of Human
Resources since July 2003 and is responsible for recruiting and training, performance evaluations
and salary administration. Ms. Bartoli also oversees our Industrial Safety, Health and Environment
Department. Before joining us, from January 1993 to June 2003, Ms. Bartoli was the Human
Resources Manager for Franquicias Panameñas, S.A., a fast-food franchise company. Ms. Bartoli
has also worked as a human resources official for Administración de Seguros (ASSA), a leading
local insurance company, and Cervecería Nacional, the largest local brewing company. Ms. Bartoli
holds a Bachelor’s degree in Psychology from Universidad Santa María La Antigua and, for several
years, has lectured on the subject at the Universidad Latina. She is a Panamanian citizen, and her
Margarita Aguilar (Quality Assurance Manager). Ms. Aguilar has been our Quality Assurance
Manager since June 2000. She is responsible for the Process Improvement Department and
Information Technology Security Administration, ensuring continuous improvement and process
redesigns and information technology security with a focus on logical, technical and physical
system information protection and its related infrastructure. The Quality Assurance Unit also
participates in risk evaluation and testing of our financial reporting on internal controls. Before
joining us in June 2000, Ms. Aguilar worked for the Autoridad de la Región Interoceánica (ARI) as
the Director of Organization and Information Systems. Before joining ARI, Ms. Aguilar worked
for 13 years at IRHE in its Human Resources, Planning, Information Technology and
Administration & Development departments. Ms. Aguilar has an Industrial Engineering degree
from Universidad Tecnológica de Panama and has studied public management postgraduate at
Universidad de Panama. Ms. Aguilar is currently completing her MBA in organizational
communications at the Universidad Santa Maria La Antigua. She is a Panamanian citizen, and her
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Lorena V. Fabrega (Corporate Communications Manager). Ms. Fabrega has been our Corporate
Communications Manager since December 2002. She is responsible for customer and public
relations and community service programs. She is also responsible for our public image and is the
primary contact with the media and is responsible for the Crisis Management Manual. Prior to
joining us, from September 2000 to November 2002, Ms. Fabrega worked as the Administrative
Manager for Airesistemas, S.A., supervising its Accounting, Finance and Human Resources
departments. Prior to September 2000, Ms. Fabrega was the Executive Director for the Latin
American Journalism Center (CELAP), a nonprofit organization that conducts workshops,
conferences and other educational forums for professional journalists in the Latin America
region. While working for Airesistemas and CELAP, she was also co-anchor on a weekly
educational television show “De Mujeres y de Todo,” and a Latin American consultant for the
Media Development Loan Fund, a nonprofit organization based in Prague, Czech Republic, that
provides capital to promising mass media communication companies to promote strong and
independent press in the former Soviet Union, Central and Eastern Europe, Africa, Asia and Latin
America. Ms. Fabrega is currently a member of the Panama Sur Rotary Club and the Panamanian
Association of Business Executives. She holds a Bachelor’s degree in Journalism, having minored
in Marketing, from Texas A&M University. She is both a Panamanian and U.S. citizen, and her
Mariel Jovane (Manager of the Legal Department). Ms. Jovane has been the Manager of our
Legal Department since October 2004 and, from February 2004 to September 2004, was our Chief
of the Legal Department. From 2002 until September 2004, Ms. Jovane served as our legal
advisor. Ms. Jovane is responsible for coordinating all legal and contractual matters and advising
the Company about regulatory and compliance issues. She is also responsible for providing legal
support to the Human Resources department regarding labor and union issues. Prior to joining us
in 2002, Ms. Jovane worked as a legal advisor for the ERSP. Ms. Jovane is an attorney admitted to
practice in Panama and holds an undergraduate degree in Political Science from ULACIT.
Ms. Jovane has a post-graduate degree in Strategic Administration and an MBA in finance from
ULACIT. Ms. Jovane is also a member of the Colegio Nacional de Abogados de Panama. She is a
Panamanian citizen, and her e-mail address is [email protected].
Each of the Company’s directors, officers and executives can be reached through Elektra Noreste,
S.A., at Edificio Hatillo, Torre A, Ave., Justo Arosemena y Ave. Cuba, Panama City, Republic of
Panama. The telephone number of Elektra Noreste, S.A. is 507-207-0008.
Board composition
We currently have a five member board of directors, three of whom are appointed by PDG and
two by the Republic of Panama. The board’s present membership is listed below.
Name
Elected or Appointed By
Member of the Board Since
Ubaldino A. Real . . . . . . . . . . . .
Dilio Arcia . . . . . . . . . . . . . . . . . .
K. George Wasaff . . . . . . . . . . . .
Robert B. Barnes . . . . . . . . . . . . .
Johan C. Hattingh . . . . . . . . . . .
Republic of Panama
Republic of Panama
PDG
PDG
PDG
September 2004
September 2004
October 2005
October 2005
October 2005
The Articles of Incorporation requires that at least 51% of the voting shares be present to have a
quorum necessary for a valid shareholder’s meeting. The Board of Directors manages our
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day-to-day business operations and has been given full authority to manage our affairs, except
for those items that must be decided upon by the shareholders by law or pursuant to the Articles
of Incorporation.
Committees of the board of directors
Our Board of Directors has an Audit Committee, which currently consists of Mr. Robert B. Barnes,
as President, Mr. K. George Wasaff and Mr. Ubaldino A. Real. Our audit committee oversees our
financial reporting process and reviews; the effectiveness of our internal financial control risk
management system; the effectiveness of our internal audit function; our independent audit
process including recommending the appointment and assessing the performance of the external
auditor; and our process for monitoring compliance with laws and regulations affecting financial
reporting and, if applicable, our code of conduct. Starting in February 2006, our audit committee
members receive a fixed fee of US$750 for each meeting attended.
Compensation
Directors’ compensation
During 2005, directors each received a fixed fee of US$750 for each meeting attended, plus
reimbursement of their out-of-pocket expenses.
Executive officers’ compensation
The aggregate compensation earned by our 11 executive officers listed above, for 2005 was
US$1.1 million. This compensation consists of a base salary of US$0.8 million and annual bonus of
US$0.2 million. Our annual bonus plan considers both company performance, through
comparison to established targets and financial performance of our peers, and individual
performance.
Corporate governance
Although we currently do not have a corporate governance policy, we have adopted certain
corporate governance practices including (i) establishing an audit committee whose functions are
described above, (ii) adopting a code of ethics and an antifraud program, (iii) performing
voluntary internal control testing, (iv) using certified systems for our billing and metering systems
and (v) providing a third-party customer and employee whistle-blower complaint line.
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Principal shareholders
At March 31, 2006, our issued and outstanding share capital consisted of 50,000,000 shares of
common stock, without par value, having one vote per share.
The following table sets forth our shareholders, the respective number of our shares owned by
them and their percentage shareholdings as of March 31, 2006.
Title of Class
Name of beneficial owner
Common Stock . . . . .
Panama Distribution Group
The Republic of Panama
Elektra’s Employees
Amount and nature
of beneficial
ownership
Percent of
class(1)
25,500,000
24,127,549
212,420
51.00%
48.25%
00.43%
(1) The remaining 0.32% is held in treasury stock. The shares held in treasury are shares that were initially purchased by Elektra
employees, which were repurchased by us. We have no present intention to cancel or reissue these treasury shares.
Under our Articles of Incorporation (Pacto Social), PDG, as the majority shareholder, may not sell
part of its shares while the Concession Contract remains in force and has no preferential rights of
acquisition in relation to the Panamanian Government’s remaining shares. PDG has the
pre-emptive right to purchase its pro rata share of any newly issued shares.
Our majority shareholder, PDG, is owned by CPI, Limited. CPI, Limited has been owned by certain
investment funds managed by Ashmore. However, due to a corporate restructuring at the
Ashmore level, these investment funds have contributed their collective ownership of CPI,
Limited to a wholly-owned subsidiary of AEI and have been issued shares in AEI following this
contribution. These investment funds are the controlling shareholders of AEI, which owns 100%
of PDG, through AEI’s indirect ownership of CPI, Limited.
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Related party transactions
Concession contract
Our distribution concession is governed by the Concession Contract dated October 22, 1998,
between us and the ERSP. See “Business—Concession Contract.”
Management agreements
Pursuant to a Management Consulting Agreement dated November 16, 1998 (the “Management
Consulting Agreement”) between Constellation Power, Inc. and us, as amended and assigned to
CPII, a holding company that owns PDG, our majority shareholder, and which is now known as
CPI, Limited, on March 4, 2002, CPI, Limited provides management and consulting services to us
in exchange for an annual fee equal to 6% of our earnings before interest, taxation, depreciation
and amortization for the relevant fiscal year for the first five years of the Concession Contract
and 4% of our earnings before interest, taxation, depreciation and amortization for the relevant
fiscal year beginning with the sixth year of the Concession Contract. The Management Consulting
Agreement was for an initial term of five years and is now automatically renewed annually so
long as CPI, Limited or an affiliate owns at least 25% of PDG.
Pursuant to a management agreement dated October 30, 1998 (the “Management Agreement”)
between CPII, a holding company that owns PDG, our majority shareholder, and which is now
known as CPI, Limited, and Panama Distribution Group, CPI, Limited provides management
services to PDG in exchange for reimbursement of its costs and expenses, up to US$25,000
annually. The Management Agreement was for an initial term of five years and is now renewed
annually so long as CPI, Limited or an affiliate owns at least 25% of PDG.
Neither the Management Consulting Agreement nor the Management Agreement may be
assigned by either party thereto without the consent of the other party, except that CPI, Limited
may assign its agreement to any of its controlled affiliates.
Legal services
Alemán, Cordero, Galindo & Lee is our local Panamanian counsel, and Mr. Carlos Cordero, a
partner of that firm, serves as our corporate Secretary.
Energy sales and purchases
In the normal course of business, we purchase electricity from the generating and other
distribution companies, sell energy to governmental institutions and make payments to the
transmission company. These transactions are made and under the terms and conditions of the
power purchase agreements and transmission fees are paid as discussed elsewhere in this
offering memorandum and in our audited financial statements and notes thereto.
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Description of other indebtedness
Syndicated long-term loan agreement
On October 19, 2004, we entered into a syndicated long-term loan agreement in an aggregate
principal amount of US$100.0 million with a bank syndicate composed of Banco Continental de
Panama, S.A., Citibank, N.A., Panama Branch, Primer Banco del Istmo, S.A., and Banco Bilbao
Vizcaya Argentaria (Panama), S.A. and Elektra Noreste, S.A., or the Syndicated Long-Term Loan.
At the time we entered into this Syndicated Long-Term Loan, using part of the proceeds, we
satisfied our obligations under our existing loan and fully repaid the outstanding balance. The
Syndicated Long-Term Loan agreement provides for borrowings of up to US$100.0 million and
has a term of ten years.
As of March 31, 2006, our outstanding indebtedness under our Syndicated Long-Term Loan
agreement was US$95.2 million of which, US$5.0 million is short-term indebtedness and US$1.4
million is interest payable on that long-term indebtedness. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operation—Indebtedness.”
We will use the proceeds of this offering to repay all outstanding amounts under the Syndicated
Long-Term Loan, including principal and interest. See “Use of Proceeds.”
Short-term credit facilities
Our short-term indebtedness, including the current portion of long-term indebtedness was
US$12.0 million as of March 31, 2006 from US$10.0 million as of December 31, 2005, primarily as
a result of the US$2.0 million increased borrowings under our short-term credit facilities for an
aggregate principal amount of US$7.0 million and amortization payments due under the
Syndicated Long-Term Loan in the first quarter of 2006 of US$5.0 million.
We use our short-term credit facilities for the issuance of promissory notes or the issuance,
negotiation and refinancing of letters of credit with maximum tenor of up to one year. As of
March 31, 2006, we had US$2.0 million in borrowings under our Citibank Credit Facility, US$5.0
million in borrowings under our Banco Billbao Credit Facility and approximately US$5.0 million in
letters of credit to guarantee for our payment obligations to ETESA. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operation—Indebtedness—
Short-Term Indebtedness.”
To the extent there are amounts remaining, we will use the proceeds of this offering to repay
outstanding amounts under our short-term credit facilities. See “Use of Proceeds.”
AEI credit agreement
Ashmore Energy International Limited (“AEI”) has entered into credit facilities among various
financial institutions (the “AEI Facilities”). Under the terms of the AEI Facilities, AEI and its
subsidiaries, including us, are subject to certain covenants, including covenants that limit our
ability to:
• incur additional indebtedness;
• incur, repay or prepay amounts under our short-term credit facilities in an aggregate amount
greater than US$50.0 million outstanding at any one time;
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• incur additional liens;
• make certain investments;
• make distributions on a non-ratable basis to our shareholders;
• issue capital stock (other than to AEI or other wholly owned subsidiaries of AEI);
• make voluntary payments of our indebtedness (other than in the context of a refinancing);
• engage in liquidations, dissolutions and mergers (other than into or with another AEI
subsidiary);
• dispose of certain of our assets;
• enter into transactions with affiliates, unless on fair and reasonable terms no less favorable
than could be obtained in arm’s length transaction with a person who is not an affiliate;
• enter into certain agreements that prohibit us from creating or assuming any lien upon our
property or making any payment to AEI;
• enter into sale and leaseback transactions;
• change our line of business; and
• modify our organizational documents or the Indenture governing these Notes (other than in
the context of a refinancing) .
In each case, the limitations are subject to a number of exceptions, materiality qualifiers and
baskets. We believe that the above covenants will not impact our ability to conduct our current
operations and implement our business plan going forward.
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Description of the notes
The following summary describes the material provisions of the Notes and the Indenture under
which the Notes will be issued. This summary does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the provisions of the Indenture and the Notes. In this
summary, all references to “Elektra,” “we,” “our,” “ours” and “us” refer to Elektra Noreste, S.A.,
except as otherwise provided. Capitalized terms used in the following summary and not
otherwise defined herein shall have the meanings ascribed to them in the Indenture.
General
We will issue US$100,000,000 Notes due July 12, 2021 under an Indenture to be dated as of
June 15, 2006 (the “Indenture”) between us and The Bank of New York, as trustee, registrar, New
York paying agent and transfer agent (the “Trustee”).
The Notes will have the following basic terms:
• The Notes will be in an aggregate principal amount of US$100,000,000. The principal amount
of the Notes will be payable in full in a single payment upon maturity unless the Notes are
redeemed earlier pursuant to the terms of the Indenture.
• The Notes will bear interest from July 10, 2006 at the rate of 7.60% per annum (such rate, the
“Note Rate”) until the maturity of the Notes on July 12, 2021 payable semiannually in arrears
on January 12 and July 12 of each year, commencing on January 12, 2007, to the holders of the
Notes registered as such as of the close of business on a record date being the tenth business
day preceding each such payment date. Interest on the Notes will be computed on the basis of
a 360-day year of twelve 30-day months. Default interest will accrue at the Note Rate plus
1% per annum.
Ranking
The Notes will be our direct unsecured unsubordinated obligations and will rank pari passu in
right of payment with each other and with all other present and future unsecured and
unsubordinated obligations of ours that are not, by their terms, expressly subordinated in right
of payment to the Notes. However, the Notes will rank junior to statutory preferred obligations
as described under “Risk Factors—Risks Relating to the Notes—Our obligations under the Notes
are subordinated to our payment of certain statutory liabilities.”
The Notes will effectively be subordinated to our secured unsubordinated debt to the extent of
the value of the assets collateralizing such indebtedness.
All of our operations are conducted by us. We currently have no subsidiaries. We may establish
subsidiaries in the future and engage in additional operations through those new subsidiaries.
The claims of creditors of our subsidiaries will have priority over our equity rights and the rights
of our creditors, including holders of the Notes, to participate in the assets of any of our
subsidiaries upon the subsidiary’s liquidation. See “Risk Factors—Risks Relating to the Notes—The
Notes will be structurally junior to the indebtedness and other liabilities of future subsidiaries we
may establish.”
Listing
Application has been made to list the Notes on the Bolsa de Valores de Panama, S.A. (the
“Panama Stock Exchange”). We will not list the Notes on any other exchange outside of Panama.
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Further issuances
The Indenture by its terms does not limit the aggregate principal amount of Notes that may be
issued thereunder and permits the issuance, from time to time, of additional Notes of the same
series as is being offered hereby; provided, however, that: (i) no default or event of default
under the Indenture shall have occurred and then be continuing or shall occur as a result of such
additional issuance (ii) such additional Notes rank pari passu and have equivalent terms and
benefits as the Notes offered in this offering memorandum and (iii) the then current rating on
the Notes is reconfirmed in writing by the applicable rating agencies after giving effect to such
additional issuance of Notes. Any additional Notes will be part of the same series as the Notes
that we are offering hereby and holders of such additional Notes will vote on all matters relating
to the Notes as a single class with holders of the Notes offered hereby.
Calculation of interest amounts
The Notes will bear interest on the principal amount thereof at a fixed interest rate 7.60% per
annum (the “Note Rate”), until all required amounts due in respect thereof have been paid.
Interest on the Notes will be paid semiannually in arrears on January 12 and July 12, in each year
commencing January 12, 2007. Interest for the first interest period will accrue from July 10, 2006.
Payments of interest on a Note, other than the last payment of principal and interest or payment
in connection with a redemption of the Notes prior to maturity, will be made on each payment
date to the person in whose name the Note is registered at the close of business, New York City
time, on the record date, which shall be the date ten business days prior to such payment date,
immediately preceding each such payment date.
Payments of principal and interest
If requested by the Trustee or pursuant to any applicable DTC rules, payment of the principal of
the Notes at maturity, together with accrued and unpaid interest thereon at the Note Rate, or
payment upon redemption prior to maturity, will be made only:
• following the surrender of the Notes at the office of the Trustee or any paying agent; and
• to the person in whose name the Note is registered as of the close of business, New York City
time, on the due date for such payment.
• Payments of principal and interest shall be made by depositing immediately available funds in
U.S. dollars into an account maintained by the Trustee, acting on behalf of the holders of the
Notes.
The Notes will initially be represented by one or more global notes, as described below under
“—Global Notes.” Payments of principal and interest on the global Notes will be made to DTC or
its nominee, as the case may be, as registered holder thereof. It is expected that such registered
holder of global Notes will receive the funds for distribution to the holders of beneficial interests
in the global Notes. Neither we nor the Trustee shall have any responsibility or liability for any of
the records of, or payments made by, DTC or its nominee or Euroclear, Clearstream or Latinclear.
If any date for a payment of principal or interest or redemption is not a business day in the city in
which the relevant paying agent is located, we will make the payment on the next business day
in the respective city. No interest on the Notes will accrue as a result of this delay in payment.
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We have appointed the Trustee as New York paying agent to receive payment of the principal
amount of and interest on the Notes. We will be required to make all payments of principal of
and interest and other amounts on the Notes to the principal paying agent by 1:00 p.m. (New
York City time) on the business day prior to the applicable payment date and otherwise in
accordance with the terms of the Indenture.
Payments in respect of the Notes will be made in the coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of public and private
debts.
In the case of amounts not paid by us under the Notes when due, interest will continue to accrue
on such amounts at a rate equal to the default rate (i.e., 1% in excess of the Note Rate), from
and including the date when such amounts were due (after giving effect to any applicable grace
period therefor), and through but excluding the date of payment by us.
Subject to applicable law, the Trustee and the paying agents will pay to us upon request any
monies held by them for the payment of principal or interest that remains unclaimed for two
years. Thereafter, holders of the Notes entitled to these monies must seek payment from us.
Payment of additional amounts
Except as provided below, we will make all payments of principal, redemption amount, and
interest on the Notes without withholding or deducting any present or future taxes, duties,
assessments or other governmental charges (including any interest or penalties with respect
thereto) of any nature imposed by the Republic of Panama or any political subdivision or
governmental authority of the Republic of Panama and any jurisdiction through which payments
are made by a paying agent (each a “Taxing Jurisdiction”). If we are required by law to withhold
or deduct any such taxes, duties, assessments or other governmental charges, except as provided
below, we will pay the holders of the Notes any additional amounts necessary to ensure that they
receive the same net amount as they would have received had no such withholding or deduction
been required.
We will not, however, pay any additional amounts in connection with any tax, duty, assessment
or other governmental charge solely to the extent that such tax, duty, assessment or other
governmental charge is imposed due to any of the following:
(i)
the holder of the Notes or beneficial owner has some connection (present or former) with
the Taxing Jurisdiction other than merely holding (or owning) the Notes, receiving principal
or interest payments on the Notes or enforcing rights under the Notes (such as, without
limitation, citizenship, nationality, residence, domicile, or existence of a business, a
permanent establishment, a dependent agent, a place of business or a place of management
present or deemed present within a Taxing Jurisdiction);
(ii) the holder of the Notes or beneficial owner fails to comply with any certification,
identification or other reporting requirements concerning its nationality, residence, identity
or connection with the Taxing Jurisdiction, if (x) such compliance is required by applicable
law, regulation, administrative practice or treaty as a precondition to exemption from all or
a part of the tax, duty, assessment or other governmental charge, (y) at least 60 calendar
days prior to the relevant payment date with respect to which such requirements under the
applicable law, regulation, administrative practice or treaty shall apply, we or the Trustee
have notified all holders of the Notes that they will be required to comply with such
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requirements (except that such 60 calendar day period shall be shortened to 30 calendar days
where there is a change in a relevant certification, identification or other reporting
requirement within the 60 calendar days prior to such relevant payment date), and (z) the
completion of such forms is not materially onerous and does not require the disclosure of
material confidential information;
(iii) the holder of the Notes fails to present (where presentation is required) its Note within 30
calendar days after we have made available to the holder of the Notes a payment of
principal or interest; provided, however, that we will pay additional amounts which such
holder of the Notes would have been entitled to had the Note owned by such holder of the
Notes been presented on any day (including the last day) within such 30-day period; or
(iv) except as otherwise provided, any estate, inheritance, gift, use, transfer, sales, personal
property or any similar taxes, assessments or other governmental charges.
We will also (i) make such withholding or deduction and (ii) remit the full amount withheld or
deducted to the relevant taxing authority in accordance with applicable law. Upon written
request from the Trustee, we will furnish to the Trustee, within 30 business days after the date of
payment of any such taxes, certified copies of tax receipts or, if such receipts are not obtainable,
documentation reasonably satisfactory to the Trustee evidencing such payment by us. Upon
written request of the holders of the Notes to the Trustee, copies of such receipts or other
documentation, as the case may be, will be made available to the holders of the Notes. At least
10 business days prior to each date on which any payment under or with respect to the Notes is
due and payable, if we have actual knowledge that we are then obligated to pay additional
amounts with respect to such payment, we will deliver to the Trustee an officer’s certificate
stating that additional amounts will be payable, the amounts so payable and setting forth such
other information as the Trustee may reasonably require for tax purposes.
To give effect to the foregoing, we will, upon the written request of any holder of the Notes,
indemnify and hold harmless and reimburse such holder of the Notes for the amount of any
taxes, duties, assessments or other governmental charges of any nature imposed by any Taxing
Jurisdiction (other than any such taxes, duties, assessments or other governmental charges for
which the holder of the Notes would not have been entitled to receive additional amounts
pursuant to any of the conditions described in the second paragraph of this section titled
“Payment of Additional Amounts”) so imposed on, and paid by, such holder of the Notes as a
result of such payment of principal or interest on the Notes, so that the net amount received by
such holder of the Notes after such reimbursement would not be less than the net amount the
holder of the Notes would have received if such taxes, duties, assessments or other governmental
charges had not been imposed or levied and so paid. Holders of the Notes will be obligated to
provide reasonable documentation and to cooperate with us in connection with the foregoing.
We will also pay any stamp, administrative, court, documentary, excise or similar taxes arising in a
Taxing Jurisdiction in connection with the Notes and will indemnify the holders of the Notes for
any such taxes paid by holders of the Notes. The Notes are deemed “bonos” for Panamanian tax
purposes.
All references to principal, interest, or other amounts payable on the Notes shall be deemed to
include any additional amounts payable by us under the Notes or the Indenture in respect
thereof as and to the extent described above. The foregoing obligations shall survive any
termination, defeasance or discharge of the Notes and the Indenture.
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If we shall at any time be required to pay additional amounts to holders of the Notes pursuant to
the terms of the Notes and the Indenture, we will use our reasonable endeavors to obtain an
exemption from the payment of (or otherwise avoid the obligation to pay) the tax, duty,
assessment or other governmental charge which has resulted in the requirement that we pay
such additional amounts.
Certain covenants
For as long as any of the Notes are outstanding or any amount remains unpaid on such Notes and
we have obligations under the Indenture and the Notes, we will, and (as applicable) will cause
each of our subsidiaries to, comply with the terms of the covenants, among others, set forth
below:
Performance of obligations under the notes and the indenture
We shall duly and punctually pay all amounts owed by us, and comply with all of our other
obligations, under the terms of the Notes and the Indenture.
Maintenance of corporate existence
We will, and will cause each of our subsidiaries to, maintain in effect our and their respective
corporate existence (subject to our ability to consummate certain transactions as described below
under “—Limitation on Consolidation, Merger, Sale or Conveyance”) and all registrations
necessary therefor and take all actions to maintain all rights, privileges, titles to property,
franchises and the like necessary for or required in connection with the normal conduct of our
consolidated business, activities or operations; provided, however, that this covenant shall not
require us or any of our subsidiaries to maintain any such right, privilege, title to property,
franchise or the like or require us to preserve the corporate existence of such subsidiary, if we
reasonably believe that the failure to do so does not and will not have a material adverse effect
on either (i) our consolidated business, activities, operations, financial condition and results of
operation, or (ii) the rights of the holders of the Notes in respect of the Notes and the Indenture
(each, a “Material Adverse Effect”).
Compliance with laws
We will use our reasonable best efforts, and will cause our subsidiaries to use their respective
reasonable best efforts, to comply at all times with all applicable laws, rules, regulations, orders
and directives of any government or government agency or authority having jurisdiction over us,
our business or any of the transactions contemplated herein, except (i) when in our reasonable
belief the failure by us or such subsidiary to comply would not have a Material Adverse Effect or
(ii) where the necessity of compliance therewith is being contested by us in good faith by
appropriate proceedings.
Maintenance of government approvals
reasonable best efforts, to obtain and maintain in full force and effect all governmental
approvals, consents or licenses of any government or governmental agency or authority or any
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third party under the laws of Panama or any other jurisdiction having jurisdiction over us, in all
cases which are necessary for us to perform our obligations under the Notes and the Indenture
(including, without limitation, any authorization required to obtain and transfer U.S. dollars or
any other currency which at that time is legal tender in the United States out of Panama in
connection with the Notes and the Indenture) or for the validity or enforceability thereof, except
when in our reasonable belief the failure to do so would not have a Material Adverse Effect.
Payments of taxes and other claims
reasonable best efforts, to pay or discharge or cause to be paid or discharged, before the same
shall become delinquent, (i) all taxes, assessments and governmental charges levied or imposed
upon us or any subsidiary, as the case may be, and (ii) all lawful claims for labor which, if unpaid,
would by law become a lien upon the property of us or any subsidiary, as the case may be;
provided, however, that neither we nor any subsidiary will be required to pay or discharge or
cause to be paid or discharged any such tax, assessment, charge or claim for which appropriate
reserves as required by U.S. GAAP have been made and whose amount, applicability or validity is
being contested in good faith and, if appropriate, by appropriate legal proceedings or where the
failure to pay or discharge or cause to be paid or discharge would not have a Material Adverse
Effect.
Maintenance of insurance
We will use our reasonable best efforts, and will cause each of our subsidiaries to use their
respective reasonable best efforts, to maintain adequate insurance coverage with insurance
companies that we and our subsidiaries reasonably believe to be financially sound in such
amounts and covering such risks as are usually carried by companies engaged in similar businesses
and owning and/or operating properties or facilities similar to those owned and/or operated by
us or our subsidiaries, as the case may be, in the same general locations in which we and our
subsidiaries own and/or operate our properties or facilities, except where the failure to maintain
such insurance would not have a Material Adverse Effect.
Independent auditors
For so long as the Notes are outstanding, we shall engage an internationally recognized
independent accounting firm to audit our financial statements and otherwise provide necessary
accounting services to us in connection therewith.
Maintenance of books and records
We shall maintain books, accounts and records in relation to our business and activities in all
material respects as required by applicable law.
Maintenance of office or agency
We shall maintain an office or agency in the Borough of Manhattan, the City of New York, where
notices to and demands upon us in respect of the Indenture and the Notes may be served.
Initially this office will be at CT Corporation System, and we will agree not to change the
designation of such office without prior notice to the Trustee and designation of a replacement
office in the Borough of Manhattan, the City of New York.
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Ranking
We will use our reasonable best efforts to ensure that the Notes are direct, unsecured
unsubordinated obligations of ours and rank pari passu, in right of payment with each other and
with all other present and future direct, unsecured and unsubordinated obligations of ours that
are not, by their terms, expressly subordinated in right of payment to the Notes other than
statutory preferred obligations as described in “Risks Relating to the Notes” above.
Notice of certain events
We will promptly give notice to the Trustee after our senior executive officers become aware of
the occurrence of any (i) event of default or an event which with the passage of time or giving of
notice may become an event of default (a “default”), accompanied by a certificate of a senior
executive officer of ours setting forth the details of such event of default or default and stating
what action we propose to take with respect thereto, and (ii) any communication received by us
from, or sent by us to, ESRP or any other applicable Panamanian governmental or regulatory
authority in connection with any material noncompliance with the terms of the Concession
Contract, or threatened early termination of the Concession Contract.
Certificate of compliance
At the time we provide the Trustee with our annual financial statements, and in any event not
later than 180 days after the end of our fiscal year (or at any other time as reasonably requested
by the Trustee), we will provide the Trustee with an officer’s certificate in English certifying that
up to a specified date no earlier than seven days prior to the date of such certificate, we have
complied with our obligations under the Notes and the Indenture (or, if such is not the case,
giving the details of the circumstances of such non-compliance) and that as of such date there did
not exist nor had there existed at any time prior thereto since the date of delivery of the previous
such certificate (or, in the case of the first such certificate, the date of the Indenture) any default
or event of default under the Notes or the Indenture.
Limitation on Liens
So long as any Note remains outstanding, we will not, and will not permit any subsidiary to,
directly or indirectly, create, assume, incur or suffer to exist any Lien on any of our or its property
or assets whether now owned or hereafter acquired whether arising in connection with the
incurrence of any Indebtedness or otherwise (“Other Indebtedness”), unless at such time we
contemporaneously create or permit such Lien to secure equally and ratably the Indebtedness
represented by the Notes until such time as the Other Indebtedness shall no longer be secured by
any such Lien. Notwithstanding the foregoing, we and our subsidiaries may create, assume, incur
or suffer to exist Permitted Liens.
As used in this covenant, the following terms have the meanings set forth below:
“Consolidated Net Worth” means the sum of stockholder’s equity, preferred stock and minority
interest as set forth in our consolidated financial statements.
“Fair Market Value” means, with respect to any property or asset, the price, which could be
negotiated in an arm’s length free market transaction, for cash, between a willing seller and a
willing buyer, neither of whom is under undue pressure or compulsion to complete the
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transaction. Fair Market Value will be determined, except as otherwise provided, (a) if such
property or asset has a Fair Market Value of less than US$10.0 million, by any of our officers or
(b) if such property or asset has a Fair Market Value in excess of US$10.0 million, by a majority of
our board of directors and evidenced by a resolution of our board of directors, dated within 30
days of the relevant transaction, delivered to the Trustee; provided that, if such property or asset
has a Fair Market Value equal to or greater than US$25.0 million and the seller or buyer of such
property or asset is our affiliate, the Fair Market Value of such property or asset will be
determined by a majority of the directors on our board who are not representatives of such
affiliate (so long as there must be at least one such director) in their reasonable good-faith
judgment based on full disclosure of all relevant facts and circumstances.
“Guarantee” means, as to any person, (a) any obligation contingent or otherwise, of such person
guaranteeing or having the economic effect of guaranteeing any Indebtedness or other
obligation payable or performable by another person (the “Primary Obligor”) in any manner,
whether directly or indirectly, and including any obligation of such person, direct or indirect,
(i) to purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for the
purpose of assuring the obligee in respect of such Indebtedness or other obligation of the
payment or performance of such Indebtedness or other obligation, (iii) to maintain working
capital, equity capital or any other financial statement condition or liquidity or level or income or
cash flow of the Primary Obligor so as to enable the Primary Obligor to pay such Indebtedness or
other obligation, or (iv) entered into for the purpose of assuring any other manner the obligee in
respect of such Indebtedness or other obligation of the payment of performance thereof or to
protect such obligee loss in respect thereof (in whole or in part), it being understood that in no
event shall a Guarantee include (x) our obligation under applicable law to return to any customer
amounts deposited by such customer with us as security for payment for its purchases of
electricity or other services provided by us or (y) our contingent reimbursement or indemnity
obligation in respect of any payments made by third parties pursuant to any performance bond
or similar instrument arranged for by us in connection with the operation of our business,
(b) Lien on any asset of such person securing any Indebtedness or other obligation of any other
person whether or not such Indebtedness or other obligation is assumed by such person (or any
right contingent or otherwise, of any holder of such Indebtedness to obtain any such Lien) and
(c) the amount of any Guarantee shall be deemed to be an amount equal to the stated or
determinable amount of the related primary obligation, or portion thereof, in respect of which
such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof as determined by the guaranteeing person in good faith.
“Indebtedness” means any obligation (including arising in connection with any Guarantee) for
the payment or repayment of money, which has been borrowed or raised (including money
raised by acceptances and all leases which, under generally accepted accounting principles in the
country of incorporation of the relevant obligor, would constitute a capital lease obligation), it
being understood and agreed that Indebtedness shall not include any obligation of a subsidiary
for borrowed money incurred in connection with a project financing or similar transaction in all
cases relating to the construction, development, or acquisition of tangible assets or facilities (and
any intangible assets necessary in connection with the operation thereof) used in the ordinary
course of such subsidiary’s business so long as there shall expressly be no recourse in respect of
any such obligation to us or any of our other subsidiaries (or any of their respective assets and
properties) and we and our other subsidiaries shall expressly have no liability with respect
thereto.
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“Lien” means any mortgage, deed of trust, lien (statutory or otherwise), pledge, assignment
(including any assignment of rights to receive payments of money other than in connection with
the sale of such rights), adverse claim charge, security interest or charge or encumbrance of any
kind (including any conditional sale or other title retention agreement or capital lease having
substantially the same economic effect), and any agreement to give any of the foregoing.
“Permitted Liens” means:
(i)
any Lien securing taxes, assessments and other governmental charges or levies, the payment
of which is not yet due or payable, to the extent that nonpayment thereof shall be
permitted, or is being contested in good faith by appropriate proceedings promptly
initiated and diligently conducted and for which such reserves or other appropriate
provision, if any, as is required by U.S. GAAP shall have been made;
(ii)
any Lien created by or resulting from any litigation or legal proceeding which is currently
being contested in good faith by appropriate proceedings promptly initiated and diligently
conducted and for which such reserves or other appropriate provision, if any, as is required
by U.S. GAAP shall have been made;
(iii)
any statutory Lien or Lien of a carrier, warehouseman, mechanic, materialman incurred in
the ordinary course of business for a sum not yet due or the payment of which is being
contested in good faith by appropriate proceedings promptly initiated and diligently
conducted and for which such reserves or other appropriate provision, if any, as is required
by U.S. GAAP shall have been made or any easements, rights of use or way, restrictions,
irregularities and other imperfections of title that do not, individually or in the aggregate,
render title on the related property or asset unusable for the intended purpose of such
property or asset;
(iv)
Liens securing performance of bids, tenders, leases and contracts in the ordinary course of
business, statutory or regulatory obligations, surety or appeal bonds, performance bonds
and other obligations of like nature incurred in the ordinary course of business and not
securing Indebtedness for borrowed money;
(v)
any Liens securing intercompany Indebtedness between us or any of our subsidiaries or any
person or entity that, directly or indirectly (including beneficially) controls more than 51%
of any class of our outstanding equity securities or securities entitled to the payment of
dividends or similar distributions provided that all such Indebtedness is expressly
subordinated to our liability in respect of the Notes for so long as the Notes shall be
outstanding (an “Intercompany Lien”);
(vi)
(a) any Lien on property or on rights relating thereto created to secure any rights granted
with respect to such property in connection with the provision of all or a part of the
purchase price or cost of the construction of such property created contemporaneously
with, or within 150 days after, such acquisition or the completion of such construction, or
(b) any Lien on property existing on such property at the time of acquisition thereof,
whether or not the indebtedness secured thereby is assumed by us or any of our
subsidiaries, or (c) any Lien existing in the property of a corporation at the time such
corporation is merged into or consolidated with us or any of our subsidiaries or at the time
of a sale, lease or other disposition of the properties of a corporation or firm as an entirety
or substantially as an entirety to us or any of our subsidiaries; provided, however, that such
Liens either individually or in the aggregate, shall not secure indebtedness having an
aggregate principal amount in excess of 100% of the Fair Market Value of the related
property;
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(vii) pledges or deposits by us or our subsidiaries required of us under workers’ compensation
laws, unemployment insurance law or similar legislation, or leases to which we and our
subsidiaries are a party, or deposits that we are required to pledge to secure our public or
statutory obligations, or deposits for the payment of rent, in each case incurred in the
ordinary course of business;
(viii) any Lien that replaces, renews or extends one or more Liens in clauses (i) through
(vii) above, so long as such replacement Lien (a) must be created within 120 days after the
earliest expiration of the Lien or Liens being replaced, renewed or extended, (b) must not
secure Indebtedness in an amount exceeding the amount of Indebtedness secured by the
Lien or Liens being replaced, renewed or extended and (b) must not attach to property or
assets other than those to which the Lien or Liens being replaced, renewed or extended is
or are attached;
(ix)
Liens originally taken in connection with our existing US$100,000,000 syndicated bank loan
(the “Existing Bank Loan”) with Banco Continental de Panamá S.A., Banco Bilbao Vizcaya
Argentaria (Panamá), S.A., Citibank, N.A. and Primer Banco del Istmo, S.A., as agreed
thereunder, which are to be released in connection with the issuance of the Notes and
which thereafter shall not be Permitted Liens hereunder; and
(x)
Liens not otherwise permitted by clauses (i) through (ix) above encumbering property
having an aggregate Fair Market Value not in excess of 5% of the Consolidated Net Worth,
as determined based on our consolidated balance sheet as of the end of the most recent
fiscal quarter ending at least 45 days prior to the date any such Lien shall be incurred.
Limitation on consolidation, merger, sale or conveyance
We or any subsidiary will not merge into or consolidate or amalgamate with any person or sell,
assign, transfer or otherwise convey or dispose of all or substantially all of our or its respective
assets, whether by one transaction or a series of transactions, to any person unless:
(1) the resulting surviving or transferee person, which we refer to as the “surviving entity,” is
(a) an affiliate of us or (b) a sociedad anónima organized under the laws of Panama;
(2) if we are not the surviving entity, the surviving entity shall have expressly assumed, by a
document executed and delivered to the Trustee in form and substance reasonably
satisfactory to the Trustee all of our obligations under the Notes;
(3) immediately after giving effect to such transaction or series of transactions on a pro forma
basis, no default or Event of Default shall have occurred and be continuing;
(4) immediately after giving effect to such transaction or series of transactions on a pro forma
basis, including any Indebtedness incurred or anticipated to be incurred in connection with
or in respect of the transaction or series of transactions either the surviving entity could incur
at least US$1.00 of indebtedness under “—Limitations on Indebtedness”; and
(5) the surviving entity shall have delivered to the Trustee an officer’s certificate and an opinion
of counsel, each stating that such merger, consolidation, sale, assignment, transfer or other
conveyance or disposition complies with this covenant and the Indenture and that all
conditions precedent herein provided for relating to such transaction have been complied
with.
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Upon the occurrence of any of the transactions permitted by the preceding paragraph, the
surviving entity will succeed to and become substituted for us, and may exercise every right and
power of us, with the same effect as if it had been named in the Notes and the Indenture.
Following such transaction, we will be released from our liability as obligor on the Notes and
under the Indenture.
Notwithstanding anything to the contrary (i) any of our subsidiaries may merge or consolidate
with or into, or convey, transfer, lease or otherwise dispose of all or substantially all of its assets
as an entirety to, us provided, we are the surviving entity in such a transaction, and (ii) any of our
wholly owned subsidiaries may merge or consolidate with or into, or convey, transfer, lease or
otherwise dispose of all or substantially all of its assets as an entirety to, any of our other wholly
owned subsidiaries, provided, however, that as a result of the foregoing no event or condition
that, with the giving of notice, the lapse of time or failure to satisfy certain conditions, or any
combination thereof, would constitute an Event of Default under the Notes or the Indenture, or
an Event of Default shall have occurred and be continuing at the time of such proposed
transaction or would result therefrom.
Limitation on incurrence of indebtedness
We will not, and will not permit any subsidiary to, directly or indirectly, create, incur, issue,
assume, guarantee, or otherwise become directly or indirectly liable for, contingently or
otherwise, any Indebtedness, except for the following Indebtedness:
(i)
the Notes (and the extension, renewal, or replacement of the Notes so long as the aggregate
principal amount of the Notes shall not be increased);
(ii) subordinated Indebtedness;
(iii) Indebtedness, so long as based on the most recent available quarterly or annual balance
sheet date next preceding the incurrence of such Indebtedness, and after giving pro forma
effect to the incurrence of such Indebtedness (and any other Indebtedness incurred or repaid
or equity securities issued by us since the date of such balance sheet), the ratio of our
Indebtedness to EBITDA shall not exceed 3.25 to 1.0.
For purposes of this covenant, the following terms have the following meanings:
“EBITDA” means, for the four consecutive fiscal quarters ending on or most recent available
quarterly or balance sheet date, our operating profit/loss on a consolidated basis for such period
plus, without duplication and to the extent deducted in determining such operating profit/loss,
the sum of (a) amortization of intangible assets for such periods and (b) depreciation of fixed
assets for such periods.
Transactions with affiliates
We shall not, and shall not permit any of our subsidiaries to, enter into or carry out (or agree to
enter into or carry out) any transaction or arrangements with any affiliate, except for any
transaction or arrangement entered into or carried out on terms no less favorable to us or such
subsidiary, than those which could have been obtained on an arm’s-length basis with a person
that is not an affiliate; provided, however, that the foregoing shall not apply to transactions or
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arrangements between us and any of our respective subsidiaries not involving any other person
so long as consummation of any such transaction would not have a Material Adverse Effect. The
foregoing will not limit and shall not apply to (a) any transaction or arrangement arising under
any agreement, contract, instrument or arrangement with an affiliate in existence on the date of
issuance of the Notes and any modifications, extensions or renewals thereto that do not
materially affect the economic impact to us or any of the foregoing, and (b) any merger into or
consolidation or amalgamation with an affiliate which is permitted under the covenant described
under “—Limitation on Consolidation, Merger, Sale or Conveyance.”
Provision of financial statements and reports
We will provide or cause to be provided to the Trustee any financial statements which we may
file with the National Securities Commission of Panama, with any other securities or regulatory
authority in Panama or otherwise make available to the public in such language or form as such
financial statements are prepared. In addition to the foregoing (and without duplication), we
will cause to be provided to the Trustee in English, or accompanied by an English translation
thereof, (i) as soon as available and in any case within 60 calendar days after the end of each
fiscal quarter (other than the fourth quarter), our unaudited consolidated balance sheet,
statement of income, statement of changes in stockholders’ equity and statement of cash flows
calculated in accordance with U.S. GAAP, or, to the extent not available, the International
Financial Reporting Standards, or IFRS, and (ii) as soon as available and in any case within 90
calendar days after the end of each fiscal year, our audited and consolidated balance sheet,
statement of income, statement of changes in stockholders’ equity and statement of cash flows
calculated in accordance with U.S. GAAP, or, to the extent not available, IFRS, accompanied by a
report thereon by an independent public accountant of recognized international standing.
In the event we shall file any financial statements or reports with the U.S. Securities and
Exchange Commission, or shall publish or otherwise make such statements or reports (other than
the statements and reports referred to in the preceding paragraph) publicly available in Panama,
the United States or elsewhere, we shall furnish a copy of such statements or reports to the
Trustee within 30 calendar days of the date of filing or the date the information is published or
otherwise made publicly available, as the case may be.
Further actions
We will, at our own cost and expense, satisfy any condition or take any action (including the
obtaining or effecting of any necessary consent, approval, authorization, exemption, filing,
license, order, recording or registration) at any time required, as may be necessary or as the
Trustee may reasonably request, in accordance with applicable laws and/or regulations, to be
taken, fulfilled or done in order to (i) enable us to lawfully enter into, exercise our rights and
perform and comply with our obligations under the Notes and the Indenture, (ii) ensure that our
obligations under the Notes and the Indenture are legally binding and enforceable, (iii) make the
Notes and the Indenture admissible in evidence in the courts of the State of New York or Panama
following an Event of Default, (iv) preserve the enforceability of, and maintain the Trustee’s
rights under, the Indenture and the Notes and (v) respond to any reasonable requests received
from the Trustee to enable the Trustee to facilitate the Trustee’s performance of its rights and
obligations under the Notes and the Indenture, including exercising and enforcing its rights
under and carrying out the terms, provisions and purposes of the Notes and the Indenture.
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Reports to holders
For as long as the Notes are outstanding, we will, to the extent required, furnish to any holder of
the Notes issued under Rule 144A, or to any prospective purchaser designated by such holder of
the Notes, upon written request of such holder of the Notes, financial and other information
described in and meeting the requirements of paragraph (d)(4) of Rule 144A with respect to us to
the extent required in order to permit such holder of the Notes to comply with Rule 144A with
respect to any resale of its Note, unless during that time, we are subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, or are exempt from reporting pursuant
to Rule 12g3-2(b) under the Exchange Act and no such information about us is otherwise
required pursuant to Rule 144A.
Appointment to fill a vacancy in the office of the trustee
We, whenever necessary to avoid or fill a vacancy in the office of the Trustee, will appoint in the
manner set forth in the Indenture, a successor Trustee, so that there shall at all times be a Trustee
with respect to the Notes.
Listing
These Notes have been authorized for public offering in Panama by the Comisión Nacional
de Valores of Panama (the Panamanian National Securities Commission), and the listing and sale
of the Notes has been authorized by the Panama Stock Exchange. We will at all times use
reasonable efforts to maintain the Notes registered with the Panamanian National Securities
Commission and listed on the Panama Stock Exchange or, if we are unable to do so having used
all reasonable efforts or if the maintenance of such registration and listing is agreed by the
Trustee to be unduly burdensome or impractical, use reasonable efforts to obtain and maintain a
quotation or listing of the Notes on such other stock exchange or exchanges or securities market
or markets as we (with the approval of the Trustee) decide and will give notice of the identity of
such other stock exchange or exchanges or securities market or markets to the holders of the
Notes. Beneficial interests in the Regulation S Global Note may be held in Panama through
Latinclear, a participant in Clearstream. See “—Book-Entry System; Delivery and Form.”
Rating agency
For so long as the Notes shall be outstanding, we shall use our reasonable best efforts to comply
with the requirements of each rating agency that has rated the Notes in order for each rating
agency to maintain its rating of the Notes and: (i) so far as permitted by applicable law, at all
times give each such rating agency such information as it shall reasonably request in order that it
may perform its function as a rating agency in respect of the Notes, (ii) inform each such rating
agency as soon as reasonably practicable of any amendments or modifications that have been or
are proposed to be made to the Indenture and (iii) in addition to copies of notices specifically
referred to herein, send a copy to each such rating agency of all material notices sent by us to the
Trustee under the terms of the Indenture.
Redemption
Mandatory redemption at maturity
Unless previously redeemed, or purchased and cancelled, the Notes shall be redeemed at their
principal amount in U.S. dollars on the final maturity date. The redemption price payable at such
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time shall be the original principal amount of the Notes plus accrued and unpaid interest thereon
at the Note Rate and all other amounts due and payable under the terms of the Notes and the
Indenture.
Our right to cause early redemption for taxation reasons
We may redeem the Notes in whole, but not in part, upon giving not less than 30 nor more than
90 calendar days’ notice to the holders of the Notes if (i) we would otherwise become obligated
to pay additional amounts based on any taxes assessed by a Taxing Jurisdiction as a result of any
generally applicable change in or amendment to the laws or regulations of such Taxing
Jurisdiction, or any generally applicable change in the official application or official
interpretation of such laws or regulations (including a determination by a court of competent
jurisdiction), in each case, which change or amendment becomes effective after the date of the
original issuance of any of the Notes and (ii) we cannot avoid our obligations to pay such
additional amounts by taking reasonable measures available to us (including, without limitation,
the use of a different paying agent). However, any such notice of redemption shall be given
within 90 calendar days of the earliest date on which we would be obligated to pay such
additional amounts if a payment in respect of the Notes were then due. Prior to the giving of any
notice of redemption described in this paragraph, we will deliver to the Trustee (A) an opinion of
counsel of recognized standing stating that such additional amounts are payable due to a change
in, or amendment to, the laws or regulations of the relevant Taxing Jurisdiction, and (B) an
officer’s certificate stating that (i) we are entitled to redeem the Notes in accordance with the
terms in the Indenture and stating the facts relating to such redemption, (ii) we have become
obligated to pay such additional amounts as a result of a change or amendment described above,
and (iii) we reasonably believe that we cannot avoid payment of such additional amounts by
taking reasonable measures available to us and that all governmental approvals necessary for us
to effect such redemption have been obtained and are in full force and effect or specifying any
necessary approvals that have not been obtained. In any such redemption, we shall pay the
trustee on the date fixed for redemption an amount in U.S. dollars equal to the sum of (i) 100%
of the then outstanding principal amount of the Notes (including any additional amounts
payable with respect thereto), (ii) all unpaid interest on the Notes accrued to the date fixed for
redemption (including any additional amounts payable with respect thereto) and (iii) all other
amounts owed to holders of the Notes under the terms of the Indenture or the Notes, but we
will not be obligated to pay any premium or other similar amount in connection therewith.
Our right to cause optional early redemption
The Notes will be redeemable, in whole or in part, at our option, at any time and from time to
time at a redemption price equal to the sum of (x) the greater of (i) 100% of the then
outstanding principal amount of the Notes and (ii) the present values of the remaining scheduled
payments on the Notes (not including interest accrued to the date of redemption) discounted to
the redemption date on a semi-annual basis at the Adjusted Treasury Rate (as defined below),
plus 50 basis points plus, (y) all unpaid interest on the Notes accrued to the date fixed for
redemption and (z) all other amounts owed to the holders of the Notes and then due under the
terms of the Indenture or the Notes.
As used herein, the following terms have the respective meanings set forth below:
“Adjusted Treasury Rate” means, with respect to any redemption date, the rate per annum equal
to the semi-annual equivalent yield to maturity or interpolated (on a day count basis) of the
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Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a
percentage of its principal amount) equal to the Comparable Treasury Price for that redemption
date.
“Comparable Treasury Issue” means the United States Treasury security selected by the
Independent Investment Banker as having an actual or interpolated maturity comparable to the
remaining term of the Notes to be redeemed that would be utilized, at the time of selection and
in accordance with customary financial practice, in pricing new issues of corporate debt securities
of comparable maturity to the remaining term of the Notes.
“Comparable Treasury Price” means the average of the Reference Treasury Dealer Quotations for
such redemption date, after excluding the highest and the lowest of such Reference Treasury
Dealer Quotations.
“Independent Investment Banker” means the Reference Treasury Dealer appointed by the
Trustee after consultation with us or if such firm is unwilling or unable to select the Comparable
Treasury Issue, an independent investment banking institution of national standing in the United
States appointed by the Trustee after consultation with us.
“Reference Treasury Dealer” means JPMorgan Securities Inc., or its affiliates which are primary
U.S. government securities dealers, and their respective successors, and two other firms that are
primary U.S. Government securities dealers in the City of New York (a “Primary Treasury Dealer”);
provided, however, that if any of the foregoing ceases to be a Primary Treasury Dealer we will
substitute for it another Primary Treasury Dealer.
“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer
and any redemption date, the average, as determined by the Reference Treasury Dealer, of the
bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of
its principal amount) quoted by the Reference Treasury Dealer at 3:30 p.m. (New York time) on
the third business day preceding the redemption date.
Unless we default in payment of the redemption price, on and after the redemption date,
interest will cease to accrue on the Notes or portions of the Notes called for redemption.
If less than all of the Notes are to be redeemed, the Trustee shall select, pro rata by lot, the
particular Notes to be redeemed or any portion thereof that is an integral multiple of US$1,000.
No Notes of less than US$1,000 will be redeemed in part. Notices of redemption will be mailed by
first class mail at least 30 but not more than 60 days before the date of redemption to each
holder of Notes to be redeemed at its registered address. Notices of redemption may not be
conditional.
If any Note is to be redeemed in part only, the notice of redemption that relates to that Note will
state the portion of the principal amount of that Note that is to be redeemed. A new Note in
principal amount equal to the unredeemed portion of the original Note will be issued in the
name of the holder thereof upon cancellation of the original Note at our expense. Notes called
for redemption become irrevocably due and payable on the date fixed for redemption. On and
after the redemption date, interest will cease to accrue on Notes or portions of them called for
redemption, provided that the redemption price has been paid or set aside as provided in the
Indenture.
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Open market purchases; no cancellation
Any Notes repurchased or redeemed by us may, at our option be cancelled or, continue to be
outstanding and may be reissued or resold if we (i) procure a person who purchases the Notes to
be redeemed on the relevant date of redemption and at the relevant redemption price (in which
event the Notes may be so resold and need not be cancelled) or (ii) notify the Trustee in writing
on or prior to the relevant date of redemption that the Notes so redeemed by us will not be
cancelled (in which event the Notes may be held by us pending resale as provided in (i) above
and need not be cancelled).
Purchases of notes by us
We and our subsidiaries or affiliates may at any time purchase any Notes in the open market or
otherwise at any price; provided, however, that, in determining whether holders of the Notes
holding any requisite principal amount of Notes have given any request, demand, authorization,
direction, notice, consent or waiver under the Indenture, Notes owned by us and our subsidiaries
or affiliates shall be deemed not outstanding for purposes thereof. All Notes purchased by us or
our subsidiaries or affiliates may, at our option, continue to be outstanding or be cancelled but if
outstanding will not be considered to be outstanding for purposes of any vote or action to be
taken from time to time by the holders of the Notes.
Events of default
The following events will each be an “Event of Default” under the terms of the Notes and the
Indenture:
(i)
We shall fail to make any principal payment on any of the Notes when due in accordance
with the terms of the Notes and the Indenture, whether on the maturity date, upon
redemption or otherwise;
(ii)
We shall fail to make any interest payment or other amounts due on or with respect to the
Notes (including additional amounts) in accordance with the terms of the Notes and the
Indenture, and this non-payment continues for fifteen calendar days from its scheduled due
date;
(iii)
We fail to perform or observe any of the covenants set forth under “—Certain Covenants—
Limitation on Consolidation, Merger, Sale or Conveyance” and “—Certain Covenants—
Limitation of Incurrence of Indebtedness,” not otherwise expressly included as an Event of
Default;
(iv)
We shall fail to perform, or breach, any term, covenant, agreement or obligation contained
in the Indenture (other than the covenant listed in (iii) above) and such failure (other than
any failure to make any payment contemplated in clauses (i) and (ii) above) is either
incapable of remedy or continues for a period of 45 calendar days (inclusive of any time
frame contained in any such term, covenant, agreement or obligation for compliance
thereunder) after written notice of such failure has been received by us from the Trustee;
(v)
We or any of our Material Subsidiaries defaults under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by us or any Material Subsidiary (or the payment of which
is guaranteed by the us or any Material Subsidiary) whether such Indebtedness or Guarantee
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now exists, or is created after the date of the Indenture, which default (a) is caused by failure
to pay principal of or premium, if any, or interest on such Indebtedness after giving effect to
any grace period provided in such Indebtedness on the date of such default (a “Payment
Default”) or (b) results in the acceleration of such Indebtedness prior to its express maturity
and, in each case, the principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, totals US$12,000,000 (or the equivalent thereof at
the time of determination) or more in the aggregate;
(vi)
One or more final nonappealable judgments or decrees for the payment of money of
US$7,000,000 (or the equivalent thereof at the time of determination) or more in the
aggregate are rendered against us or any Material Subsidiary and are not paid (whether in
full or in installments in accordance with the terms of the judgment) or otherwise
irrevocably discharged through insurance or payments by a third party;
(vii) Any of (a) the Concession Contract is suspended, revoked, terminated or amended in a
manner that reasonably can be expected to have a Material Adverse Effect or ceases to be
in full force and effect in any material respect, (b) we receive written notice from the ERSP
or any other applicable government or regulatory authority of Panama, that the Concession
Contract has been or will be suspended, revoked, terminated or amended in a manner that
reasonably can be expected to have a Material Adverse Effect (each, a “Concession Action”)
and, in the case of either (a) or (b), the we have not, within a period of 30 days hereafter,
obtained a waiver, stay or injunction against of any such Concession Action, but only for as
long as such waiver stay or injunction shall remain in effect;
(viii) Any government or governmental authority shall have condemned, nationalized, seized, or
otherwise expropriated all or any substantial portion of our consolidated assets or property
(including that of any Material Subsidiary) or our share capital (including the share capital
of any Material Subsidiary), or shall have assumed custody or control of such consolidated
assets or property or of our business or operations or our share capital, or shall have taken
any action that would prevent us or our officers (or those of any Material Subsidiary) from
carrying on a substantial portion of our business or operations for a period of longer than
60 consecutive days and the result of any such action shall materially prejudice our ability to
perform our obligations under the Notes and, in each case, we shall have received written
notice thereof from the Trustee at the request of any holder of a Note as to which such
event shall, upon such notice, constitute an event of default;
(ix)
Any Panamanian government or governmental authority thereof shall declare and made
effective a general suspension of payment or a moratorium on the payment of our
Indebtedness (which does not expressly exclude the Notes);
(x)
An attachment, execution, seizure before judgment or other legal process is levied or
enforced upon any part of our property or that of any Material Subsidiary that reasonably
can be expected to have a Material Adverse Effect and (i) such attachment, execution,
seizure before judgment or other legal process shall not have been discharged within 30
days thereof or (ii) if such attachment, execution, seizure before judgment or other legal
process shall not have been discharged within said 30-day period, we or our Material
Subsidiary, as the case may be, shall not have within said 30-day period contested such
attachment, execution, seizure before judgment or other legal process in good faith by
appropriate proceedings upon stay of execution of the enforcement thereof or upon
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posting a bond in connection therewith; provided, however, that in no event shall the grace
period provided by subclause (ii) of this subparagraph extend beyond the 180th day after
the initiation of such proceedings;
(xi)
A resolution is passed or adopted by our directors or stockholders or by any Panamanian
governmental or regulatory authority or a judgment of a court of competent jurisdiction is
made, that we or any of our Material Subsidiaries be wound up or dissolved otherwise than
for the purposes of, or pursuant to, or in connection with a merger, consolidation or
amalgamation (within the meaning of these words under the laws of Panama) and any
winding up, dissolution or liquidation proceedings resulting from the taking of such
corporate action remains undismissed for 30 days;
(xii) We or any of our Material Subsidiaries shall generally not pay our debts as such debts
become due, or shall admit in writing our inability to pay our or their debts generally, or
shall make a general assignment for the benefit of creditors; a resolution by any
Panamanian governmental or regulatory authority shall have declared and made effective
an intervention or any similar action against us and the same shall have continued
undischarged for a period of 60 days;
(xiii) Any proceeding shall be instituted by or against us or any of our Material Subsidiaries
seeking to adjudicate us or any of our Material Subsidiaries bankrupt or insolvent, or
seeking liquidation (other than for the purposes of or pursuant to a merger, consolidation
or amalgamation, within the meaning of such terms under the laws of Panama), winding
up, reorganization, arrangement, adjustment, protection, relief or composition of any
Indebtedness under any law relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment of a receiver,
Trustee, or other similar official for us or for any substantial part of our property or that of
any of our Material Subsidiaries and, in the case of any of the foregoing actions instituted
against us or any of our Material Subsidiaries, such proceeding or action shall not have been
dismissed or discharged and shall remain in effect for 60 days; or we shall take corporate
action to authorize any of the actions set forth above in this subsection (xiii);
(xiv) Any material provision of the Notes or the Indenture (a) shall cease to be in full force and
effect or binding and enforceable against us (which has not been replaced by alternative
provisions satisfactory to the Trustee within (or otherwise if such default continues for) a
period of 30 days after the Trustee shall have given written notice thereof to us except for
such provision, the invalidity, illegality or unenforceability of which could not, individually
or in the aggregate, have a Material Adverse Effect), (b) cease to be admissible in evidence
in the courts of Panama, or (c) it becomes unlawful for us to perform any material
obligation under any of the Notes or the Indenture or we shall contest the enforceability of
the Notes or the Indenture or we deny that we have liability under any of the Notes or the
Indenture; or
(xv) The occurrence of certain events that result in irreparable damage or destruction to the
electrical distribution facilities that we operate and maintain and that is not fully covered
by insurance, resulting in Material Adverse Effect.
As used herein, “Material Subsidiary” means any subsidiary of ours, which, on any given date of
determination, accounts for more than 5% of our total consolidated assets, as such total
consolidated assets are set forth on, the most recent consolidated financial statements of ours
prepared in accordance with the Indenture.
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Remedies upon occurrence of an event of default
Upon the occurrence of an event of default, the Trustee shall, upon the request of holders of the
Notes holding not less than 25% in principal amount of the Notes then outstanding, by written
notice to us and provided that such event of default is continuing, declare all of the Notes
immediately due and payable; provided, however, that in the case of any of the events of default
described in paragraphs (xi),(xii) or (xiii) above, all of the Notes shall, without any notice to us, or
any other act by any holder of the Notes, become immediately due and payable.
The holders of a majority in aggregate principal amount of the outstanding Notes may rescind a
declaration of acceleration if any amount has been paid to or deposited with the Trustee
sufficient to pay the amounts set forth in the applicable provisions of the Indenture and all
events of default, other than the failure to pay principal due solely because of the declaration of
acceleration, have been cured or waived.
The holders of a majority in aggregate principal amount of the outstanding Notes shall have the
right to direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the Trustee, subject to the
limitations specified in the Indenture. Subject to the provisions of the Indenture relating to the
Trustee’s duties, the Trustee shall be under no obligation to exercise any of its rights and powers
under the Indenture unless it has been offered an indemnity to its reasonable satisfaction against
the costs, expenses and liabilities it may reasonably incur.
No holder of the Notes will have any right to institute any proceeding with respect to the
Indenture or the Notes or for any remedy thereunder unless the holder of the Notes has
previously given written notice to the Trustee of a continuing event of default under the Notes
or the continuing breach of a covenant contained in the Indenture, the holders of the Notes of
not less than 25% in aggregate principal amount of the outstanding Notes have made a written
request to the Trustee to institute proceedings in respect of the event of default or breach in its
own name as Trustee, the holders of the Notes have offered to the Trustee indemnity satisfactory
to it, the Trustee for 60 days thereafter has failed to institute any such proceeding and no
direction inconsistent with that request has been given to the Trustee during that 60-day period
by the holders of a majority in aggregate principal amount of the outstanding Notes. However,
the right of any holder of the Notes institute a suit for the enforcement of the payment of
principal or interest on the due date therefor may not be impaired without its consent.
The holders of a majority in aggregate principal amount of the outstanding Notes may waive any
past default under the Indenture except an uncured default in the payment of principal of or
interest on the Notes or an uncured default relating to a covenant or provision of the Indenture
that cannot be modified or amended without the consent of each affected holder of the Notes.
Modification of the indenture
We and the Trustee may, without the consent of the holders of the Notes, amend, waive or
supplement the Indenture for certain specific purposes, including, among other things, curing
ambiguities, defects or inconsistencies, or making any other provisions with respect to matters or
questions arising under the Indenture or the Notes or making any other change that will not
adversely affect the interest of any holder of the Notes.
In addition, with certain exceptions, the Indenture may be modified by us and the Trustee with
the consent of the holders of a majority of the aggregate principal amount of the Notes then
outstanding. Any amendment, waiver or supplement to the Indenture, with or without the
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consent of the holders of a majority of the aggregate principal amount of the Notes then
outstanding, may be subject to prior approval or filing requirements of the Comisión Nacional de
Valores of Panama pursuant to agreement, or acuerdo, 4-2003. However, no modification may,
without the consent of the holder of the Notes of each outstanding Note:
(i)
change the maturity of any payment of principal of or any installment of interest on any
Note whether at maturity or earlier redemption or otherwise;
(ii)
reduce the principal amount or the rate of interest, or change the method of computing
the amount of principal or interest payable on any date;
(iii)
change any place of payment where the principal of or interest on Notes is payable;
(iv)
change the coin or currency in which the principal of or interest on the Notes is payable;
(v)
impair the right of the holders of the Notes to institute suit for the enforcement of any
payment on or after the date due;
(vi)
reduce the percentage in principal amount of the outstanding Notes, the consent of whose
holders of the Notes is required for any modification or the consent of whose holders of the
Notes is required for any waiver of compliance with certain provisions of the Indenture or
certain defaults under the Indenture and their consequences provided for in the Indenture;
or
(vii) modify any of the provisions of certain sections of the Indenture, including the provisions
summarized in “—Modification of the Indenture,” except to increase any percentage or to
provide that certain other provisions of the Indenture cannot be modified or waived
without the consent of each holder of the Notes.
Defeasance and covenant defeasance
We may, at our option, elect to be discharged from our obligations with respect to the Notes. In
general, upon a defeasance, we will be deemed to have paid and discharged the entire
indebtedness represented by the Notes and to have satisfied all of our obligations under the
Notes and the Indenture except for (i) the rights of the holders of the Notes to receive payments
in respect of the principal of and interest and additional amounts, if any, on the Notes when the
payments are due, (ii) certain provisions of the Indenture relating to ownership, registration and
transfer of the Notes, (iii) the covenant relating to the maintenance of an office or agency in
New York and (iv) certain provisions relating to the rights, powers, trusts, duties and immunities
of the Trustee.
In addition, we may, at our option, and at any time, elect to be released with respect to the
Notes from the covenants described above under the caption “—Certain Covenants.” We refer to
this as “covenant defeasance.” Following such covenant defeasance, the occurrence of a breach
or violation of any such covenant with respect to the Notes will not constitute an event of
default under the Indenture, and certain other events (not including, among other things,
non-payment or bankruptcy and insolvency events) described under “—Events of Default” also
will not constitute event of default.
In order to exercise either defeasance or covenant defeasance, we will be required to satisfy,
among other conditions, the following requirements:
(i)
we must irrevocably deposit with the Trustee, in trust, for the benefit of the holders of the
Notes, cash in U.S. dollars or U.S. government obligations, or a combination thereof, in
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amounts sufficient, in the opinion of an internationally recognized firm of independent
public accountants, to pay and discharge the principal of and each installment of interest on
the Notes on the stated maturity of such principal or installment of interest in accordance
with the terms of the Indenture and the Notes;
(ii)
in the case of an election to fully defease the Notes, we must deliver to the Trustee an
opinion of counsel stating that (i) we have received from, or there has been published by,
the U.S. Internal Revenue Service a ruling or (ii) since the date of the Indenture there has
been a change in the applicable U.S. federal income tax law or the interpretation thereof,
in either case to the effect that, and based thereon, the opinion of counsel shall confirm
that, the holders of the Notes will not recognize gain or loss for U.S. federal income tax
purposes as a result of such deposit, defeasance and discharge and will be subject to U.S.
federal income tax on the same amount, in the same manner and at the same time as
would have been the case if such deposit, defeasance and discharge had not occurred;
(iii)
in the case of a covenant defeasance, we must deliver to the Trustee an opinion of counsel
to the effect that the holders of the Notes will not recognize gain or loss for U.S. federal
income tax purposes as a result of such deposit and covenant defeasance and will be subject
to U.S. federal income tax on the same amount, in the same manner and at the same time
as would have been the case if such deposit and covenant defeasance had not occurred;
(iv)
no event of default, or event or condition that with the giving of notice, the lapse of time
or failure to satisfy certain specified conditions, or any combination thereof, would become
an event of default, including, with respect to certain events of bankruptcy or insolvency,
has occurred and is continuing with respect to the Notes, at any time during the period
ending on the 121st day after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until the expiration of such period);
(v)
we must deliver to the Trustee an opinion of counsel to the effect that payment of amounts
deposited in trust with the Trustee will not be subject to future taxes, duties, fines,
penalties, assessments or other governmental charges imposed by a Taxing Jurisdiction,
except to the extent that additional amounts in respect thereof shall have been deposited
in trust with the Trustee;
(vi)
we must deliver to the Trustee an opinion of counsel to the effect that such defeasance or
covenant defeasance shall not result in a breach or violation of, or constitutes a default
under, any other agreement or instrument to which we are a party or by which we are
bound; and
(vii) such defeasance or covenant defeasance shall not result in the trust arising from such
deposit constituting an investment company as defined under the Investment Company Act
of 1940, as amended.
The trustee
The Bank of New York is the Trustee under the Indenture and has been appointed by us as
registrar and paying agent with respect to the Notes. We may have normal banking relationships
with The Bank of New York in the ordinary course of business. The address of the Trustee is 101
Barclay, 21W, New York, New York 10286, Attn: Global Finance Unit.
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Paying agents; transfer agents; registrar
We have initially appointed the Trustee as paying agent, registrar and transfer agent. We may at
any time appoint new paying agents, transfer agents and registrars. However, we will at all times
maintain a paying agent in New York City until the Notes are paid.
Notices
We will mail notices to the registered address of the holders of the Notes as provided in the
register. So long as DTC, or its nominee, is the registered holder of the Global Notes, as defined
below, each person owning a beneficial interest in a Global Note, as defined below, must rely on
the procedures of DTC to receive notices provided to DTC. Each person owning a beneficial
interest in a Global Note who is not a participant in DTC must rely on the procedures of the
participant through which the person owns its interest in the Global Note to receive notices
provided to DTC.
Governing law
The Indenture and the Notes are governed in all respects by the laws of the State of New York.
Jurisdiction
We have consented to the non-exclusive jurisdiction of any court of the State of New York or any
U.S. Federal court sitting, in each case in the Borough of Manhattan in the City of New York, New
York, United States, and any appellate court from any thereof. We have appointed CT
Corporation System as our authorized agent upon which service of process may be served in any
action or proceeding brought in any court of the State of New York or any U.S. Federal court
sitting, in each case in the Borough of Manhattan in the City of New York in connection with the
Indenture or the Notes.
Waiver of immunities
To the extent that we may in any jurisdiction claim for ourselves or our assets immunity from a
suit, execution, attachment, whether in aid of execution, before judgment or otherwise, or other
legal process in connection with the Indenture and the Notes and to the extent that in any
jurisdiction there may be immunity attributed to us or our assets, whether or not claimed, we
have irrevocably agreed for the benefit of the holders of the Notes not to claim, and irrevocably
waive, the immunity to the full extent permitted by law. See “Risk Factors—Risks Relating to
Panama—It maybe difficult to enforce civil liabilities against us or our directors and executive
officers and controlling persons.”
Currency rate indemnity
We have agreed that, if a judgment or order made by any court for the payment of any amount
in respect of any Notes is expressed in a currency other than U.S. dollars, we will indemnify the
relevant holder of the Notes against any deficiency arising from any variation in rates of
exchange between the date as of which the denomination currency is notionally converted into
the judgment currency for the purposes of the judgment or order and the date of actual
payment. This indemnity will constitute a separate and independent obligation from our other
obligations under the Indenture, will give rise to a separate and independent cause of action,
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will apply irrespective of any indulgence granted from time to time and will continue in full force
and effect notwithstanding any judgment or order for a liquidated sum or sums in respect of
amounts due under the Indenture or the Notes.
Form, denomination and registration
The Notes will be issued in registered form without interest coupons. No Notes will be issued in
bearer form. Any Note issued in exchange for the Regulation S global Note or the Restricted
global Note will be issued in registered form only in minimum denominations of US$10,000 and
integral multiples of US$1,000 in excess thereof; provided, however, that each qualified
institutional buyer, or QIB, purchasing a beneficial interest in the Notes from the initial
purchasers in reliance on Rule 144A under the Securities Act will be required to purchase the
Notes in a minimum aggregate principal amount of US$10,000 and in integral multiples of
US$1,000 in excess thereof.
We have agreed to maintain a paying agent, registrar and transfer agent in the Borough of
Manhattan, the City of New York. We have initially appointed the Trustee at its corporate trust
office as principal paying agent. The Trustee, acting as transfer agent, will keep a register,
subject to such reasonable regulations as we may prescribe.
Book-entry; delivery and form
Notes offered and sold to QIBs in reliance on Rule 144A under the Securities Act will be
represented by a single, permanent Global Note in definitive, fully registered book-entry form
(the “Restricted Global Note”) which will be registered in the name of a nominee of DTC and
deposited on behalf of the purchasers of the Notes represented thereby with a custodian for
DTC.
Notes offered and sold in reliance on Regulation S will be represented by a single, permanent
global Note in definitive, fully registered book-entry form (the “Regulation S Global Note” and,
together with the Restricted Global Note, the “Global Notes”) which will be registered in the
name of a nominee of a common depositary of Euroclear Bank S.A./ N.V., as the operator of the
Euroclear System, or Euroclear, or Clearstream Banking, société anonyme, or Clearstream, and
deposited on behalf of the purchasers of the Notes represented thereby with a custodian for
Euroclear or Clearstream. Beneficial interests in the Global Notes will be represented through
book-entry accounts of financial institutions acting on behalf of owners as direct and indirect
participants in DTS Euroclear or Clearstream.
Beneficial interests in the Regulation S Global Note may be held in Panama through Central
Latinoamericana de Valores, S.A. (“Latinclear”). Latinclear is a participant in Clearstream. Subject
to the transfer restrictions discussed below, transfers of beneficial interests in the Regulation S
Global Note may be made (i) among Latinclear participants or (ii) from a Latinclear participant to
a non-Latinclear participant through Clearstream.
Each Global Note (and any Notes issued in exchange therefor) will be subject to certain
restrictions on transfer set forth therein as described under “Notice to Investors.” Except in the
limited circumstances described below, owners of beneficial interests in a Global Note will not be
entitled to receive physical delivery of certificated Notes.
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Global notes
We expect that pursuant to procedures established by DTC, Euroclear and Clearstream (a) upon
deposit of the Global Notes, DTC, Euroclear or Clearstream or their custodian will credit on its
internal system portions of the Global Notes to the respective accounts of persons who have
accounts therewith and (b) ownership of the Notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC, Euroclear or
Clearstream or their nominee (with respect to interests of participants as defined below) and the
records of participants (with respect to interests of persons other than participants). Such
accounts will initially be designated by or on behalf of the Initial Purchaser and ownership of
beneficial interests in the Global Notes will be limited to persons who are participants and have
accounts with DTC, Euroclear or Clearstream or persons who hold interests through participants.
Except as otherwise described herein, investors may hold their interests in a Global Note directly
through DTC, Euroclear or Clearstream only if they are participants in such system, or indirectly
through organizations which are participants in such system.
Investors may hold their interests in the Regulation S Global Note directly through Clearstream,
Euroclear or Latinclear if they are participants in such systems, or indirectly through
organizations, which are participants in such systems. Clearstream, Euroclear or Latinclear will
hold such interests in the Regulation S Global Note on the books of their respective depositories,
which in turn will hold such interests in the depositories’ names on the books of the Bank of New
York.
So long as DTC, Euroclear or Clearstream or their nominee are the registered owner or holders of
any Global Notes, DTC, Euroclear or Clearstream or such nominee will be considered the sole
owner or holder of the Notes represented by the Global Notes for all purposes under the
Indenture and the Notes. No beneficial owner of an interest in any Note will be able to transfer
such interest except in accordance with the applicable procedures of DTC, Euroclear, Clearstream
or Latinclear, in addition to those provided for under the Indenture.
Payments of principal of and interest (including additional amounts) on the Global Notes will be
made to DTC, Euroclear or Clearstream or their nominee, as the case may be, as the registered
owner thereof. None of us, the Trustee or any paying agent under the Indenture will have any
responsibility or liability for any aspect of the records relating to, or payments made on account
of, beneficial ownership interests in the Global Notes, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests representing any Notes held
by DTC, Euroclear or Clearstream or their nominee.
We expect that DTC, Euroclear or Clearstream or their nominee, upon receipt of any payment of
principal of or premium and interest (including additional amounts) on a Global Note, will credit
participants’ accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records of DTC, Euroclear
or Clearstream or their nominee.
Payment to owners of beneficial interests in a Global Note held through such participant will be
governed by standing instructions and customary practice, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such customers. Such
payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way in accordance with
DTC rules and will be settled in same day funds. Transfers between participants in Euroclear,
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Clearstream or Latinclear will be effected in the ordinary way in accordance with their respective
rules and operating procedures. If a holder requires physical delivery of a certificated note for
any reason, including to sell Notes to persons in jurisdictions, which require physical delivery of
such securities, or to pledge such securities, such holder must transfer its interest in the applicable
Global Note in accordance with the normal procedures of DTC, Euroclear, Clearstream or
Latinclear and those procedures set forth in the Indenture. Consequently, the ability to transfer
interests in a Global Note to such persons may be limited.
Before the 40th calendar day after the later of the commencement of the offering of the Notes
and the issue date, transfers by an owner of a beneficial interest in the Regulation S Global Note
to a transferee who takes delivery of such interest through the Restricted Global Note will be
made only in accordance with the applicable procedures and upon receipt by the Trustee of a
written certification from the transferor in the form provided in the Indenture to the effect that
such transfer is being made to a person whom the transferor reasonably believes is a QIB in a
transaction meeting the requirements of Rule 144A.
Transfers by an owner of a beneficial interest in the Restricted Global Note to a transferee who
takes delivery of such interest through the Regulation S Global Note, whether before, on or after
the 40th day referred to above, will be made only upon receipt by the Trustee of a certification
to the effect that such transfer is being made in accordance with Regulation S.
Transfers of Physical Notes to a person who will hold through a Global Note will be made only in
accordance with the applicable procedures and upon receipt by the Trustee of a written
certification in the form provided in the Indenture (i) in the case of a transfer into the Restricted
Global Note before the 40th day referred to above, to the effect that such transfer is being made
to a person whom the transferor reasonably believes is a QIB in a transaction meeting the
requirements of Rule 144A and (ii) in the case of a transfer into the Regulation S Global Note, to
the effect that such transfer is being made in accordance with Regulation S.
Any beneficial interest in a Global Note that is transferred to a person who takes delivery in the
form of an interest in the other Global Note will, upon transfer, cease to have an interest in the
first Global Note and become an interest in the other Global Note and, accordingly, will
thereafter be subject to all transfer restrictions, if any, and other procedures applicable to
beneficial interests in such other Global Note.
Subject to compliance with the transfer restrictions applicable to the Notes, we understand that
crossmarket transfers between DTC participants, on the one hand, and directly or indirectly
through Euroclear, Clearstream, or Latinclear participants, on the other, will be effected in DTC,
Euroclear or Clearstream in accordance with DTC, Euroclear or Clearstream rules by its respective
depositary; however, such crossmarket transactions will require delivery of instructions to
Clearstream or Euroclear, as the case may be, by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (Brussels or Luxembourg time,
respectively). We understand that Clearstream or Euroclear, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its depositary to take action
to effect final settlement on its behalf by delivering or receiving interests in the relevant Global
Note in DTC and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Clearstream participants and Euroclear participants
may not deliver instructions directly to the depositaries of Euroclear or Clearstream.
Because of time zone differences, the securities account of a Euroclear or Clearstream participant
purchasing an interest in a Global Note from a DTC participant will be credited during the
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securities settlement processing day immediately following the DTC settlement date, and such
credit will be reported to the relevant Euroclear or Clearstream participant on such business day
following the DTC settlement date. Cash received in Euroclear or Clearstream as a result of sales
of interests in a Global Note by or through a Euroclear or Clearstream participant to a DTC
participant will be received with value on the DTC settlement date but will be available in the
relevant Euroclear or Clearstream cash account only as of the Business Day following settlement
in DTC.
We expect that DTC and Clearstream will take any action permitted to be taken by a holder of
Notes (including the presentation of Notes for exchange) only at the direction of the participant
to whose interests in the applicable Global Notes are credited and only in respect of the
aggregate principal amount of Notes as to which such participant has given such direction.
However, if there is an event of default under the Indenture, DTC and Clearstream will exchange
the applicable Global Note for Physical Notes (as defined below), which it will distribute to
participants and which will be legended to the extent set forth under “Notice to Investors.”
DTC has provided us with the following information: DTC, the world’s largest depository, is a
limited-purpose trust company organized under the New York Banking Law, a “banking
organization” within the meaning of the New York Banking Law, a member of the Federal
Reserve System, a “clearing corporation” within the meaning of the New York Uniform
Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A
of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2.2 million
issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market
instruments from over 100 countries that DTC’s participants (“Direct Participants”) deposit with
DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other
securities transactions in deposited securities, through electronic computerized book-entry
transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical
movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities
brokers and dealers, banks, trust companies, clearing corporations, and certain other
organizations.
DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation, or DTCC. DTCC,
in turn, is owned by a number of Direct Participants of DTC and Members of the National
Securities Clearing Corporation, Fixed Income Clearing Corporation and Emerging Markets
Clearing Corporation (NSCC, FICC, and EMCC, also subsidiaries of DTCC), as well as by the New
York Stock Exchange Inc., the American Stock Exchange LLC and the National Association of
Securities Dealers, Inc.
Access to the DTC system is also available to others such as both U.S. and non-U.S. securities
brokers and dealers, banks, trust companies, and clearing corporations that clear through or
maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect
Participants”). DTC has Standard & Poor’s highest rating: AAA. The DTC rules applicable to its
participants are on file with the SEC. More information about DTC can be found at
www.dtcc.com. and www.dtc.org.
Clearstream advises that it is incorporated under the laws of Luxembourg as a bank. Clearstream
holds securities for its customers, and facilitates the clearance and settlement of securities
transactions between Clearstream customers through electronic book-entry transfers between
their accounts. Clearstream provides to Clearstream customers, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded securities
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markets in over 30 countries through established depository and custodial relationships. As a
bank, Clearstream is subject to regulation by the Luxembourg Commission for the Supervision of
the Financial Sector. Clearstream customers are recognized financial institutions around the
world, including underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Clearstream’s U.S. customers are limited to
securities brokers, dealers and banks. Indirect access to Clearstream is also available to other
institutions such as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Clearstream customer.
Latinclear advises that it is incorporated under the laws of Panama as a corporation. Latinclear
holds securities deposited with it by its participants and facilitates the settlement of transactions
among its participants in such securities through electronic computerized book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement of securities
certificates. Latinclear’s participants include securities brokers-dealers and banks. Access to
Latinclear’s book-entry system is also available to others, such as banks, brokers, dealers, trust
companies and individual investors that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. Latinclear’s book-entry system is also used by other
organizations such as securities brokers and dealers, banks and trust companies that work
through a direct participant. The rules that apply to Latinclear and its participants are on file
with the Panamanian National Securities Commission. Latinclear is owned by a number of its
Panamanian direct participants and by the Panama Stock Exchange.
Although DTC, Euroclear, Clearstream and Latinclear are expected to follow the foregoing
procedures in order to facilitate transfers of interests in the Global Notes among the DTC
participants, Euroclear, Clearstream and Latinclear, they are under no obligation to perform such
procedures, and such procedures may be discontinued or modified at any time. None of us, the
Trustee or the paying agent will have any responsibility for the performance by DTC, Euroclear,
Clearstream and Latinclear, the participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
Physical notes
Interests in the Global Notes will be exchangeable or transferable, as the case may be, for
physical notes (“Physical Notes”) if (i) DTC, Euroclear or Clearstream notifies us that it is unwilling
or unable to continue as depositary for the Global Notes, or DTC, Euroclear or Clearstream ceases
to be a “clearing agency” registered under the Exchange Act, and a successor depositary is not
appointed by us within 90 calendar days, (ii) we, at our option, elect to terminate the book-entry
system through a depositary or (iii) an event of default has occurred and is continuing with
respect to the Global Notes.
Replacement, exchange and transfer of notes
If a Note becomes mutilated, destroyed, lost or stolen, we may issue, and the Trustee will
authenticate and deliver, a substitute Note in replacement. In each case, the affected holder of
the Notes will be required to furnish to us, the Trustee and certain other specified parties an
indemnity under which it will agree to pay us, the Trustee and certain other specified parties for
any losses they may suffer relating to the Note that was mutilated, destroyed, lost or stolen. We
and the Trustee may also require that the affected holder of the Notes present other documents
or proof. The affected holder of the Notes will be required to pay all expenses and reasonable
charges associated with the replacement of the mutilated, destroyed, lost or stolen Note.
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Under certain limited circumstances, beneficial interests in the Global Note may be exchanged for
Physical Notes. If we issue Physical Notes, a holder of the Notes of such Physical Note may present
its Notes for exchange with Notes of a different authorized denomination, together with a
written request for an exchange, at our office or agency designated for such purpose in the City
of New York.
We would issue the Physical Notes for such beneficial interests in the Global Note in initial
denominations of US$10,000 or any larger amount that is an integral multiple thereof, and
would issue them in registered form only, without interest coupons. Any Physical Note issued in
exchange for an interest in the Global Note will bear the legend restricting transfer that is borne
by such Global Note. In connection with any such exchange, an appropriate adjustment will be
made in the records of the registrar to reflect a decrease in the principal amount of the relevant
Global Note. The procedures for payment and registration of transfer applicable to any
certificated note that may be issued in the future are set forth in the Indenture.
In addition, the holder of the Notes of any Physical Note may transfer such Physical Note, in
whole or in part, by surrendering it at any such office or agency together with an executed
instrument of assignment. Each new Physical Note issued in connection with a transfer of one or
more Physical Notes will be available for delivery from the Trustee within five business days after
receipt by the Trustee of the relevant original Physical Note or Physical Notes and the relevant
executed instrument of assignment. Transfers of the Physical Notes will be effected without
charge by or on behalf of us, the Trustee, but only upon payment (or the giving of such
indemnity as the registrar or such transfer agent may require in respect) of any tax or other
governmental charges, which may be imposed in relation thereto.
We will not charge the holders of the Notes for the costs and expenses associated with the
exchange, transfer or registration of transfer of the Notes. We may, however, charge the holders
of the Notes for any tax or other governmental charges. We may reject any request for an
exchange or registration of transfer of any Note (i) made within 15 calendar days of the mailing
of a notice of redemption of Notes or (ii) made between any regular record date and the next
interest payment date.
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Taxation
General
The following discussion summarizes certain material Panamanian tax and U.S. federal income
tax consequences to beneficial owners arising from the purchase, ownership and disposition of
the Notes. The summary does not purport to be a comprehensive description of all potential
Panamanian tax and U.S. federal income tax considerations that may be relevant to a decision to
purchase, own or dispose of the Notes and is not intended as tax advice to any particular
investor. This summary does not describe any tax consequences arising under the laws of any
state, locality or other taxing jurisdiction other than Panama and the U.S.
Prospective purchasers of the Notes should consult their own tax advisors as to the Panamanian,
U.S. or other tax consequences of the purchase, ownership and disposition of the Notes,
including, in particular, the application of the tax considerations discussed below to their
particular situations, as well as the application of state, local, foreign or other tax laws.
Panamanian taxation
THE FOLLOWING IS A SUMMARY OF THE PRINCIPAL PANAMANIAN INCOME TAX CONSEQUENCES
RESULTING FROM THE BENEFICIAL OWNERSHIP AND DISPOSITION OF THE NOTES BY CERTAIN
PERSONS. THIS SUMMARY IS BASED ON THE PANAMANIAN TAX CODE OF 1956, AS AMENDED,
OTHER APPLICABLE TAX LAWS, DECREES AND REGULATIONS ISSUED THEREUNDER, AND
JUDICIAL AND ADMINISTRATIVE INTERPRETATIONS THEREOF, ALL AS IN EFFECT ON THE DATE
HEREOF, AND IS SUBJECT TO ANY CHANGES IN THESE OR OTHER LAWS, DECREES, REGULATIONS
AND INTERPRETATIONS OCCURRING AFTER SUCH DATE, POSSIBLY WITH RETROACTIVE EFFECT.
THIS SUMMARY IS INTENDED AS A DESCRIPTIVE SUMMARY ONLY AND IS NOT A COMPLETE
ANALYSIS OR LISTING OF ALL POTENTIAL PANAMANIAN INCOME TAX CONSEQUENCES TO
HOLDERS OF THE NOTES. THE SUMMARY DOES NOT ADDRESS THE TAX TREATMENT OF
POTENTIAL INVESTORS THAT MAY BE SUBJECT TO SPECIAL INCOME TAX AND WITHHOLDING
RULES. THE SUMMARY IS NOT INTENDED AS TAX ADVICE TO ANY PARTICULAR INVESTOR, NOR
DOES IT PURPORT TO FURNISH INFORMATION IN THE LEVEL OF DETAIL OR WITH ATTENTION TO
AN INVESTOR’S SPECIFIC TAX CIRCUMSTANCES THAT WOULD BE PROVIDED BY AN INVESTOR’S
OWN TAX ADVISOR. PROSPECTIVE PURCHASERS OF THE NOTES ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE PRECISE PANAMANIAN AND OTHER TAX CONSEQUENCES OF
ACQUIRING, OWNING AND DISPOSING OF THE NOTES.
Taxation of interest
Interest payable on the Notes will be exempt from income tax or withholding requirements in
Panama, provided that the Notes are registered with the Panamanian National Securities
Commission and are initially placed on an exchange or through an organized market in Panama.
The Notes have been registered with the Panamanian National Securities Commission and will be
initially placed on the Panama Stock Exchange. Accordingly, interest payments made on the
Notes will be exempt from income tax or withholding requirements in Panama. Should the Notes
not be initially placed on the Panama Stock Exchange, interest payments will be subject to a 5%
income tax, which would have to be withheld by Elektra.
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Taxation of dispositions
Under current Panamanian tax law, because the Notes have been registered with the
Panamanian National Securities Commission, any capital gains realized by a holder of the Notes
on the sale or other disposition of Notes will be exempt from income tax in Panama, provided
that the sale or disposition of the Notes is made through an exchange or another organized
market. The Notes will be listed on the Panama Stock Exchange. Thus, any gains realized on the
sale of the Notes on this exchange will be exempt from income tax in Panama.
If the Notes are not sold through an exchange or another organized market, pursuant to Law
No. 18 of June 19, 2006, (i) the seller will be subject to income tax in Panama on capital gains on
the sale of the Notes calculated at a fixed rate of ten percent (10%); (ii) the buyer will be
obligated to withhold from the seller an amount equal to five percent (5%) of the aggregate
proceeds of the sale, as a withholding in respect of the capital gains income tax payable by the
seller, and the buyer will be required to send to the fiscal authorities the withheld amount within
ten (10) days following the date of withholding; (iii) the seller will have the option of considering
the amount withheld by the buyer as payment in full of the seller’s obligation to pay income tax
on capital gains; and (iv) in the event the amount withheld by the buyer is greater than the
amount of capital gains income tax payable by the seller, the seller will be entitled to recover the
excess amount as a tax credit by filing a special sworn income tax declaration with the fiscal
authorities. The capital gains income tax provisions of Law No. 18 of June 19, 2006 do not except
from income tax in Panama capital gains on sales of Notes outside Panama by holders not
resident in Panama and, therefore, such provisions would apply, for example, to sales of Notes by
“qualified institutional buyers” in the United States, including sales through the facilities of DTC.
Notwithstanding Law No. 18 of June 19, 2006, based on Tax Opinion No. 201-01-706 of June 27,
2006 issued by the Bureau of Revenue, any capital gains realized by a holder of Notes who is not
resident in Panama on the sale or other disposition of Notes that is executed and effected
outside of Panama, and which payment thereof is made outside of Panama, will not be deemed
Panamanian source income and therefore will not be subject to income tax in Panama. Losses
recognized on the sale or disposition of Notes will likewise be disallowed as a deduction for
income tax purposes in Panama. Regulations implementing the June 2006 tax law are expected
to be promulgated in the next few months and, while the Company will monitor developments,
it expects that such regulations will be generally consistent with the position taken by the Bureau
of Revenue in Tax Opinion No. 201-01-706 of June 27, 2006.
Stamp and other taxes
As the Notes have been registered with the Panamanian National Securities Commission, the
Notes are not subject to stamp, registration or similar taxes. There are no sales, transfer or
inheritance taxes applicable to the sale or disposition of the Notes.
Foreign investors
A person domiciled outside of Panama is not required to file a tax return in Panama, solely by
reason of his or her investment in the Notes, provided that gains realized on the sale and
disposition of the Notes are exempt from income tax as indicated above.
United States taxation
THE FOLLOWING DISCUSSION OF U.S. FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF
NOTES IS A GENERAL SUMMARY ONLY AND IS BASED ON PRESENT LAW, WHICH IS SUBJECT TO
PROSPECTIVE AND RETROACTIVE CHANGE. THE DISCUSSION IS NOT INTENDED AS TAX ADVICE,
DOES NOT CONSIDER ANY INVESTOR’S PARTICULAR CIRCUMSTANCES, AND DOES NOT CONSIDER
TAX CONSEQUENCES OTHER THAN THOSE ARISING UNDER U.S. FEDERAL INCOME TAX LAW.
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TO ENSURE COMPLIANCE WITH U.S. TREASURY DEPARTMENT CIRCULAR 230, HOLDERS OF NOTES
ARE HEREBY NOTIFIED THAT THE FOLLOWING DISCUSSION IS WRITTEN IN CONNECTION WITH
THE PROMOTION OR MARKETING OF THE TRANSACTIONS DESCRIBED IN THIS OFFERING
MEMORANDUM. SUCH DISCUSSION OF TAX ISSUES WAS NOT INTENDED TO BE USED, AND IT
CANNOT BE USED (BY ANY PERSON) FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE
IMPOSED UNDER THE U.S. INTERNAL REVENUE CODE. EACH PROSPECTIVE PURCHASER OF NOTES
SHOULD CONSULT ITS OWN TAX ADVISORS TO DETERMINE THE PARTICULAR TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES.
The following discussion summarizes certain material U.S. federal income tax consequences to
beneficial owners arising from the purchase, ownership, and disposition of the Notes. The
discussion which follows is based on the U.S. Internal Revenue Code of 1986, as amended (the
“Code”), its legislative history, judicial authority, administrative rulings and practice, and
Treasury regulations promulgated thereunder, all as in effect and current on the date hereof.
Such authorities may be repealed, revoked or modified and could result in U.S. federal income
tax consequences different from those discussed below, possibly with retroactive effect.
For purposes of this summary, the term “U.S. Holder” means a beneficial owner of a note that is,
for U.S. federal income tax purposes (a) an individual who is a U.S. citizen or resident, (b) a
corporation or other entity taxable as such created or organized under the laws of the U.S. or any
state thereof, or the District of Columbia, (c) an estate that is subject to U.S. federal income tax
on a net basis with respect to its worldwide income, or (d) a trust if a court within the U.S. is able
to exercise primary supervision over the administration of the trust, and one or more U.S. persons
have the authority to control all substantial decisions of the trust, or if the trust has validly
elected to be treated as a U.S. person under applicable U.S. Treasury Regulations. The term
“Non-U.S. Holder” means a beneficial owner of a note that is neither a U.S. Holder nor a
partnership. If a partnership holds Notes, the tax treatment of a partner will depend upon the
status of the partner and the activities of the partnership. Partners of partnerships holding Notes
should consult their tax advisors.
This discussion is intended as a summary only and is not intended as tax advice to any particular
investor. This summary is not a complete analysis or listing of all potential U.S. federal income tax
consequences to U.S. Holders and Non-U.S. Holders relating to the Notes, and does not address
the effect of any U.S. gift, estate, state or local tax law or foreign tax law on a potential investor
in the Notes. This summary does not address the tax treatment of U.S. Holders and
Non-U.S. Holders that may be subject to special income tax rules, including, without limitation,
insurance companies, tax-exempt organizations, banks, U.S. Holders whose functional currency is
not the U.S. dollar, U.S. Holders subject to the alternative minimum tax, U.S. Holders and
Non-U.S. holders that are broker-dealers in securities, U.S. Holders and Non-U.S. Holders that hold
the Notes as a hedge against currency risks, as a position in a “straddle” for tax purposes, or as
part of an “integrated transaction” within the meaning of Section 1.1275-6 of the U.S. Treasury
Regulations. This summary is generally limited to investors who will hold the Notes as “capital
assets” within the meaning of Section 1221 of the Code, and who are initial investors who
purchase the Notes at the issue price within the meaning of Section 1273 of the Code.
U.S. holders
Taxation of interest and additional amounts. Interest paid on a note will be included in the
gross income of a U.S. Holder as ordinary income at the time it is treated as received or accrued,
in accordance with the U.S. Holder’s regular method of tax accounting. A U.S. Holder will also be
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required to include in gross income as interest any withholding tax paid and additional amounts
paid with respect to withholding tax on the Notes, including withholding tax on payments of
such additional amounts. The repayment of principal amount on a note is not taxable.
Interest received or accrued on the Notes (including additional amounts, if any (see “Description
of the Notes—Payment of Additional Amounts”)) will constitute income from sources outside the
U.S. If Panamanian or other withholding taxes are imposed, U.S. Holders will be treated as having
actually received an amount equal to the amount of such taxes and as having paid such amount
to the relevant taxing authority. As a result, the amount of interest income included in gross
income by a U.S. Holder will be greater than the amount of cash actually received by the
U.S. Holder. A U.S. Holder may be able, subject to certain generally applicable limitations, to
claim a foreign tax credit or, alternatively, a deduction for Panamanian withholding taxes
imposed on payments of interest (including additional amounts). Interest income (including
additional amounts) generally will constitute “passive income” or, in the case of certain
U.S. Holders, “financial services income” for U.S. foreign tax credit purposes (or “high
withholding tax interest,” if the Panamanian withholding tax is ever imposed at a rate of 5% or
more). U.S. Holders should note that recently enacted legislation eliminates the “high
withholding tax interest” category with respect to taxable years beginning after December 31,
2006. Under this new legislation, the foreign tax credit limitation categories would be limited to
“passive category income” and “general category income.” The calculation of U.S. foreign tax
credits and, in the case of a U.S. Holder that elects to deduct foreign taxes, the availability of
deductions involves the application of complex rules that depend on a U.S. Holder’s particular
circumstances. U.S. Holders should, therefore, consult their own tax advisors regarding the
application of the U.S. foreign tax credit rules to interest income (including additional amounts)
on the Notes.
Possible Original Issue Discount. It is possible that the Notes will be treated as issued with
original issue discount (“OID”). If the Notes are treated as issued with OID, a U.S. Holder will be
required to accrue OID on a constant yield basis and include such accruals in gross in income (in
addition to stated interest received on its Note) over the term of the Notes.
A Note has OID to the extent that its stated redemption price at maturity exceeds its issue price,
provided that such excess equals or exceeds a de minimis amount (generally defined as 0.25% of
the Note’s stated redemption price at maturity multiplied by the number of complete years to its
maturity). The issue price of a Note is the first price at which a substantial amount of such issue
of Notes has been sold (ignoring sales to bond houses, brokers, or similar persons or
organizations acting in the capacity of underwriters, dealers, or wholesalers).
Generally, if the excess of a Note’s stated redemption price at maturity over its issue price is de
minimis, a U.S. Holder such a Note will recognize capital gain with respect to such de minimis OID
when principal payments on the Note are made. U.S. Holders should consult their own tax
advisors in the event that the Notes are issued with OID.
Possible Premium. It is also possible that the issue price of the Notes will exceed their stated
redemption price at maturity, in which case the Notes will be considered to have been issued at a
premium. In such case, a U.S. Holder may elect to amortize the amount of such premium on a
constant yield basis as an offset to interest income. U.S. Holders should consult their own tax
advisors in the event that the Notes are issued at a premium.
159
Sale, redemption, retirement and other disposition of the notes. In general, a U.S. Holder will
generally recognize gain or loss on the sale, redemption, retirement or other taxable disposition
of a note in an amount equal to the difference between (i) the amount of cash and the fair
market value of property received by such U.S. Holder on such disposition (less any amounts
attributable to accrued but unpaid interest which will be taxable as such at the time of
purchase), and (ii) the U.S. Holder’s adjusted tax basis in the note. A U.S. Holder’s adjusted tax
basis in a note will generally equal the acquisition cost of such note (less any amounts
attributable to accrued interest) to the U.S. Holder decreased by the amount of any principal
payments made on the note (i) increased by any amount includable in income by the U.S. Holder
as OID and (ii) reduced by any amortized premium. Such gain or loss will be capital gain or loss.
Net capital gains derived with respect to capital assets held for more than one year are eligible
for taxation at a maximum rate of 15% for non-corporate U.S. Holders (including individuals),
although U.S. Holders should be aware that this reduced rate is currently scheduled to increase to
20% for taxable years after 2010. Certain limitations exist on the deductibility of capital losses
under the Code.
Gain or loss recognized by a U.S. Holder on the sale, redemption, retirement or other taxable
disposition of a note will generally be U.S.-source gain or loss. Generally, U.S. foreign tax credits
may not be used to offset U.S.-source gain. Prospective investors should consult their own tax
advisors as to the U.S. tax and foreign tax credit implications of such sale, redemption, retirement
or other disposition of a note, particularly if a Panamanian tax is imposed on a sale, redemption,
retirement or other disposition of a note.
Non-U.S. holders
Except as otherwise described below, a Non-U.S. Holder of a note will not be subject to
U.S. federal income tax by withholding or otherwise on payments of interest (including
additional amounts) on a note or gain realized in connection with the sale, redemption,
retirement or other disposition of a note, unless the Non-U.S. Holder is (a) in the case of gain
realized by a Non-U.S. Holder who is an individual present in the U.S. for 183 days or more in the
taxable year of disposition and certain other conditions are satisfied; or (b) engaged in a trade or
business in the U.S. and the interest or gain on the note, as the case may be, is effectively
connected with the conduct of such trade or business (and, if an income tax treaty applies,
through a permanent establishment in the U.S.). In addition, if such Non-U.S. Holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30% (or such lower rate provided
by an applicable treaty) of its effectively connected earnings and profits for the taxable year,
subject to certain adjustments.
Backup withholding and information reporting
For non-corporate U.S. Holders, information reporting requirements generally will apply to
(a) payments of principal and interest on a note within the U.S., including payments made by
wire transfer from outside the U.S. to an account such non-corporate U.S. Holder maintains in the
U.S., and (b) the payment of the proceeds from the sale of a note effected at a U.S. office of a
broker. Additionally, backup withholding will apply to such payments to a non-corporate
U.S. Holder that (a) fails to provide an accurate taxpayer identification number, (b) is notified by
the U.S. Internal Revenue Service that it has failed to report all interest required to be shown on
its U.S. federal income tax returns, or (c) in certain circumstances, fails to comply with applicable
certification requirements.
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Backup withholding and information reporting will not apply to payments made by us or our
paying agents, in their capacities as such, to a Non-U.S. Holder of a note if the holder has
provided the required certification that it is not a “U.S. person” within the meaning of the Code,
provided that neither we nor our paying agent has actual knowledge that the holder is a
U.S. person. Payments of the proceeds from a disposition by a Non-U.S. Holder of a note made to
or through a foreign office of a broker will not be subject to information reporting or backup
withholding, except that information reporting and backup withholding may apply to those
payments if the broker is:
1.
a U.S. person;
2.
a controlled foreign corporation for U.S. federal income tax purposes;
3.
a foreign person, 50% or more of whose gross income is effectively connected with a
U.S. trade or business for a specified three-year period; or
4.
a foreign partnership, if at any time during its tax year, one or more of its partners are
U.S. persons, as defined in Treasury regulations, who in the aggregate hold more than 50%
of the income or capital interest in the partnership or if, at any time during its tax year, the
foreign partnership is engaged in a U.S. trade or business.
Payment of the proceeds from a disposition by a Non-U.S. Holder of a note made to or through
the U.S. office of a broker is likely subject to information reporting and backup withholding
unless the holder or beneficial owner certifies as to its taxpayer identification number or
otherwise establishes an exemption from information reporting and backup withholding.
Non-U.S. Holders should consult their own tax advisors regarding application of backup
withholding in their particular circumstance and the availability of and procedure for obtaining
an exemption from backup withholding under current Treasury regulations. Any amounts
withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be
allowed as a refund or as a credit against the holder’s U.S. federal income tax liability, provided
the required information is timely furnished to the U.S. Internal Revenue Service.
161
Plan of distribution
Under the terms and subject to the conditions contained in the Purchase Agreement dated
June 15, 2006, the Initial Purchaser has agreed to purchase all of the Notes being sold pursuant to
the Purchase Agreement that are not purchased by investors through the Local Brokers, as
defined below and in the Purchase Agreement, in Panama, and we have agreed to sell the Notes
to the Initial Purchaser.
The Purchase Agreement provides that the obligations of the Initial Purchaser to pay for and
accept delivery of the Notes are subject to the approval of certain legal matters by its counsel
and to certain other conditions. The Initial Purchaser is committed to take and pay for all of the
Notes offered hereby if any are taken.
The Purchase Agreement provides that we will indemnify the Initial Purchaser against certain
liabilities, including liabilities under the Securities Act.
The Notes will constitute a new class of securities with no established trading market. We do not
intend to list the Notes, or have the Notes authorized for trading, on any exchange other than
the Panama Stock Exchange. The Initial Purchaser has advised us that it currently intends to make
a market in the Notes. However, the Initial Purchaser is not obligated to do so and any
market-making activities with respect to the Notes may be discontinued at any time without
notice. Accordingly, we cannot give any assurance as to the liquidity of, or the trading market
for, the Notes.
It is anticipated that the Notes will be listed on, and offered by us through, the Panama Stock
Exchange. The annual interest rate on the Notes will be announced by us prior to the
determination of the price of the Notes. Additionally, potential investors may contact JPMorgan
to obtain the interest rate on the Notes.
On the date that the price of the Notes is determined, between 9:30 a.m. and 10:00 a.m. Panama
time, each person registered as a member of the Panama Stock Exchange (a “Local Broker”) will
be permitted to submit bids for the Notes. At 10:00 a.m. Panama time, JPMorgan will submit its
bid for the Notes through Wall Street Securities, S.A., a Local Broker. We anticipate that the
aggregate principal amount of the bids for the Notes that we accept from Local Brokers and
JPMorgan will equal the aggregate principal amount of the Notes set forth on the cover page of
this preliminary offering memorandum. Bids accepted from Local Brokers may be at prices equal
to or higher than the price at which the Notes will be offered to investors, which will be
determined by us and JPMorgan. The price at which we expect to offer the Notes to investors is
set forth on the front cover page of the final offering memorandum. Nevertheless, this price is
subject to change as determined by us and JPMorgan.
Subject to the satisfaction of certain conditions, on the settlement date for the Notes, Local
Brokers whose bids were accepted by us will receive beneficial interests in the Regulation S
Global Note directly from us, through Latinclear. JPMorgan will receive beneficial interests in the
Notes directly from us, through Latinclear, and JPMorgan will subsequently transfer such
beneficial interests to subsequent purchasers through such subsequent purchaser’s participant
accounts in DTC, Euroclear or Clearstream, as the case may be.
The Initial Purchaser has advised us that it proposes initially to offer the Notes at the price listed
on the cover page of the final offering memorandum. After the initial offering, the price to
investors, concessions and discounts may be changed.
162
The Local Broker through whom JPMorgan will submit its bid for the Notes, will receive a fee of
US$75,000 in connection with this offering.
The expenses of the offering, not including the Initial Purchasers’ structuring fee, are estimated
to be approximately US$2.5 million and are payable by us.
In connection with this offering, the Initial Purchaser, or any person acting for it, may over-allot
or effect transactions with a view to supporting the market price of the Notes at a level higher
than that which might otherwise prevail for a limited period after the issue date. However, there
is no obligation for the Initial Purchaser, or any person acting for either of it, to do this. Such
stabilizing, if commenced, may be discontinued at any time, and must be brought to an end after
a limited period.
We have been advised by the Initial Purchaser that the Initial Purchaser proposes to resell the
Notes initially at the price set forth on the cover page hereof (a) within the U.S. to QIBs in
reliance on Rule 144A under the Securities Act and (b) outside the U.S. to certain persons in
reliance on Regulation S under the Securities Act. See “Notice to Investors.” After the initial
offering, the offering price and other selling terms of the Notes may from time to time be varied
by the Initial Purchaser.
The Notes have not been and will not be registered under the Securities Act and may not be
offered or sold within the U.S. or to, or for the account or benefit of, U.S. persons except as
described in the immediately preceding paragraph. For a description of certain restrictions on
resale or transfer, see “Notice to Investors.”
In connection with sales outside the U.S., the Initial Purchaser has agreed that except for sales
described in the second preceding paragraph, it will not offer, sell or deliver the Notes to, or for
the account of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40
days after the later of the commencement of the offering and the closing date, and it will send
to each dealer to whom it sells such Notes during such period a confirmation or other notice
setting forth the restrictions on offers and sales of the Notes within the U.S. or to, or for the
account or benefit of, U.S. persons. Resales of the Notes are restricted as described below under
“Notice to Investors.”
In addition, until 40 days after the later of the commencement of the offering and the closing
date, an offer or sale of the Notes within the U.S. by a dealer (whether or not participating in the
offering) may violate the registration requirements of the Securities Act if such offer or sale is
made otherwise than in accordance with Rule 144A under the Securities Act or pursuant to
another valid exemption therefrom.
As used herein, the terms “United States” and “U.S. person” have the meaning given to them in
Regulation S under the Securities Act.
We expect to deliver the Notes on or about July 10, 2006. Under Rule 15c6-1 of the Exchange Act,
trades in the secondary market generally are required to settle within three business days, unless
the parties to any such trade expressly agree otherwise. Accordingly, if you wish to trade Notes
on any day prior to the third business day before the date of delivery of the Notes, you and your
counterparty will be required, by virtue of the fact that the Notes initially will settle on a delayed
basis, to agree to a delayed settlement cycle at the time of any such trade to prevent a failed
settlement.
163
The Notes may be offered by the Company to the public in Panama, either directly or through an
agent.
Any investor purchasing the Notes in the global offering is solely responsible for ensuring that
any offer or resale of the Notes it purchased in the global offering occurs in compliance with
applicable laws and regulations.
The Initial Purchaser or its affiliates may from time to time provide investment banking and
general financing and banking services to us. In addition, the Initial Purchaser and certain of its
affiliates are lenders to the Company.
Wall Street Securities, S.A., as a Local Broker acting on behalf of the Issuer, will hold the Notes on
behalf of the Issuer, prior to the offering of the Notes on the Panama Stock Exchange. Wall
Street Securities, S.A. is a company incorporated under the laws of the Republic of Panama as a
sociedad anónima, and is located at Calle Aquilino de la Guardia y Rogelio Alfaro, Apartado
Postal 0819-09280, Republic of Panama, and may be contacted at the above address, by
telephone at 507-205-1700 and by fax at 507-264-0111.
Wall Street Securities, S.A. is a wholly owned Subsidiary of Banco Continental de Panama, S.A.,
and a shareholder of both the Panama Stock Exchange and Latinclear.
164
Notice to investors
The following information relates to the form and transfer of the Notes. Because of the
following restrictions, purchasers of Notes offered in the U.S. in reliance on Rule 144A and
outside the U.S. in reliance on Regulation S are advised to consult legal counsel prior to making
any offer, resale, pledge or transfer of the Notes.
The Notes have not been registered under the Securities Act, any securities laws of any state
located in the U.S., or laws of any other U.S. jurisdiction and may not be offered or sold in the
U.S. or to, or for the account or benefit of, U.S. persons except in accordance with an applicable
exemption from the registration requirements thereof. Accordingly, the Notes are being offered
and sold only (1) to qualified institutional buyers in compliance with Rule 144A, or (2) outside the
U.S. to non-U.S. persons in reliance upon Regulation S under the Securities Act.
Each purchaser of Notes offered hereby, by its acceptance thereof, will be deemed to have
acknowledged, represented to and agreed with us and the Initial Purchaser as follows:
1.
It understands and acknowledges that the Notes have not been registered under the
Securities Act, any securities laws of any state located in the U.S., or any other U.S. jurisdiction,
are being offered for resale in transactions not requiring registration under the Securities Act or
to any other securities laws, including sales pursuant to Rule 144A under the Securities Act, and,
unless so registered, may not be offered, sold or otherwise transferred except in compliance with
the registration requirements of the Securities Act, or any other applicable securities law,
pursuant to an exemption therefrom or in a transaction not subject thereto and in each case in
compliance with the conditions for transfer set forth in paragraph (4) below. It also understands
that we and our affiliates are permitted to repurchase the Notes and, thus, each purchaser may
need to hold the Notes for more than two years to be freely tradable under Rule 144 of the
Securities Act.
2.
It is not an affiliate (as defined in Rule 144 under the Securities Act) of ours or acting on
our behalf and it is either:
a.
a “qualified institutional buyer” within the meaning of Rule 144A and is aware that
any sale of the Notes to it will be made in reliance on Rule 144A. Such acquisition will
be for its own account or for the account of another qualified institutional buyer; or
b.
a person who, at the time the buy order for the Notes was originated, was outside the
U.S. and was not a U.S. person (and was not purchasing for the account or benefit of a
U.S. person) within the meaning of Regulation S under the Securities Act.
3.
It acknowledges that neither us nor the Initial Purchaser or any person representing us or
the Initial Purchaser has made any representation to it with respect to us or the offering or sale
of any Notes, other than the information contained or incorporated by reference in this offering
memorandum, which has been delivered to it and upon which it is relying in making its
investment decision with respect to the Notes. It acknowledges that no representation or
warranty is made by the Initial Purchaser as to the accuracy or completeness of such materials. It
has had access to such financial and other information concerning us and the Notes as it has
deemed necessary in connection with its decision to purchase the Notes, including an opportunity
to ask questions of and request information from us or the Initial Purchaser.
4.
It is purchasing the Notes for its own account, or for one or more investor accounts for
which it is acting as a fiduciary or agent, in each case for investment, and not with a view to, or
165
for offer or sale in connection with, any distribution thereof in violation of the Securities Act,
subject to any requirements of law that the disposition of its property or the property of such
investor account or accounts be at all times within its or their control and subject to its or their
ability to resell such Notes pursuant to an effective registration statement under the Securities
Act, Rule 144A, Regulation S or any exemption from registration available under the Securities
Act. It agrees on its own behalf and on behalf of any investor account for which it is purchasing
the Notes and each subsequent holder of the Notes by its acceptance thereof will agree (I) to
offer, resell, pledge or otherwise transfer such Notes only in accordance with the Securities Act
and any applicable securities law and, prior to the expiration of the holding period applicable to
sales of the Notes under Rule 144(k) under the Securities Act (or any successor provision) (the
“resale restriction termination date”) only (a) to us or an affiliate of ours, (b) pursuant to a
registration statement which has been declared effective under the Securities Act, (c) for so long
as the Notes are eligible for resale pursuant to Rule 144A to a person it reasonably believes is a
QIB that purchases for its own account or for the account of a QIB in a principal amount of not
less than US$ 10,000 for the purchaser and each such account to whom notice is given that the
transfer is being made in reliance on Rule 144A, (d) pursuant to offers and sales that occur
outside the U.S. within the meaning of Regulation S or (e) pursuant to another available
exemption from the registration requirements of the Securities Act; (II) in connection with any
transfer of any Note in certificated form, to check the box provided on the reverse thereof
relating to the manner of such transfer and surrender such Note to the trustee; (III) if any
proposed transfer is being made in accordance with (I)(d) or (e) above prior to the resale
restriction termination date, to acknowledge that we reserve the right, prior to such transfer, to
require the delivery of such certifications, legal opinions or other information satisfactory to us
to confirm that the proposed transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act; (IV) to
acknowledge that the trustee will not be required to accept for registration of transfer any
Notes, except upon presentation of evidence satisfactory to us and the trustee that the foregoing
restrictions on transfer have been complied with; and (V) to agree to provide to any person
acquiring any of the Notes from it a notice advising such person that resales of the Notes are
restricted as stated herein and that certificates representing the Notes may bear a legend to that
effect.
5.
Each purchaser acknowledges that each Global Note will contain a legend substantially to
the following effect unless we determine otherwise in compliance with applicable law:
The following is the form of restrictive legend which will appear on the face of the Rule 144A
global note, and which will be used to notify transferees of the foregoing restrictions on
transfer:
“THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. THIS NOTE HAS BEEN
REGISTERED WITH THE PANAMANIAN NATIONAL SECURITIES COMMISSION. THE HOLDER
HEREOF, BY PURCHASING THIS NOTE, AGREES THAT THIS NOTE OR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED
ONLY (I) TO THE ISSUER, (II) SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO
RULE 144A UNDER THE SECURITIES ACT, AS AMENDED (“RULE 144A”), TO A PERSON WHO
THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN
RULE 144A) IN ACCORDANCE WITH RULE 144A, (III) IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT, AS
166
AMENDED, (IV) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT AFFORDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (V) PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, AND IN EACH OF
SUCH CASES IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES OR OTHER APPLICABLE JURISDICTION AND IN ACCORDANCE WITH THE
TRANSFER RESTRICTIONS CONTAINED IN THE INDENTURE UNDER WHICH THIS NOTE WAS
ISSUED. THE HOLDER HEREOF, BY PURCHASING THIS NOTE, REPRESENTS AND AGREES THAT
IT SHALL NOTIFY ANY PURCHASER OF THIS NOTE FROM IT OF THE RESALE RESTRICTIONS
REFERRED TO ABOVE. IN VIEW OF THE ABILITY OF THE ISSUER AND ITS AFFILIATES TO
REPURCHASE THE NOTES, THE HOLDER HEREOF MAY NEED TO HOLD NOTES FOR MORE
THAN TWO YEARS TO BE FREELY TRADABLE IN THE UNITED STATES UNDER RULE 144 OF
THE SECURITIES ACT.
THE FOREGOING LEGEND MAY BE REMOVED FROM THIS NOTE ON SATISFACTION OF THE
CONDITIONS SPECIFIED IN THE INDENTURE REFERRED TO HEREIN.”
The following is the form of restrictive legend which will appear on the face of the Regulation S
global note and which will be used to notify transferees of the foregoing restrictions on transfer:
“THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. THIS NOTE HAS BEEN
REGISTERED WITH THE PANAMANIAN NATIONAL SECURITIES COMMISSION. THE HOLDER
HEREOF, BY PURCHASING THIS NOTE, AGREES THAT NEITHER THIS NOTE NOR ANY INTEREST
OR PARTICIPATION HEREIN MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
THE FOREGOING LEGEND MAY BE REMOVED FROM THIS NOTE AFTER 40 DAYS BEGINNING
ON AND INCLUDING THE LATER OF (A) THE DATE ON WHICH THE NOTES ARE OFFERED TO
PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN REGULATION S UNDER THE
SECURITIES ACT) AND (B) THE ORIGINAL ISSUE DATE OF THIS NOTE.”
6.
It acknowledges that we and the Initial Purchaser will rely upon the truth and accuracy of
the foregoing acknowledgments, representations and agreements and agrees that, if any of the
acknowledgments, representations or warranties deemed to have been made by its purchase of
Notes are no longer accurate, it shall promptly notify us and the Initial Purchaser. If it is acquiring
any Notes as a fiduciary or agent for one or more investor accounts, it represents that it has sole
investment discretion with respect to each such account and that it has full power to make the
foregoing acknowledgments, representations and agreements on behalf of each such account.
7.
With respect to the purchase and holding of any Note or Notes, either (a) the purchaser
and holder is not (i) an “employee benefit plan” (as defined in Section 3(3) of ERISA that is
subject to Title I of ERISA, (ii) a “plan” described in Section 4975 of the Code, (iii) an entity whose
underlying assets include “plan assets” (within the meaning of ERISA) or (iv) a governmental plan
which is subject to any federal, state or local law that is substantially similar to the provisions of
Section 406 of ERISA or Section 4975 of the Code; or (b) its purchase and holding of any Note or
Notes will not result in a prohibited transaction under Section 406 of ERISA or Section 4975 of the
Code (or, in the case of a governmental plan, any substantially similar federal, state or local law)
for which an exemption is not available.
167
Legal matters
Certain matters of Panamanian law will be passed upon for us by Alemán, Cordero, Galindo &
Lee, our special Panamanian counsel, and by Arias, Fábrega & Fábrega, special Panamanian
counsel to the Initial Purchaser. The validity of the Notes offered and sold pursuant to this
offering and certain other matters will be passed upon for us by Jones Day, and for the Initial
Purchaser by Shearman & Sterling LLP.
168
Independent accountants
The financial statements of Elektra as of December 31, 2005 and 2004 and for the three years
ended December 31, 2005, 2004 and 2003, included in this offering memorandum, have been
audited by PricewaterhouseCoopers, independent accountants, as stated in their report
appearing herein. With respect to the unaudited financial information of Elektra Noreste, S.A for
the three-month period ended March 31, 2006 and 2005, included in this offering memorandum,
PricewaterhouseCoopers reported that they have applied limited procedures in accordance with
professional standards for a review of such information. However, their separate report dated
May 11, 2006 appearing herein, states that they did not audit and they do not express an opinion
on that unaudited financial information. Accordingly, the degree of reliance on their report on
such information should be restricted in light of the limited nature of the review procedures
applied.
169
Elektra Noreste, S. A.
Index for financial statements
December 31, 2005, 2004 and 2003
Pages
Report of independent auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-2
Financial statements:
Balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-3
Statements of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-5
Statements of stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-6
Statements of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-7
Notes to financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-9
Index for financial statements
March 31, 2006 and December 31, 2005
Pages
Review report of independent auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-31
Financial statements:
Balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-32
Statements of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-34
Statements of stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-35
Statements of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-36
Notes to financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-37
F-1
Report of independent auditors
To the Board of Directors and Stockholders of
We have audited the accompanying balance sheets of Elektra Noreste, S. A. as of December 31,
2005 and 2004, and the related statements of income, stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2005. These financial statements are
responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statements
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of Elektra Noreste, S. A. at December 31, 2005 and 2004, and the results of
its operations and its cash flows for each of the three years in the period ended December 31,
2005 in conformity with accounting principles generally accepted in the United States of America.
/s/
January 27, 2006
F-2
Balance sheets
December 31, 2005 and 2004
(in US Dollars)
2005
2004
Assets
Property, plant, and equipment:
Property, plant, and equipment, net of accumulated
depreciation (Notes 3 and 12) . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress (Notes 3 and 12) . . . . . . . . . . . . . . . .
US$213,997,316 US$208,838,150
13,840,455
12,615,408
Total property, plant, and equipment . . . . . . . . . . . . . .
227,837,771
221,453,558
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,576,063
6,544,514
Accounts receivable (Note 12):
Trade, net (Notes 4 and 5) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fuel component adjustment (Note 2) . . . . . . . . . . . . . . . . . .
Generators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,232,827
16,724,807
569,495
1,601,477
33,897,011
1,165,006
433,208
1,307,496
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . .
58,128,606
36,802,721
Inventory (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid income tax (Notes 9 and 10) . . . . . . . . . . . . . . . . . . . .
Deferred income tax (Notes 9 and 10) . . . . . . . . . . . . . . . . . . .
Advances to suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,050,919
131,029
1,468,470
—
398,614
8,554,205
166,142
—
630,589
501,222
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68,753,701
53,199,393
Other assets:
Debt issuance cost (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Severance fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security deposits on facilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust fund for long-term loan debt (Note 12) . . . . . . . . . . . . .
Deferred income tax (Notes 9 and 10) . . . . . . . . . . . . . . . . . . .
1,597,611
911,843
58,138
2,500,000
2,069,550
1,789,849
723,244
60,119
2,500,000
2,998,342
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,137,142
8,071,554
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The accompanying notes are an integral part of these financial statements.
F-3
US$303,728,614 US$282,724,505
Balance Sheets — (continued)
December 31, 2005 and 2004
(in US Dollars)
2005
Liabilities and Stockholders’ Equity
Stockholders’ equity:
Common stock authorized, issued and outstanding:
50,000,000 shares without par value; 160,031 held in
treasury (Note 17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss (Note 13) . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . .
2004
US$106,098,875 US$106,098,875
(457,493)
—
18,748,041
4,011,196
124,389,423
110,110,071
41,228,848
10,226,889
24,216,754
10,109,571
6,674,630
512,700
—
4,115,573
2,665,177
257,885
6,334,477
20,000
3,551,472
—
2,630,584
218,659
Total accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . .
65,681,702
47,081,517
Current portion of bank debt (Notes 12 and 18) . . . . . . . . .
Interest payable on debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative Instrument (Note 13) . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,000,000
1,396,934
6,533
653,561
655,386
5,000,000
1,042,220
12,423,698
—
883,296
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,394,116
66,430,731
Long-term bank debt (Notes 12 and 18) . . . . . . . . . . . . . . . . . . .
90,000,000
95,000,000
Customer deposits and other liabilities:
Customer deposits (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for seniority premium and severance payments . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,923,025
703,156
1,318,894
9,546,696
682,769
954,238
Commitments and contingencies (Note 18)
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
179,339,191
172,614,434
Current liabilities:
Accounts payable:
Generation and transmission (Notes 5 and 8) . . . . . . . . . . .
Suppliers (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances, retentions and deposits on construction
contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Related company (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax payable (Notes 9 and 10) . . . . . . . . . . . . . . . . . .
Deferred income tax (Notes 9 and 10) . . . . . . . . . . . . . . . . .
Customer deposits (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . .
Witholding taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity . . . . . . . . . . . .
F-4
US$303,728,614 US$282,724,505
Statements of income
For the years ended December 31, 2005, 2004 and 2003
2005
Revenues
Net energy sales (Note 5) . . . . . . . . . . . . . .
Other income (Note 15) . . . . . . . . . . . . . . . .
2004
2003
US$263,501,949 US$217,615,046 US$204,302,420
8,983,742
7,773,157
7,203,380
Total revenues . . . . . . . . . . . . . . . . . . . . . .
272,485,691
225,388,203
211,505,800
Purchase of energy and transmission
charges, net (Notes 5 and 14) . . . . . . . . . . .
193,905,488
151,822,767
147,830,142
Gross distribution margin . . . . . . . . . . . . . . . .
78,580,203
73,565,436
63,675,658
8,218,840
195,942
1,483,867
2,575,193
8,499,148
1,943,000
11,890,034
7,517,199
9,115,038
358,756
524,429
2,237,051
8,506,837
1,756,246
10,909,897
8,180,320
8,510,224
223,759
1,561,358
1,833,165
7,751,629
2,012,000
10,182,773
7,937,159
1,005,214
56,989
Total operating expenses . . . . . . . . . . . .
43,328,437
41,645,563
39,938,915
Operating income . . . . . . . . . . . . . . . . . . . . . .
35,251,766
31,919,873
23,736,743
Other Income (Expense)
Interest income . . . . . . . . . . . . . . . . . . . . . . .
Interest expense (Note 16) . . . . . . . . . . . . .
196,350
(7,639,719)
138,630
(4,440,820)
98,656
(3,886,642)
Total other expense . . . . . . . . . . . . . . . . .
(7,443,369)
(4,302,190)
(3,787,986)
Income before income taxes . . . . . . . . . . . . . .
27,808,397
27,617,683
19,948,757
Income taxes (Notes 9 and 10):
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred expense (benefit) . . . . . . . . . . . . .
2,700,530
5,871,022
8,658,265
(614,466)
3,768,520
2,217,480
Total income taxes . . . . . . . . . . . . . . . . . .
8,571,552
8,043,799
5,986,000
Operating Expenses
Labor and other personnel . . . . . . . . . . . . .
Severance expenses . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . .
Repair and maintenance . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . .
Management fees (Note 5) . . . . . . . . . . . . .
Administrative and other . . . . . . . . . . . . . .
Loss (gain) on sale and disposal of fixed
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(73,152)
US$ 19,236,845 US$ 19,573,884 US$ 13,962,757
F-5
Statements of stockholders’ equity
Common
Stocks
Treasury
Stock
Advance
Dividends
Other
Retained Comprehensive
Earnings
Income (loss)
Balance as of
December 31,
2002 . . . . . . . . . . . . . . US$142,142,962 US$(330,557) US$(8,791,392) US$ 8,622,999
Net income 2003 . . . . . .
—
—
—
13,962,757
Reacquisition of
stock . . . . . . . . . . . . . .
—
(165,396)
—
—
Complementary
dividend tax paid . . .
—
—
—
(117,416)
Balance as of
December 31,
2003 . . . . . . . . . . . . . .
Net income 2004 . . . . . .
Capital reduction . . . . .
Reacquisition of
stock . . . . . . . . . . . . . .
Dividends declared . . . .
Accredited
complementary
dividend tax . . . . . . . .
Complementary
dividend tax paid . . .
Balance as of
December 31,
2004 . . . . . . . . . . . . . .
Net income 2005 . . . . . .
Other comprehensive
income net
unrealized loss on
hedging instruments,
net of taxes of
US$196,068 . . . . . . . .
Dividends declared . . . .
142,142,962
—
(35,500,000)
—
—
US$
Total
Stockholders’
Equity
— US$141,643,922
—
13,962,757
—
(165,396)
—
(117,416)
(495,953)
—
—
(8,791,392)
—
—
22,468,250
19,573,884
—
—
—
—
155,323,867
19,573,884
(35,500,000)
(48,134)
—
—
8,791,392
—
(38,268,213)
—
—
(48,134)
(29,476,821)
—
—
—
773,128
—
773,128
—
—
—
(535,853)
—
(535,853)
106,642,962
—
—
—
(544,087)
—
—
—
Balance as of
December 31,
2005 . . . . . . . . . . . . . . US$106,642,962 US$(544,087) US$
—
—
4,011,196
19,236,845
—
—
—
(4,500,000)
— US$ 18,748,041
F-6
—
—
(457,493)
—
110,110,071
19,236,845
(457,493)
(4,500,000)
US$(457,493) US$124,389,423
Statements of cash flows
2005
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss (gain) on sale and disposal of fixed
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . .
Provision for severance payments net of
contribution to severance fund . . . . . . .
Deferred income tax . . . . . . . . . . . . . . . . . .
Fuel component adjustment . . . . . . . . . . .
2004
2003
US$ 19,236,845 US$ 19,573,884 US$ 13,962,757
11,890,034
10,909,897
1,005,214
1,483,867
56,989
524,429
(73,152)
1,561,358
(4,739)
5,871,022
(15,559,801)
369,284
(614,466)
7,523,994
60,986
2,217,480
(4,831,000)
(7,249,951)
(3,852,198)
(4,530,308)
—
221,051
1,503,286
115,358
1,981
36,132
(780,457)
(1,204,350)
(335,685)
834
(25,142)
1,378,858
999,132
200,350
(2,950)
17,404,723
492,700
(5,019,942)
(163,473)
(2,925,856)
(2,508,825)
1,302,322
(255,088)
791,850
1,751,775
2,249,150
(204,438)
31,228,175
27,820,840
25,689,479
Acquisition of fixed assets . . . . . . . . . . . . . . .
Proceeds from sales of fixed assets . . . . . . . .
Withdrawal from trust fund . . . . . . . . . . . . .
(19,473,247)
193,786
—
(17,836,936)
317,458
1,831,627
(16,806,673)
274,152
(685,794)
Net cash used in investing activities . . .
(19,279,461)
(15,687,851)
(17,218,315)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . .
Accounts receivable – related
company . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances to suppliers . . . . . . . . . . . . . . . . .
Deposits on facilities . . . . . . . . . . . . . . . . . .
Trade accounts payable and other
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable – related company . . . .
Income tax, net . . . . . . . . . . . . . . . . . . . . . .
Seniority premium payments . . . . . . . . . . .
Net cash provided by operating
activities . . . . . . . . . . . . . . . . . . . . . . . .
10,182,773
Continued…
F-7
Statements of cash flows — continued
2005
Repayment of long-term debt . . . . . . . . . . .
Proceeds from long-term debt . . . . . . . . . . .
Bonds payments . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt, net . . . . . . . . . . . . . . . . . . .
Capital reduction . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of treasury stock . . . . . . . . . . . .
Complementary dividend tax paid . . . . . . .
2004
2003
US$ (5,000,000) US$ (45,000,000) US$(48,305,000)
—
100,000,000
40,630,000
—
—
(349,322)
5,000,000
(9,700,000)
—
—
(35,500,000)
—
(16,917,165)
(16,284,503)
(4,577)
—
(48,134)
(165,396)
—
(535,853)
(117,416)
Net cash used in financing activities . . . .
(16,917,165)
(7,068,490)
(8,311,711)
Net (decrease) increase in cash . . . . . . . . . . . .
Cash at beginning of the year . . . . . . . . . . . . .
(4,968,451)
6,544,514
5,064,499
1,480,015
159,453
1,320,562
Cash at end of the year . . . . . . . . . . . . . . . . . . .
US$ 1,576,063 US$
6,544,514 US$ 1,480,015
Supplementary disclosures
Cash payments for interest . . . . . . . . . . . . . .
US$ 7,034,743 US$
2,279,000 US$ 3,275,572
Cash payments for income taxes . . . . . . . . .
US$ 7,472,155 US$
7,357,217 US$
340,354
US$ 21,983,710 US$
—
Non-cash investing and financing activities
Dividends declared but not paid . . . . . . . . .
US$
F-8
—
Notes to financial statements
December 31, 2005, 2004 and 2003
1. Description of business
Elektra Noreste, S. A. (the Company) is a corporation formed as a result of the privatization of
the Institute for Hydraulic Resources and Electricity (Instituto de Recursos Hidraúlicos y
Electrificación (“IRHE”) in Spanish). The Company was incorporated by means of Public Deed
No.143, dated January 19, 1998, and began operations in January 1998. The authorized capital
stock of the Company consists of fifty million common shares without par value. At present,
Panama Distribution Group, S. A (“PDG”) owns 51% of the authorized, issued and outstanding
shares of common stock of the Company, while the Panamanian Government and employees
own 48.25% and 0.43%, respectively. The remaining amount of shares is held as treasury stock.
The activities of the Company include the purchase of energy in blocks and its transportation
through the distribution network to customers. The Company performs voltage transformation,
delivers the power to end consumers, and performs meter reading, billing and collections. The
Company is also responsible for installing, operating, and maintaining public lighting in the
concession zone (as defined in the following paragraph), according to the lighting levels and
criteria established by the Public Services Regulator (Ente Regulador de los Servicios Públicos
(“ERSP”) in Spanish). Additionally, the Company is authorized to perform power generation
activities up to a limit of 15% of the maximum demand and energy in the concession zone.
According to the concession contract described in Note 18, the Company has exclusivity for the
distribution and marketing of electric power to customers located in the geographical areas of
Panama East, Colón, Panama Bay, and the Comarca of San Blas and Darien (indigenous reserve).
In regard to “large customers,” defined by Law 6, dated February 3, 1997, as customers with a
maximum demand over 100 KW per site that have the option to purchase energy directly from
other agents of the electricity market, the Company has exclusivity for only the distribution of
electricity.
2. Summary of accounting policies
The financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America (“US GAAP”).
Use of estimates
Preparation of the financial statements in conformity with US GAAP requires management to
make estimates and assumptions that affect the amounts reported in the financial statements
and accompanying notes. These estimates include but are not limited to the useful lives for
depreciation and amortization, allowances for doubtful accounts receivable, estimates of future
cash flows associated with asset impairments, loss contingencies, collectibility of the fuel
component adjustment receivable and estimated unbilled revenue. The estimates and
assumptions used are based upon management’s evaluation of the relevant facts and
circumstances as of the date of the financial statements. Actual results could differ materially
from those estimates.
F-9
Notes to financial statements — (continued)
December 31, 2005, 2004 and 2003
Functional currency
The financial statements are expressed in United States dollars (US $); however, the books of the
Company are maintained in balboas, the monetary unit of the Republic of Panama. The balboa is
currently, and has been since prior to the inception of the Company, valued at par with the
United States dollar.
Utility regulation
The Company is subject to regulation by the ERSP. This agency regulates and makes the final
determination regarding the rates the Company charges to its customers. The Company
maintains its accounts in accordance with the Uniform System of Accounts prescribed for electric
utilities by the ERSP.
The Company is subject to the provisions of Financial Accounting Standards Board (FASB)
Statement No.71, “Accounting for the Effects of Certain Types of Regulation”. Regulatory assets
represent probable future revenues associated with certain costs that are expected to be
recovered from customers through the ratemaking process. Regulatory liabilities represent
probable future reductions in revenues associated with amounts that are expected to be credited
to customers through the ratemaking process.
Regulatory assets and (liabilities) reflected in the Company’s balance sheets at December 31
relate to the following:
Fuel component adjustment . . . . . . . . . .
Deferred income tax . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
2004
Note
US$16,724,807
US$1,165,006
See “fuel component
adjustment” herein
See Note 9
(5,017,440)
US$11,707,367
(337,850)
US$ 827,156
In the event that a portion of the Company’s operations is no longer subject to the provisions of
Statement No.71, the Company would be required to write off related regulatory assets and
liabilities that are not specifically recoverable through regulated rates. In addition, the Company
would be required to determine if any impairment to other assets, including plant, exists and, if
impaired, write down the assets to their fair value. All regulatory assets and liabilities are
reflected in rates.
Revenue recognition
Energy sales
Elektra recognizes its revenues for energy sales when service is delivered to and consumed by
customers. The Company bills customers based on meter readings that are performed on a
systematic basis throughout the month. The applicable rates used to bill the customers include
energy cost and distribution components. The energy cost component operates as a pass-through
F-10
December 31, 2005, 2004 and 2003
for the energy purchased and transmission charges while the distribution components in the
tariff are set by the ERSP to allow distributors to recover the cost of operating, maintenance,
administration and commercial expenses, depreciation, standard energy losses and also to obtain
a fair return on their investment. The energy cost component is adjusted every six months to
reflect fluctuations in energy costs and the distribution components are adjusted based on the
consumer price index.
At the end of the year, the Company recognizes revenue for energy sales that have not yet been
billed, but where electricity has been consumed by customers. This revenue is recorded as
unbilled revenue within the trade receivables on the balance sheet and is calculated based on
estimates of daily average energy consumption and applicable rates to the customers of the
Company. The Company believes that it is unlikely that subsequent bills will be materially
different from accruals.
Other income
The Company recognizes connection and reconnection charges, pole rentals, and wheeling
charges as service is rendered. These charges are included in other operating income in the
statements of income.
Accounts receivable
Accounts receivable are recorded at the invoiced amount and bear interest on past due amounts.
It is the Company’s policy to review outstanding accounts receivable on a monthly basis and
adjust the corresponding allowance for doubtful accounts. Bad debt accounts are written off
against this allowance when management determines the receivable is uncollectible.
The Company has established its provision percentages based on the collection experience as
follows:
•
•
•
•
•
To cover 100% of the account balances classified as inactive or terminated.
To cover 50% of the account balances classified as disconnected.
To cover 47% of the account balances classified as active aged over 60 days.
To cover 1% of the account balances classified as active aged less than 60 days.
To cover 25% of the account balances with payment settlements.
Purchased energy and transmission charges
The Company records the annual cost of purchased energy obtained under long-term and shortterm contracts in the statements of income. These contracts are considered executory in nature,
since they do not convey to the Company the right to use the related property, plant or
equipment. The Company also engages in short-term hourly purchases in the wholesale markets,
which is administered by the National Dispatch Center (Centro Nacional de Despacho (CND) in
Spanish).
F-11
December 31, 2005, 2004 and 2003
The Company also pays a regulated tariff to ETESA, a company fully-owned by the Panamanian
Government for connecting to and for use of the transmission system. ETESA is responsible for
expanding and upgrading the interconnecting transmission system to meet the requirements of
demand growth and system stability. The current transmission tariff is due to remain in force
until June 30, 2009.
The regulated system under which the Company operates provides that any excess or deficiency
between the estimated energy costs included in the tariff and the actual costs incurred by the
Company be included as a compensation adjustment to be recovered from or refunded to
customers in the next tariff revision. Any excess in energy costs charged to customers is accrued in
the accounts payable on the balance sheet and leads to a reduction in the next tariff revision to
be applied to the customers. Conversely, any deficit in energy cost charged to customers is
accrued in the account receivable on the balance sheet and leads to an increase in the next tariff
revision to be recovered from customers.
Changes in the under/over collection of these energy costs are reflected under net energy
purchased and transmission costs in the statements of income. The cumulative amount receivable
is presented as a fuel component adjustment receivable on the balance sheet until these amounts
are billed to customers. The fuel component adjustment includes six months with actual fuel
price information, plus six months of estimated of fuel price information. At December 31, 2005
and 2004, there was a receivable balance of US$16,724,807 and US$1,165,006, respectively, for
this account resulting from a deficiency in energy costs that need to be charged to customers.
For the last several years, the fuel adjustment component has not been fully passed through to
distribution company customers in the form of a tariff increase; the amount not billed to
customers has been subsidized by the Panamanian Government. Refer to Note 20.
Property, plant, and equipment
Upon the Company’s formation, the IRHE transferred a portion of its productive assets stated at
historical cost net of the associated accumulated depreciation. New asset acquisitions and
construction in progress are recorded at their original cost which includes materials, contractor
costs, construction overhead and financing costs. The Company reports property, plant and
equipment on the balance sheet net of accumulated depreciation.
Costs associated with improvements made to property, plant and equipment are capitalized as
well as major disbursements for renewals. Costs associated with repairs, minor replacements and
maintenance which do not improve the asset or prolong its useful life are expensed as incurred.
The Company also capitalizes interest during construction in accordance with SFAS 34,
“Capitalization of Interest Costs”.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable through operations, in
F-12
December 31, 2005, 2004 and 2003
accordance with SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
If the carrying amount of the asset exceeds the expected undiscounted future cash flows
generated by the asset or group of assets, an impairment loss is recognized and the asset is
written down to its fair value. Fair value can be determined by the use of quoted market prices,
appraisals or other valuation techniques, such as expected discounted future cash flows.
Management judgment is involved in both deciding whether testing for recoverability is
necessary and estimating undiscounted cash flows. As of December 31, 2005, no write-downs of
long-lived assets were required.
Gains or losses on property, plant and equipment are recognized when the assets are retired or
otherwise disposed of. The difference between the net book value of the property and any
proceeds received for the property is recorded as a gain or loss.
Depreciation and amortization
Depreciation and amortization are calculated on the straight-line method over the estimated
useful lives of the assets. Estimated useful lives used for each fixed asset category are shown
below:
Years of Estimated
Useful Life
Poles, towers and accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electric transformers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underground conductors and ducts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overhead conductors and accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Substation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer meters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public lighting equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation and communications equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30 to 40
30
40
25 to 35
30
30
25 to 40
25
8 and 15
5 to 20
Cash and cash equivalents
All highly liquid investments with original maturities of three months or less are classified as cash
equivalents.
Inventory
Inventory consists primarily of materials and supplies for the Company’s consumption. Inventory
is accounted for at the lower of cost or market. Cost is determined using the average cost
method.
F-13
December 31, 2005, 2004 and 2003
Debt issuance costs
The Company defers all costs related to the issuance of long-term debt. These costs include
borrowers’ commissions and other costs such as legal, registration and stamp costs. Debt issuance
costs are amortized over the term of the debt instrument using the effective interest method.
Derivatives
The Company accounts for derivatives under SFAS No.133 “Accounting for Derivatives
Instruments and Hedging Activities”, which recognizes all derivatives as either assets or liabilities
in the balance sheet and measures those instruments at fair value. Gains and losses on derivatives
that qualify as cash flow hedges are recorded net of tax within other comprehensive income. The
gains or losses within accumulated other comprehensive income related to cash flow hedges of
debt instruments are reclassified into earnings during the period that interest expense on the
debt is recognized.
Related parties
As a result of the restructuring of the electricity sector of Panama, three distribution companies,
four generating companies and one transmission company were formed. The Panamanian
Government retains an approximate fifty-one percent (51%) interest in the hydraulic generating
companies, a forty-nine percent (49%) interest in the thermal generating company and
distribution companies, and a one hundred percent (100%) interest in the transmission company.
The Panamanian Government retained 48.25% of the Company’s stock and 0.43% is owned by
present and former IRHE employees.
In the normal course of business, the Company purchases electricity from the generating and
other distribution companies, sells energy to governmental institutions and makes payments to
the transmission company. The Company recognizes these activities as related party transactions.
The Company entered into a Management Consulting Agreement with CPI, Ltd., which owns
100% of the PDG shares. PDG owns 51% of the Company’s authorized issued and outstanding
shares of common stock. The Company records the related fees derived from the agreement as
management fees within the statements of income and any outstanding unpaid balance with
CPI, Ltd. is shown in the balance sheet as a related company payable.
Seniority premium and severance fund
According to the Panamanian Labor Code, upon the termination of any employee contracted for
an indefinite period of time, regardless the cause, the employee is entitled to a seniority
premium at the rate of one week’s salary for every year of work, since they were first employed,
seniority premiums represent 1.92% of total salaries paid.
Law 44 of 1995 introduced reforms to the Panamanian Labor Code by requiring all employers to
make a cash contribution to a severance fund that would cover the payment to employees of a
F-14
December 31, 2005, 2004 and 2003
seniority premium and severance for unjustified dismissal. The Company maintains a trust fund
through an authorized private entity, Progreso, S. A., who acts as trustee to secure the severance
fund liability.
Income taxes
Income taxes are accounted for under the asset-liability method as prescribed by SFAS No.109,
“Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Investment Tax Credit
The Company accounts for Investment Tax Credit (ITC) as a reduction of the current income tax
under the flow-through accounting method.
Customer deposits
The Company requires customers to provide cash deposits as a guarantee of payment for energy
consumed, according to the legislation set forth by the ERSP. The ERSP has issued resolutions
JD-219 (March 31, 1998) and JD-761 (June 8, 1998) which provide that in those cases where the
customer has established a good payment record, defined as no more than three late payments
in a twelve-month period, the deposit shall be returned.
Comprehensive income
Comprehensive income (loss) is represented by the net income for the period plus the effect of
the net unrealized gain (loss) on hedging instruments, net of tax.
Comprehensive income for the years ended December 31, 2005, 2004 and 2003, is as follows:
2005
2004
2003
Net income for the year . . . . . . . . . . . . . . . . . . . . .
Net unrealized loss on hedging instruments,
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$19,236,845 US$19,573,884 US$13,962,757
Comprehensive income for the year . . . . . . . . . .
US$18,779,352 US$19,573,884 US$13,962,757
(457,493)
—
Environmental matters
The Company is subject to a broad range of environmental, health and safety laws and
regulations. In July 1998, the Panamanian Government enacted environmental legislation
F-15
—
December 31, 2005, 2004 and 2003
creating an environmental protection agency (Autoridad Nacional del Ambiente in Spanish) and
imposing new environmental standards affecting the Company’s operations. Failure to comply
with these applicable environmental standards, stricter laws and regulations may require
additional investments or may adversely affect the Company’s financial results.
Accruals for environmental matters are recorded when it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated based on current law.
Established accruals are adjusted periodically due to new assessments and remediation efforts or
as additional technical and legal information become available.
Environmental costs are capitalized if the costs extend the life of the property, increase its
capacity and mitigate or prevent contamination from future operations. Costs related to
environmental contamination treatment and clean-up are charged to expense.
Reclassifications
Certain reclassifications have been made to the financial statements and footnotes of prior years
to conform to current-year presentation. These reclassifications had no effect on the Company’s
net income or to the total stockholders’ equity.
Contingencies
In the normal course of business, the Company is subject to various regulatory actions,
proceedings, and lawsuits related to tax or other legal matters. The Company establishes reserves
for these potential contingencies when they are deemed probable and reasonably estimable. For
further discussion of contingencies, see Note 18.
Application of recent accounting pronouncements
In May 2005, the FASB issued SFAS No.154, “Accounting Changes and Error Corrections—a
replacement of APB Opinion 20 and FASB Statement 3”, or SFAS No.154. SFAS No.154 requires
retrospective application to prior periods’ financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS No.54 also requires that a change in depreciation,
amortization or depletion method for long lived, non-financial assets be accounted for as a
change in accounting estimate effected by a change in accounting principle. SFAS No.154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 14, 2005. The implementation of SFAS No.154 is not expected to have a material
impact on the Company’s operations.
In March 2005, the FASB issued Interpretation No.47, “Accounting for Conditional Asset
Retirement Obligations.” The Interpretation clarifies the accounting for a conditional asset
retirement obligation as identified in SFAS No.143, “Accounting for Asset Retirement
Obligations.” Interpretation No.47 is effective for the 2006 fiscal year. The Company believes
F-16
December 31, 2005, 2004 and 2003
there will be no material effect on the results of operations or the financial statements upon
adoption of this Interpretation.
3. Property, plant, and equipment
At December 31, 2005 and 2004, property, plant and equipment are as follows:
2005
Poles, towers and accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electric transformers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underground conductors and ducts . . . . . . . . . . . . . . . . . . . . . .
Consumer services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overhead conductors and accessories . . . . . . . . . . . . . . . . . . . . .
Substation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer meters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public lighting equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation and communication equipment . . . . . . . . . . . .
Office furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
US$ 77,431,920 US$ 76,853,692
36,336,355
34,423,533
48,493,512
48,138,866
25,279,049
23,962,729
21,020,729
18,267,885
43,373,192
40,597,381
19,412,171
18,315,052
11,789,783
11,165,697
11,153,615
10,936,768
7,386,476
7,397,963
13,189,788
11,831,455
2,303,688
2,077,398
Less: Accumulated depreciation and amortization . . . . . . . . . .
317,170,278
(105,879,498)
303,968,419
(97,818,382)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
211,290,780
2,706,536
206,150,037
2,688,113
US$ 213,997,316 US$208,838,150
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$ 13,840,455 US$ 12,615,408
During 2005, the Company incurred a loss of US$1,005,214 on the disposal of equipment, which is
reflected in the Company’s statements of income.
The Company has pledged property, plant and equipment as collateral for bank debt at
December 31, 2005 and 2004. The amount pledged includes certain property, plant and
equipment at December 31, 2005 and 2004 as well as future additions up to a total value of
US$65,000,000.
F-17
December 31, 2005, 2004 and 2003
4. Accounts receivable – trade
At December 31, 2005 and 2004, accounts receivable – trade, are as follows:
2005
Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government and municipal entities . . . . . . . . . . . . . . . . . . . . . . . . .
2004
US$28,993,323 US$24,010,376
5,668,078
8,028,934
Unbilled revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government subsidy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,661,401
6,624,154
2,914,640
32,039,310
6,187,522
200,004
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,200,195
(4,967,368)
38,426,836
(4,529,825)
US$39,232,827 US$33,897,011
5. Related party transactions
Energy sales and purchases
In the normal course of business, the Company purchases electricity from the generating and
other distribution companies, sells energy to governmental institutions and makes payments to
the transmission company. These transactions are made under the terms and conditions of the
power purchase agreements and the transmission fees discussed in Notes 2 and 18. A summary of
the balances and amounts derived from the purchase and sale of energy with related parties is as
follows:
Balances
Description
2005
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable – government subsidy . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction amounts
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of energy . . . . . . . . . . . . . . . . . . . . .
Transmission costs . . . . . . . . . . . . . . . . . . . . . .
2005
2004
US$ 5,628,499 US$ 7,874,851
2,914,640
200,004
34,798,414
21,304,203
2004
2003
US$ 22,637,049 US$ 18,280,185 US$ 16,186,833
173,187,346
118,364,655
134,862,739
8,343,175
8,375,965
3,046,435
Management Consulting Agreement
The Company entered into a Management Consulting Agreement in 1998 with CPI, Ltd., the
successor to Constellation Power, Inc. (“the Operator”).
Under this agreement, CPI, Ltd’s employees, agents, consultants, contractors or affiliates shall
perform the following services:
• Review the business plan of the Company and make the necessary recommendations to the
board of directors;
F-18
December 31, 2005, 2004 and 2003
• Provide on-going advice concerning day-to-day operations of the Company, including
accounting, billing, quality control, environmental matters, and safety;
• Prepare the annual business plan of the Company in cooperation with senior management;
• Investigate and make recommendations to the board, from time to time, regarding business
development opportunities and corporate strategic planning, including potential expansion;
and
• Review all contracts with third parties exceeding an annual value of US$100,000.
The Company pays the Operator an annual fee as compensation for the performance of its
obligations under this agreement in an amount equal to six percent (6%) of earnings before
interest, taxes, depreciation and amortization for the first five years of the concession contract
and four percent (4%) of earnings before interest, taxes, depreciation and amortization
beginning November 1, 2003.
At December 31, 2005 and 2004, the Company had the following balances and transactions with
CPI, Ltd.:
2005
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
US$512,700 US$20,000
2004
2003
US$1,943,000 US$1,756,246 US$2,012,000
6. Inventory
At December 31, 2005 and 2004, inventory is composed of the following:
2005
2004
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tools and spare parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$6,362,665 US$8,064,684
688,254
489,521
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$7,050,919 US$8,554,205
7. Debt issuance costs
At December 31, 2005 and 2004, deferred costs are as follows:
2005
Debt issuance cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt registration cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
US$1,293,643 US$1,472,705
144,750
133,224
159,218
183,920
US$1,597,611 US$1,789,849
F-19
December 31, 2005, 2004 and 2003
The debt issuance costs, legal fees, and registration costs correspond to a syndicated long-term
loan granted by four banks as discussed in Note 12. These prepaid fees are being amortized
under the effective interest method over the repayment period of the loan.
8. Accounts payable
Generation and transmission
At December 31, 2005 and 2004, accounts payable to generation and transmission companies are
as follows:
2005
AES Panamá, S. A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Empresa de Generación Eléctrica Fortuna, S. A. . . . . . . . . . . . . . . .
Empresa de Generación Eléctrica Bahía Las Minas Corp. . . . . . . . .
Empresa de Transmisión Eléctrica, S. A. . . . . . . . . . . . . . . . . . . . . . .
PanAM Generating Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporación Panameña de Energía, S. A. . . . . . . . . . . . . . . . . . . . . .
Autoridad del Canal de Panamá . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Térmica del Noreste, S. A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pedregal Power Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
US$14,176,444 US$15,408,864
2,496,879
1,557,431
13,590,812
1,327,041
3,652,844
2,068,105
3,432,429
1,125,001
163,791
63,033
881,435
942,762
1,832,273
1,444,355
930,919
—
71,022
280,162
US$41,228,848 US$24,216,754
Suppliers
At December 31, 2005 and 2004, accounts payable to suppliers are as follows:
2005
Construction contractors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance and repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Materials and inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outsourcing and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telecommunication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
US$ 3,746,370 US$ 2,046,082
1,491,582
1,949,069
1,572,013
2,374,090
1,307,722
793,116
258,380
338,003
1,850,822
2,609,211
US$10,226,889 US$10,109,571
9. Income tax
The provision for income tax is determined based on book income before income taxes, adjusted
for any non-taxable income and non-deductible expenses. The actual income tax rate is 30%.
Deferred income tax is recognized for the effects of all temporary differences between the book
and tax basis of assets and liabilities. A valuation reserve is recorded to reduce the value of
deferred tax assets when it is not probable that tax benefits can be totally realized.
F-20
December 31, 2005, 2004 and 2003
The difference between the provision for income tax for the years-ended December 31, 2005,
2004 and 2003, and the income tax calculated using the enacted statutory corporate tax rate
(30% for 2005, 28% to 30% in 2004, and 30% in 2003) for income before income tax reported in
the financial statements is attributable to the following:
2005
Income tax:
Computed at expected statutory rate . . . . . . . . . .
Decrease in income tax due to non-taxable
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in income tax due to non-deductible
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of change on enacted rate . . . . . . . . . . . . . .
Total income tax . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
2003
US$8,342,519 US$8,285,305 US$5,984,627
(198,163)
(337,738)
38,697
388,499
96,232
—
—
1,373
—
US$8,571,552 US$8,043,799 US$5,986,000
Deferred income tax assets and liabilities recognized on temporary differences that will be
reversed in future periods, are as follows:
2005
Non-current deferred income tax assets:
Investment tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current deferred income tax liability—depreciation expense
applicable to future periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current deferred income tax assets, net . . . . . . . . . . . . . . . . . . . .
2004
US$5,075,988 US$5,976,165
333,688
276,364
5,409,676
6,252,529
3,340,126
3,254,187
US$2,069,550 US$2,998,342
2005
2004
Current deferred income tax assets:
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury lock derivative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
358,177
196,068
347,622
382,614
—
585,825
Total deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
901,867
968,439
Current deferred income tax liabilities—fuel component
adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$ 5,017,440 US$337,850
Current deferred income tax (liabilities) assets, net . . . . . . . . . . . . . . .
US$(4,115,573) US$630,589
The Company estimates that is more likely than not that there will be enough income tax
payable in future years to allow for the use of the deductible temporary differences included in
the balance sheet as of December 31, 2005.
F-21
December 31, 2005, 2004 and 2003
In accordance with tax regulations, the income tax returns of companies in Panama are open for
examination by the tax authorities for three years. Companies are also subject to examination by
the Panamanian tax authorities regarding compliance with stamp tax regulations.
In February 2005, the Panamanian Government enacted a fiscal reform package consisting of
both revenue raising and expenditure reduction measures. The revenue raising measures include
an expansion of the definition of taxable income to include certain individual income sources
previously not fully taxable, a narrower definition of offshore income (which is tax exempt), the
introduction of an alternative minimum tax for individuals and corporations, the elimination of a
tax exemption on capital gains derived from public tender offers and the elimination of certain
tax incentives to manufacturing and construction activities. The effect of this tax reform was to
increase current and deferred income tax by US$120,023 and US$388,499 for the years ended
December 31, 2005 and 2004, respectively.
10. Investment tax credit
During 2001, the Company received an investment tax credit of US$13,673,745 which was
granted by the Panamanian Government under an incentive law that promoted investments in
infrastructure to enhance the energy distribution network. The tax credit can be used as a
reduction of up to 25% of the income tax incurred in any given year, until 100% of the amount
pending to be realized in future years is consumed.
Due to the benefit received, the Company is not allowed to deduct for tax purposes, the
depreciation on the US$13,673,745 of infrastructure invested. The tax effect of this is
US$4,102,123 (US$13,673,745 x 30%).
11. Customer deposits
At December 31, 2005 and 2004, the Company estimated that the amount of deposits to be
returned to customers during fiscal year 2006 and 2005 will be US$2,665,177 (including accrued
interest of US$165,177) and was US$2,630,584 (including accrued interest of US$130,584), in fiscal
year 2005.
The activity in the customer deposits accounts for the years 2005 and 2004 is as follows:
2005
2004
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits received from customers . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits returned to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$12,177,280 US$12,950,005
1,409,362
1,715,342
257,779
220,424
(2,033,033)
(2,459,168)
(223,186)
(249,323)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$11,588,202 US$12,177,280
Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$ 2,665,177 US$ 2,630,584
US$ 8,923,025 US$ 9,546,696
F-22
December 31, 2005, 2004 and 2003
12. Bank debt
At December 31, 2005 and 2004, bank debt is as follows:
2005
Short-Term Facilities:
The Bank of Nova Scotia
Authorized credit facility in the amount of US$20,000,000
and US$10,000,000 in 2005 and 2004, respectively . . . . .
US$
2004
5,000,000 US$
—
Long-Term Bank Facilities:
Syndicated long-term loan, with an annual eurodollar rate
of 3 months + 3.50%, assigned as follows:
Banco Continental de Panamá, S. A. . . . . . . . . . . . . . . . . . . .
Primer Banco del Istmo, S. A. . . . . . . . . . . . . . . . . . . . . . . . . .
Citibank, N.A., Panama Branch . . . . . . . . . . . . . . . . . . . . . . .
Banco Bilbao Vizcaya Argentaria (Panamá), S. A. . . . . . . . .
33,250,000
33,250,000
19,000,000
9,500,000
35,000,000
35,000,000
20,000,000
10,000,000
Total long-term facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
95,000,000
100,000,000
Total bank debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100,000,000
10,000,000
100,000,000
5,000,000
Long-term bank debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$ 90,000,000 US$ 95,000,000
The Company has available short-term facilities with Bank of Nova Scotia, Banco Bilbao Vizcaya
Argentaria (Panamá), S. A., Banco General, S. A., Citibank, N. A. Total short-term facilities of
US$43,300,000 in 2005 and US$39,500,000 in 2004 had annual interest rates ranging between 6
months Libor + 1.40% and 1.75%.
On October 19, 2004, the Company signed a US$100,000,000 new Syndicated Long-Term Loan
Agreement (“Loan Agreement”) due in October 2014. The loan was offered by a bank syndicate
composed of Banco Continental de Panamá, S. A., Citibank, N.A., Panama Branch, Primer Banco
del Istmo, S. A., and Banco Bilbao Vizcaya Argentaria (Panamá), S. A. On that date, the Company
fully repaid the outstanding balance of the previous Syndicated Long-Term Loan Agreement.
The following are the aggregate amounts of maturities of the long-term debt, including current
maturities for the next five years and in total thereafter:
Year
Principal Amount
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$ 5,000,000
5,000,000
5,000,000
10,000,000
10,000,000
60,000,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$95,000,000
F-23
December 31, 2005, 2004 and 2003
Some of the principal conditions within the new Syndicated Long-Term Loan Agreement are
described below:
Affirmative and negative covenants:
(a) Preservation of concession and government approvals.
(b) Restriction on mergers consolidations, liquidations and dissolution and investments in
subsidiaries and/or affiliates.
(c) Limitation on sales, transfers or other disposal of assets.
(d) Limitation on investments and capital expenditures.
(e) Limitation on making any payment under the Management Agreement if there is a default
under this Agreement or the other loan documents.
(f) Prohibition on granting any lien upon any of property, assets or revenues.
Repayment of loan principal
The Company repays the principal amount of the outstanding loans in quarterly installments
through a step-up fashion repayment plan.
Financial covenants
The Company is committed to comply with seven key financial covenants calculated for any
period of four consecutive fiscal quarters (taken as one accounting period), as follows:
(a) Funded Debt to EBITDA (as defined) Ratio is not to be higher than 3.0-to-1.
(b) Debt Service Coverage Ratio is not to be less than 1.2-to-1.
(c) Interest Coverage Ratio is not to be less than 2-to-1 through the fiscal year ending
December 31, 2005. This ratio will increase gradually up to 5-to-1, up to fiscal year ending
December 31, 2014.
(d) Leverage Ratio is to be less than 1.75-to-1 through the fiscal year ending December 31, 2005
and 1.5-to-1 after December 31, 2005 through December 31, 2013.
(e) Minimum Tangible Net Worth of the Borrower is not to be less than US$100,000,000.
(f) Dividends are to be paid whenever the debt service coverage ratio immediately preceding
the date of the proposed dividends and immediately following the proposed dividend
payment, as estimated by the Company to be no less than 1.5-to-1.
(g) Dividend Payouts where the declaration and payment of any dividend is more than semiannually are not allowed.
Security and guarantees
To guarantee the Company’s obligations under the Loan Agreement and related agreements, the
Company has granted the lenders a first mortgage (the “Mortgage”), recorded at the Public
Registry of Panama, for an amount up to US$65 million with respect to specified property and
real estate. The mortgaged property consists of distribution substations, land, building, vehicles,
F-24
December 31, 2005, 2004 and 2003
technology hardware and other related fixed assets. The mortgaged real estate consists of land
and buildings. The Company has also granted the lenders a lien on pending and future
receivables. These receivables (including existing and future receivables) have been legally and
validly assigned and transferred to the Trustee (BNP Paribas, Panama Branch) and constitute the
property of the Trustee in accordance with the terms and conditions of the Trust Agreement. In
addition, the Company assigned various insurance policies to the Trustee and created a debt
service reserve account assigned to the Trustee.
Trust Agreement
In connection and in compliance with the terms and conditions of the Syndicated Long-Term
Loan Agreement, a Trust Agreement was signed on October 25, 2004 through which the
Company has agreed to maintain a bank reserve account of US$2,500,000 assigned to BNP
Paribas, Panama Branch in its position as of trustee. The Company has also pledged the following
specific assets to be maintained by the trustee in the event of default:
(a)
(b)
(c)
(d)
(e)
The collection accounts in several banks and the funds deposited there in;
The receivables related to the rental of properties;
The customer accounts receivables portfolio;
The insurance policies and the indemnity paid by the insurance companies;
Proceeds earned by the trust related to capital earnings, interest income, indemnity or any
other related income resulting from the sale, exchange, transfer, disposal, usage, collection
or any other activity performed by the trustee on the Company’s behalf; and
(f) Any other type of assets that from time to time are incorporated in the Trust in accordance
with the Trust terms and conditions.
13. Derivative instrument
The Company entered into a derivative transaction in order to hedge its exposure to interest rate
risk. To qualify for hedge accounting, derivatives must be designated as a hedge (for example, an
offset of interest rate risks) and must be effective at reducing the risk associated with the hedged
item. The Company is using a treasury lock (an agreement that fixes the yield on a specific
treasury security for a specific period, which is used in connection with the issuance of a fixed
rate debt) to manage its exposure to fluctuations in interest rates. The Company does not enter
into derivative transactions for trading or speculative purposes.
On December 22, 2005, the Company entered into a hedging arrangement exclusively as a tool to
lock in an interest rate for an upcoming issuance of bonds in order to minimize the Company’s
interest rate risk. This treasury lock was entered into with Citibank N.A., New York, for a 120-day
period and a notional amount of US$100,000,000, which was designated as a cash flow hedge of
the forecasted interest payments on the expected debt offering. Given the use of cash flow
hedge accounting, this transaction is reflected as of December 31, 2005 within other
comprehensive income as an after-tax loss in the amount of US$457,493. The Company expects to
execute this treasury lock at maturity date.
F-25
December 31, 2005, 2004 and 2003
14. Purchase of energy and transmission chargers, net
The Company recorded purchase of energy and transmission charges as follows:
2005
2004
2003
Purchase of energy . . . . . . . . . . . . . . . . . . . . . .
Transmission chargers . . . . . . . . . . . . . . . . . . .
Fuel component adjustment . . . . . . . . . . . . . .
US$201,130,024 US$135,922,802 US$149,614,707
8,343,175
8,375,965
3,046,435
(15,567,711)
7,524,000
(4,831,000)
Total net purchase of energy and
transmission chargers . . . . . . . . . . . . . . . . . .
US$193,905,488 US$151,822,767 US$147,830,142
15. Other income
Other income is composed of the following:
2005
2004
2003
Connection/Reconnection charges . . . . . . . . . . . . . . .
Pole rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wheeling charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collections of uncollectible accounts and related
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$ 853,227 US$ 884,200 US$ 941,245
2,484,195
2,410,408
2,321,534
3,264,329
2,728,647
2,280,202
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$8,983,742 US$7,773,157 US$7,203,380
799,167
1,582,824
672,261
1,077,641
570,986
1,089,413
16. Interest costs
The Company capitalizes the portion of interest costs associated with construction in progress.
The following is a summary of interest costs incurred:
2005
2004
2003
Interest costs capitalized . . . . . . . . . . . . . . . . . . . . . . .
Interest costs charged to expenses . . . . . . . . . . . . . . .
US$ 249,974 US$ 217,828 US$ 150,096
7,639,719
4,440,820
3,886,642
Total interest costs incurred . . . . . . . . . . . . . . . . . . . .
US$7,889,693 US$4,658,648 US$4,036,738
17. Dividends and treasury stocks
Advance dividends
During 2004, the Board of Directors declared dividends for the amount of US$38,268,213. Out of
the total dividends paid to stockholders, US$8,791,392 was applied against the outstanding
balance of the advance dividends account as of December 31, 2003.
F-26
December 31, 2005, 2004 and 2003
Dividend tax
Dividends are paid to shareholders net of withholding taxes that the Company pays on behalf of
it shareholders. The complementary dividend tax payments are recorded as a reduction to
stockholders’ equity.
Treasury stocks
In 1998, as consequence of the privatization process, the Company’s employees had the option to
purchase, at a discount price, a portion of the common stock of the Company. In the event that
employees wish to sell their previously acquired stock, the Company is no longer required to
repurchase the stock.
18. Commitments and contingencies
At December 31, 2005, the Company had contingent liabilities from claims originating in the
ordinary course of business. The ultimate outcome of these contingencies is not expected to have
a material impact on the Company’s financial condition or operating results. Following are the
most representative matters:
During 2005, a labour complaint was filed with a labour court by the Electricity Industry Workers
Union of the Republic of Panama against the Company and the other seven electricity companies
that originated from the privatization of the IRHE. The complaint seeks the payment of
US$7,191,852.59 from the Company, plus additional amounts from the other defendants,
claiming that, due to calculation errors, the Panamanian Government did not pay in full the
labour rights and severance compensation of the IRHE employees who at that time agreed to
terminate their existing employment, as required for the privatization of the new electric
companies. This complaint has been opposed by the Company. Legal counsel of the Company is
of the opinion that such complaints are groundless, since under Executive Decree No.42 of 1998,
the Panamanian Government assumed full liability for the payment of any compensation or
calculation adjustment due to IRHE workers terminated as part of the privatization.
The Company challenged the Regulator regarding the order to reimburse power generating
companies for public lighting charges. The Company based its argument on the fact that the
Regulator had previously authorized the distribution company to include public lighting charges
within the wheeling charges billed to the generating companies. When the generating
companies challenged these charges, the Regulator changed its previous instructions to the
Company and through several resolutions, ordered the Company to not only to stop charging for
public lighting but to reimburse to the generators all of the previous charges applied and already
collected. The Company appealed the decision, and the Supreme Court decided to stop any
reimbursement to the generating companies. All of these cases are open and most of them are
waiting for evidence submission. Management considers that the outcome of these cases will not
have a material negative impact on the financial statements.
F-27
December 31, 2005, 2004 and 2003
As of December 31, 2005, the Company had energy and long-term firm capacity purchase
contracts with the following generation companies:
Company
Térmica del Noreste, S. A. . . . . . . . . . . . . .
Bahía Las Minas . . . . . . . . . . . . . . . . . . . . . .
ESTI – AES . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bahía Las Minas . . . . . . . . . . . . . . . . . . . . . .
AES Panamá . . . . . . . . . . . . . . . . . . . . . . . . .
La Mina Hidro-Power . . . . . . . . . . . . . . . . .
AES Panamá . . . . . . . . . . . . . . . . . . . . . . . . .
AES Panamá . . . . . . . . . . . . . . . . . . . . . . . . .
AES Panamá . . . . . . . . . . . . . . . . . . . . . . . . .
AES Panamá . . . . . . . . . . . . . . . . . . . . . . . . .
AES Panamá . . . . . . . . . . . . . . . . . . . . . . . . .
Bontex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paso Ancho Hidro-Power . . . . . . . . . . . . . .
Pedregal Power Co. . . . . . . . . . . . . . . . . . . .
PanAm . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pedregal Power Co. . . . . . . . . . . . . . . . . . . .
MW
Begin
End
80
48.72
40
40
28
40
20
20
40
60
19.8
4
30
60
12; 5; 15
June 19, 2000
January 1, 2005
November 20, 2003
January 17, 2005
January 1, 2006
January 1, 2008
January 1, 2006
January 1, 2007
January 1, 2006
January 1, 2007
January 1, 2008
January 1, 2008
January 1, 2008
January 1, 2006
January 1, 2006
January 1, 2006
July 19, 2010
December 31, 2008
November 2013
January 16, 2006
December 31, 2006
December 31, 2015
December 31, 2006
December 31, 2007
December 31, 2006
December 31, 2007
December 31, 2008
December 31, 2015
December 31, 2015
December 31, 2008
December 31, 2008
December 31, 2008
In accordance with the 1997 Electricity Law, the Company enters into long-term power purchase
agreements with electricity generators that cover most of its regulated customers’ contributions
to the total peak customer demand of electricity and work towards limiting any associated
energy costs. Historically, the Company contracts annually for approximately 79% to 85% of its
total energy requirements via purchase agreements on the contract market. For the year ended
December 31, 2005, the Company purchased approximately 79% of its total energy requirements
via power purchase agreements on the contract market. These purchase agreements include both
a fixed charge based on energy capacity requirements and a variable charge based on energy
use.
The Company has several unconditional long-term contracts obligations related to the purchase
of energy capacity. The aggregate amount of payments required under such obligations at
December 31, 2005, is as follows:
Year
Payment Obligation
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$ 41,703,888
32,535,888
37,955,088
15,855,888
15,855,888
123,812,340
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$267,718,980
F-28
December 31, 2005, 2004 and 2003
The Company has provided limited guarantees to generating companies in order to provide for
credit assurance and performance obligations under the power purchase agreements. These
guarantees are not recognized on the balance sheet, because the Company believes that it is able
to perform under these contracts and that is not probable that payments will be required. The
guaranteed amounts are limited to a month’s estimate of energy capacity and associated energy
consumption and are established for a twelve month period with automatic renewals as long as
the power purchase agreement is in place. The aggregate guarantee amount for the
performance obligation is US$11,051,057. The Company has also issued a guarantee in favor of
the ERSP for US$8,000,000 in compliance with clause 53 of the Concession Contract.
As of December 31, 2005 and 2004, the Company has on-going construction contracts for
improvements and developments of the distribution system. Future commitments on these
contracts amount to US$762,669 and US$1,963,228, respectively.
The Company has a standby letter of credit for US$3,352,360 in favor of ETESA to guarantee the
payment of the energy purchase in the spot market.
On October 20, 2003, the Company and the workers’ union signed a second Labor Collective
Agreement for a four-year term that will expire on October 20, 2007.
Concession contract
The Company has exclusive rights to install, own and operate an energy distribution network,
and to supply energy to end customers other than large customers, currently defined as those
with peak demand on a site-by-site basis of over 100kW. Large customers can choose to buy
energy directly from generators or from the spot market.
The Company’s concession contract is valid for 15-years. One year prior to the end of the 15-year
period, the ERSP will hold a competitive bid for the sale of the majority stake in the Company
currently held by PDG. The majority shareholder has the right to set the reserve price for the
tender (by making its own bid) and will only be required to sell its share of the Company if
another higher offer is made, in which case it will be entitled to the sale proceeds. If no higher
offer is made, the majority shareholder will retain its ownership for another 15-year term subject
to the same renewal procedures. Resulting from this bidding process, the new majority
shareholder will be granted rights to the new 15 year concession contract with no requirement to
make any payments to the Panamanian Government.
The concession contract establishes provisions related to the Concessionaire’s obligation in service
supply issues, the non separation of the majority shares package, the delivery of periodic,
technical and financial information to the ERSP, compliance with the technical quality standards
(quality standards, measurement standards and operation regulations of the CND), and payment
of the control, supervision and monitoring tariff of the ERSP, which may not be transferred to
the users through the tariff.
F-29
December 31, 2005, 2004 and 2003
19. Fair value of financial instruments
The estimated fair values of financial instruments as of December 31, 2005 and 2004 are based on
the information available at the date of the balance sheet. The Company has no knowledge of
any factors that may significantly affect the estimated fair values of the most common financial
assets and liabilities such as cash and trade receivables, severance funds, accounts payable, longterm debt and customer deposits.
20. Subsequent events
On January 23, 2006, the Panamanian Government announced that the substantial tariff increase
authorized on January 1, 2006 would be suspended for 90 days while the Energy Commission,
established by Executive Decree No.27 on September 21, 2005, studied the approved rate increase
and the electricity industry. The Company has not received any information to indicate that the
suspension will directly affect its concession contract or any existing contracts relating to the
operations of its electricity distribution business. The Company considers that all amounts
recorded under “Fuel Component Adjustment” will be recovered and that this temporary
suspension will not have a negative impact on the Company’s operations or financial position.
F-30
Review report of independent auditors
To the Board of Directors and Stockholders of
We have reviewed the accompanying condensed balance sheet of Elektra Noreste, S.A. as of
March 31, 2006, and the related condensed statements of income, stockholders’ equity and cash
flows for each of the three-month periods ended March 31, 2006 and March 31, 2005. These
interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with standards established by the American Institute of
Certified Public Accountants. A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should be made to the
accompanying condensed interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
/s/
May 11, 2006
F-31
Balance sheets
March 31,
2006
December 31,
2005
Assets
Property, plant, and equipment:
Property, plant, and equipment, net of accumulated
depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$213,475,431 US$213,997,316
14,427,850
13,840,455
Total property, plant, and equipment . . . . . . . . . . . . . .
227,903,281
227,837,771
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88,763
1,576,063
Accounts receivable:
Trade, net (Notes 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fuel component adjustment (Note 2) . . . . . . . . . . . . . . . . . .
Generators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,908,067
25,132,807
530,549
1,393,014
39,232,827
16,724,807
569,495
1,601,477
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . .
64,964,437
58,128,606
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid income tax (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative instrument (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,232,157
263,620
1,468,470
2,650,500
939,470
385,713
7,050,919
131,029
1,468,470
—
—
398,614
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77,993,130
68,753,701
Other assets:
Debt issuance cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Severance fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security deposits on facilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust fund for long-term loan debt . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,524,648
984,743
58,282
2,500,000
2,103,734
1,597,611
911,843
58,138
2,500,000
2,069,550
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,171,407
7,137,142
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-32
US$313,067,818 US$303,728,614
Balance sheets — (continued)
March 31,
2006
December 31,
2005
Liabilities and Stockholders’ Equity
Stockholders’ equity:
Common stock authorized, issued and outstanding:
50,000,000 shares without par value less; 160,031 held
in treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive gain (loss) (Note 5) . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . .
US$106,098,875 US$106,098,875
1,855,350
(457,493)
21,820,930
18,748,041
129,775,155
124,389,423
38,572,538
13,701,981
41,228,848
10,226,889
6,738,535
384,000
7,397,397
2,569,428
225,476
6,674,630
512,700
4,115,573
2,665,177
257,885
Total accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . .
69,589,355
65,681,702
Current portion of bank debt (Note 6) . . . . . . . . . . . . . . .
Interest payable on debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative Instrument (Note 5) . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,000,000
1,376,111
6,533
—
609,454
10,000,000
1,396,934
6,533
653,561
655,386
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
83,581,453
78,394,116
Long-term bank debt (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88,750,000
90,000,000
Customer deposits and other liabilities:
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for seniority premium and severance payments . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,923,025
726,220
1,311,965
8,923,025
703,156
1,318,894
Commitments and contingencies (Notes 8 and 9)
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
183,292,663
179,339,191
Current liabilities:
Accounts payable:
Generation and transmission . . . . . . . . . . . . . . . . . . . . . . .
Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances, retentions and deposits on construction
contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Related company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax (Note 4) . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Witholding taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity . . . . . . . . . . . .
F-33
US$313,067,818 US$303,728,614
Statements of income
For three months ended March 31, 2006 and 2005
2006
Revenues
Net energy sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
US$69,145,279 US$59,044,679
2,013,852
2,113,142
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71,159,131
61,157,821
Purchase of energy and transmission charges, net (Note 7) . . . . .
53,648,896
42,792,909
Gross distribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,510,235
18,364,912
Operating Expenses
Labor and other personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Severance expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repair and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale and disposal of fixed, net . . . . . . . . . . . . . . . . . . . . .
2,083,611
107,987
604,936
610,665
2,079,057
393,000
3,020,668
2,015,956
178,186
2,138,652
72,061
604,116
550,936
1,887,099
451,000
2,922,680
2,055,171
133,305
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,094,066
10,815,020
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,416,169
7,549,892
Other Income (Expense)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55,831
(2,082,158)
47,092
(1,578,482)
Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,026,327)
(1,531,390)
4,389,842
1,316,953
6,018,502
2,028,227
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision from income taxes (Note 4) . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-34
US$ 3,072,889 US$ 3,990,275
Statements of stockholders’ equity
Common
Stocks
Balance as of
December 31, 2005 . . US$106,642,962
Net income for three
months ended
March 31, 2006 . . . . . .
—
Other comprehensive
income net
unrealized gain on
hedging instruments,
net of taxes of
US$991,218 . . . . . . . . .
—
Balance as of March 31,
2006 . . . . . . . . . . . . . . . US$106,642,962
Balance as of
December 31, 2004 . . US$106,642,962
Net income for three
months ended
March 31, 2005 . . . . . .
—
Balance as of March 31,
2005 . . . . . . . . . . . . . . . US$106,642,962
Treasury
Stock
Retained
Earnings
US$(544,087) US$18,748,041
Other
Comprehensive
Income (loss)
Total
Stockholders’
Equity
US$ (457,493) US$124,389,423
—
3,072,889
—
3,072,889
—
—
2,312,843
2,312,843
US$(544,087) US$21,820,930
US$1,855,350
US$129,775,155
US$(544,087) US$ 4,011,196
US$
—
US$110,110,071
—
3,990,275
—
US$114,100,346
—
3,990,275
US$(544,087) US$ 8,001,471
F-35
US$
Statements of cash flows
2006
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale and disposal of fixed assets, net . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for severance payments net of contribution to
severance fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fuel component adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade accounts payable and other liabilities . . . . . . . . . . . . . .
Accounts payable – related company . . . . . . . . . . . . . . . . . . . .
Income tax, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Seniority premium payments . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
US$ 3,072,889 US$ 3,990,275
3,020,668
178,196
604,936
2,922,680
133,305
604,116
(18,182)
2,256,422
(8,408,000)
221,321
386,837
(13,000)
953,544
(59,772)
(181,238)
12,901
680,845
(128,700)
(939,470)
(17,965)
(715,276)
(101,165)
15,683
115,509
5,129,276
90,000
(1,675,835)
(350,711)
Net cash provided by operating activities . . . . . . . . . . . . . .
1,027,074
10,753,015
Acquisition of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of fixed assets . . . . . . . . . . . . . . . . . . . . . . . .
(3,375,787)
111,413
(4,125,461)
70,562
Net cash used in investing activities . . . . . . . . . . . . . . . . . . .
(3,264,374)
(4,054,899)
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,250,000)
2,000,000
—
(1,250,000)
1,500,000
(12,417,165)
Net cash provided by (used in) financing activities . . . . . . .
Net decrease in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
750,000
(1,487,300)
1,576,063
(12,167,165)
(5,469,049)
6,544,514
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$
Supplementary disclosures
Cash payments for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$ 2,038,141 US$ 1,504,118
Cash payments for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
F-36
US$
88,763 US$ 1,075,465
—
US$ 3,317,225
Notes to financial statements
1. Description of business
Elektra Noreste, S. A. (the Company) is a corporation formed as a result of the privatization of
the Institute for Hydraulic Resources and Electricity (Instituto de Recursos Hidraúlicos y
Electrificación (“IRHE”) in Spanish). The Company was incorporated by means of Public Deed
No.143, dated January 19, 1998, and began operations in January 1998. The authorized capital
stock of the Company consists of fifty million common shares without par value. At present,
Panama Distribution Group, S. A (“PDG”) owns 51% of the authorized, issued and outstanding
shares of common stock of the Company, while the Panamanian Government and employees
own 48.25% and 0.43%, respectively. The remaining amount of shares is held as treasury stock.
The activities of the Company include the purchase of energy in blocks and its transportation
through the distribution network to customers. The Company performs voltage transformation,
delivers the power to end consumers, and performs meter reading, billing and collections. The
Company is also responsible for installing, operating, and maintaining public lighting in the
concession zone (as defined in the following paragraph), according to the lighting levels and
criteria established by the Public Services Regulator (Ente Regulador de los Servicios Públicos
(“ERSP”) in Spanish). Additionally, the Company is authorized to perform power generation
activities up to a limit of 15% of the maximum demand and energy in the concession zone.
According to the concession contract described in Note 8, the Company has exclusivity for the
distribution and marketing of electric power to customers located in the geographical areas of
Panama East, Colón, Panama Bay, and the Comarca of San Blas and Darien (indigenous reserve).
In regard to “large customers,” defined by Law 6, dated February 3, 1997, as customers with a
maximum demand over 100 KW per site that have the option to purchase energy directly from
other agents of the electricity market, the Company has exclusivity for only the distribution of
electricity.
2. Summary of accounting policies
The financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America (“US GAAP”).
Use of estimates
Preparation of the financial statements in conformity with US GAAP requires management to
make estimates and assumptions that affect the amounts reported in the financial statements
and accompanying notes. These estimates include but are not limited to the useful lives for
depreciation and amortization, allowances for doubtful accounts receivable, estimates of future
cash flows associated with asset impairments, loss contingencies, collectibility of the fuel
component adjustment receivable and estimated unbilled revenue. The estimates and
assumptions used are based upon management’s evaluation of the relevant facts and
circumstances as of the date of the financial statements. Actual results could differ materially
from those estimates.
F-37
Utility regulation
The Company is subject to regulation by the ERSP. This agency regulates and makes the final
determination regarding the rates the Company charges to its customers. The Company
maintains its accounts in accordance with the Uniform System of Accounts prescribed for electric
utilities by the ERSP.
The Company is subject to the provisions of Financial Accounting Standards Board (FASB)
Statement No.71, “Accounting for the Effects of Certain Types of Regulation”. Regulatory assets
represent probable future revenues associated with certain costs that are expected to be
recovered from customers through the ratemaking process. Regulatory liabilities represent
probable future reductions in revenues associated with amounts that are expected to be credited
to customers through the ratemaking process.
Regulatory assets and (liabilities) reflected in the Company’s balance sheets at March 31, 2006
and December 31, 2005 relate to the following:
Fuel component adjustment . . . . . . . . .
Deferred income tax . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2006
December 31,
2005
US$25,132,807
US$16,724,807
(7,539,840)
US$17,592,967
(5,017,440)
Note
See “fuel component
adjustment” herein.
See Note 4
US$11,707,367
In the event that a portion of the Company’s operations is no longer subject to the provisions of
Statement No.71, the Company would be required to write off related regulatory assets and
liabilities that are not specifically recoverable through regulated rates. In addition, the Company
would be required to determine if any impairment to other assets, including plant, exists and, if
impaired, write down the assets to their fair value. All regulatory assets and liabilities are
reflected in rates.
Revenue recognition
Energy sales
Elektra recognizes its revenues for energy sales when service is delivered to and consumed by
customers. The Company bills customers based on meter readings that are performed on a
systematic basis throughout the month. The applicable rates used to bill the customers include
energy cost and distribution components. The energy cost component operates as a pass-through
for the energy purchased and transmission charges while the distribution components in the
tariff are set by the ERSP to allow distributors to recover the cost of operating, maintenance,
administration and commercial expenses, depreciation, standard energy losses and also to obtain
a fair return on their investment. The energy cost component is adjusted every six months to
reflect fluctuations in energy costs and the distribution components are adjusted based on the
consumer price index.
F-38
On a quarterly basis, the Company recognizes revenue for energy sales that have not yet been
billed, but where electricity has been consumed by customers. This revenue is recorded as
unbilled revenue within the trade receivables on the balance sheet and is calculated based on
estimates of daily average energy consumption and applicable rates to the customers of the
Company. The Company believes that it is unlikely that subsequent bills will be materially
different from accruals.
Other Income
The Company recognizes connection and reconnection charges, pole rentals, and wheeling
charges as service is rendered. These charges are included in other operating income in the
statements of income.
The regulated system under which the Company operates provides that any excess or deficiency
between the estimated energy costs included in the tariff and the actual costs incurred by the
Company be included as a compensation adjustment to be recovered from or refunded to
customers in the next tariff revision. Any excess in energy costs charged to customers is accrued in
the accounts payable on the balance sheet and leads to a reduction in the next tariff revision to
be applied to the customers. Conversely, any deficit in energy cost charged to customers is
accrued in the account receivable on the balance sheet and leads to an increase in the next tariff
revision to be recovered from customers.
Changes in the under/over collection of these energy costs are reflected under net energy
purchased and transmission costs in the statements of income. The cumulative amount receivable
is presented as a fuel component adjustment receivable on the balance sheet until these amounts
are billed to customers. At March 31, 2006, December 31, 2005, and as of March 31, 2005 there
was a receivable balance of US$25,132,807, US$16,724,807, and US$1,178,006, respectively, for
this account resulting from a deficiency in energy costs that need to be charged to customers.
The account receivable as of March 31, 2006 includes deficit in energy cost accrued from April 1,
2005 through March 31, 2006. Based on Resolution JD-5930 from March 31, 2006 issued by the
Regulator, the distribution companies were order not to include in the rate adjustment applied
starting April 1, 2006 through December 31, 2006 the accrued amount of energy cost deficit as of
March 31, 2006. It is expected, as indicated by Government officials, that this amount will be
recognized as a subsidy.
For the last several years, the fuel adjustment component has not been fully passed through to
distribution company customers in the form of a tariff increase; the amount not billed to
customers has been subsidized by the Panamanian Government. Refer to Note 9.
F-39
Derivatives
The Company accounts for derivatives under SFAS No.133 “Accounting for Derivatives
Instruments and Hedging Activities”, which recognizes all derivatives as either assets or liabilities
in the balance sheet and measures those instruments at fair value. Gains and losses on derivatives
that qualify as cash flow hedges are recorded net of tax within other comprehensive income. The
gains or losses within accumulated other comprehensive income related to cash flow hedges of
debt instruments are reclassified into earnings during the period that interest expense on the
debt is recognized.
Income taxes
Income taxes are accounted for under the asset-liability method as prescribed by SFAS No.109,
“Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Investment tax credit
The Company accounts for Investment Tax Credit (ITC) as a reduction of the current income tax
under the flow-through accounting method.
Comprehensive income
Comprehensive income (loss) is represented by the net income for the period plus the effect of
the net unrealized gain (loss) on hedging instruments, net of tax.
Comprehensive income for three months ended March 31, 2006 and 2005, is as follows:
March 31, 2006
March 31, 2005
Net income for three months ended . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain on hedging . . . . . . . . . . . . . . . . . . . . . . . . . .
instruments, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$ 3,072,889 US$ 3,990,275
Comprehensive income for the period . . . . . . . . . . . . . . . . . . . . .
US$ 4,928,239 US$ 3,990,275
1,855,350
—
Contingencies
In the normal course of business, the Company is subject to various regulatory actions,
proceedings, and lawsuits related to tax or other legal matters. The Company establishes reserves
for these potential contingencies when they are deemed probable and reasonably estimable. For
further discussion of contingencies, see Note 8.
F-40
Application of recent accounting pronouncements
In May 2005, the FASB issued SFAS No.154, “Accounting Changes and Error Corrections—a
replacement of APB Opinion 20 and FASB Statement 3”, or SFAS No.154. SFAS No.154 requires
retrospective application to prior periods’ financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS No.54 also requires that a change in depreciation,
amortization or depletion method for long lived, non-financial assets be accounted for as a
change in accounting estimate effected by a change in accounting principle. SFAS No.154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 14, 2005. The implementation of SFAS No.154 is not expected to have a material
impact on the Company’s operations.
In March 2005, the FASB issued Interpretation No.47, “Accounting for Conditional Asset
Retirement Obligations.” The Interpretation clarifies the accounting for a conditional asset
retirement obligation as identified in SFAS No.143, “Accounting for Asset Retirement
Obligations.” Interpretation No. 47 is effective for the 2006 fiscal year. The Company believes
there will be no material effect on the results of operations or the financial statements upon
adoption of this Interpretation.
3. Accounts receivable – trade
At March 31, 2006 and December 31, 2005 accounts receivable – trade, are as follows:
March 31,
2006
Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government and municipal entities . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2005
US$30,452,625 US$28,993,323
7,994,919
5,668,078
38,447,544
34,661,401
Unbilled revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government subsidy (advance) receivable . . . . . . . . . . . . . . . . . . . .
5,872,864
(840,097)
6,624,154
2,914,640
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
43,480,311
(5,572,244)
44,200,195
(4,967,368)
US$37,908,067 US$39,232,827
4. Income tax
The provision for income tax is determined based on book income before income taxes, adjusted
for any non-taxable income and non-deductible expenses. The actual income tax rate is 30%.
Deferred income tax is recognized for the effects of all temporary differences between the book
and tax basis of assets and liabilities. A valuation reserve is recorded to reduce the value of
deferred tax assets when it is not probable that tax benefits can be totally realized.
F-41
Deferred income tax assets and liabilities recognized on temporary differences that will be
reversed in future periods, are as follows:
March 31,
2006
Non-current deferred income tax assets:
Investment tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$5,075,988 US$5,075,988
333,688
333,688
Total deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current deferred income tax liability—depreciation expense
applicable to future periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current deferred income tax assets, net . . . . . . . . . . . . . . . . . . . .
5,409,676
5,409,676
3,305,942
3,340,126
US$2,103,734 US$2,069,550
March 31,
2006
Current deferred income tax assets:
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury lock derivative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2005
US$
December 31,
2005
513,740 US$
(795,150)
423,853
142,443
358,177
196,068
347,622
901,867
Current deferred income tax liabilities—fuel component
adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$ 7,539,840 US$ 5,017,440
Current deferred income tax liabilities, net . . . . . . . . . . . . . . . . . . . .
US$(7,397,397) US$(4,115,573)
The Company estimates that is more likely than not that there will be enough income tax
payable in future years to allow for the use of the deductible temporary differences included in
the balance sheet as of March 31, 2006.
In accordance with tax regulations, the income tax returns of companies in Panama are open for
examination by the tax authorities for three years. Companies are also subject to examination by
the Panamanian tax authorities regarding compliance with stamp tax regulations.
5. Derivative instrument
On December 22, 2005, the Company entered into a hedging arrangement exclusively as a tool to
lock in an interest rate for an upcoming issuance of bonds in order to minimize the Company’s
interest rate risk. This treasury lock was entered into with Citibank N.A., New York, for a 120-day
period. The instrument was negotiated for a notional amount of US$100,000,000, which was
designated as a cash flow hedge of the forecasted interest payments on the expected debt
offering. Given the use of cash flow hedge accounting, this transaction is reflected as of
March 31, 2006 and December 31, 2005 within other comprehensive income as an after-tax gain
F-42
(loss) in the amount of US$2,312,843 and (US$457,493), respectively. The Company expects to
execute this treasury lock at maturity date. The Company does not enter into derivative
transactions for trading or speculative purposes.
6. Bank debt
At March 31, 2006 and December, 31 2005, bank debt is as follows:
March 31,
2006
Short-term facilities:
Banco Bilbao Viscaya Argentaria (Panamá), S. A. . . . . . . . . . .
Citibank, N.A., Panama Branch . . . . . . . . . . . . . . . . . . . . . . . . .
The Bank of Nova Scotia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,000,000 US$
2,000,000
—
—
—
5,000,000
Total short-term facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,000,000
5,000,000
Long-term bank facilities:
Syndicated long-term loan, with an annual eurodollar rate
of 3 months + 3.50%, assigned as follows:
Banco Continental de Panamá, S. A. . . . . . . . . . . . . . . . . . . .
Primer Banco del Istmo, S. A. . . . . . . . . . . . . . . . . . . . . . . . . .
Citibank, N.A., Panama Branch . . . . . . . . . . . . . . . . . . . . . . .
Banco Bilbao Vizcaya Argentaria (Panamá), S. A. . . . . . . . . .
32,812,500
32,812,500
18,750,000
9,375,000
33,250,000
33,250,000
19,000,000
9,500,000
Total long-term facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
93,750,000
95,000,000
Total bank debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100,750,000
12,000,000
100,000,000
10,000,000
Long-term bank debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$
December 31,
2005
US$ 88,750,000 US$ 90,000,000
The Company has available short-term facilities with the Bank of Nova Scotia, Banco Bilbao
Vizcaya Argentaria (Panamá), S. A., Banco General, S. A., Citibank, N. A., Panama Branch. Total
short-term facilities of US$50,300,000 in March 31,2006 and US$43,300,000 in December 31, 2005
had annual interest rates ranging between 6 months Libor + 1.20% and 1.50%.
7. Purchase of energy and transmission chargers, net
The Company recorded purchase of energy and transmission charges as follows:
March 31,
2006
December 31,
2005
Purchase of energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transmission charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fuel component adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$59,303,316 US$40,413,643
2,753,580
2,392,266
(8,408,000)
(13,000)
Total net purchase of energy and transmission chargers . . . . . . . .
US$53,648,896 US$42,792,909
F-43
8. Commitments and contingencies
At March 31, 2006, the Company had contingent liabilities from claims originating in the
ordinary course of business. The ultimate outcome of these contingencies is not expected to have
a material impact on the Company’s financial condition or operating results. Following are the
most representative matters:
During 2005, a labour complaint was filed with a labour court by the Electricity Industry Workers
Union of the Republic of Panama against the Company and the other seven electricity companies
that originated from the privatization of the IRHE. The complaint seeks the payment of
US$7,191,852.59 from the Company, plus additional amounts from the other defendants,
claiming that, due to calculation errors, the Panamanian Government did not pay in full the
labour rights and severance compensation of the IRHE employees who at that time agreed to
terminate their existing employment, as required for the privatization of the new electric
companies. This complaint has been opposed by the Company. Legal counsel of the Company is
of the opinion that such complaints are groundless, since under Executive Decree No.42 of 1998,
the Panamanian Government assumed full liability for the payment of any compensation or
calculation adjustment due to IRHE workers terminated as part of the privatization.
The Company challenged the Regulator regarding the order to reimburse power generating
companies for public lighting charges. The Company based its argument on the fact that the
Regulator had previously authorized the distribution company to include public lighting charges
within the wheeling charges billed to the generating companies. When the generating
companies challenged these charges, the Regulator changed its previous instructions to the
Company and through several resolutions, ordered the Company to not only to stop charging for
public lighting but to reimburse to the generators all of the previous charges applied and already
collected. The Company appealed the decision, and the Supreme Court decided to stop any
reimbursement to the generating companies. All of these cases are open and most of them are
waiting for evidence submission. Management considers that the outcome of these cases will not
have a material negative impact on the financial statements.
F-44
As of March 31, 2006, the Company had energy and long-term firm capacity purchase contracts
with the following generation companies:
Company
Térmica del Noreste, S. A. . . . . . . . . . . . . . . . .
Bahía Las Minas . . . . . . . . . . . . . . . . . . . . . . . . .
ESTI – AES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AES Panamá . . . . . . . . . . . . . . . . . . . . . . . . . . . .
La Mina Hidro-Power . . . . . . . . . . . . . . . . . . . .
AES Panamá . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AES Panamá . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AES Panamá . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AES Panamá . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AES Panamá . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bontex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paso Ancho Hidro-Power . . . . . . . . . . . . . . . . .
Pedregal Power Co. . . . . . . . . . . . . . . . . . . . . . .
PanAm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pedregal Power Co. . . . . . . . . . . . . . . . . . . . . . .
Fortuna . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fortuna . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MW
Begin
End
June 19, 2000
July 19, 2010
80
January 1, 2005 December 31, 2008
48.72
November 20, 2003
November 2013
40
28
40
20
20
40
60
19.8
4
30
60
12; 5; 15
80
120
In accordance with the 1997 Electricity Law, the Company enters into long-term power purchase
agreements with electricity generators that cover most of its regulated customers’ contributions
to the total peak customer demand of electricity and work towards limiting any associated
energy costs. Historically, the Company contracts annually for approximately 79% to 85% of its
total energy requirements via purchase agreements on the contract market. For three months
ended March 31, 2006, the Company purchased approximately 84.2% of its total energy
requirements via power purchase agreements on the contract market. These purchase
agreements include both a fixed charge based on energy capacity requirements and a variable
charge based on energy use.
The Company has several unconditional long-term contracts obligations related to the purchase
of energy capacity. The aggregate amount of payments required under such obligations at
March 31, 2006, is as follows:
Year
Payment Obligation
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$ 41,088,691
31,920,691
37,339,891
15,855,888
15,855,888
123,812,340
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US$265,873,389
F-45
The Company has provided limited guarantees to generating companies in order to provide for
credit assurance and performance obligations under the power purchase agreements. These
guarantees are not recognized on the balance sheet, because the Company believes that it is able
to perform under these contracts and that is not probable that payments will be required. The
guaranteed amounts are limited to a month’s estimate of energy capacity and associated energy
consumption and are established for a twelve month period with automatic renewals as long as
the power purchase agreement is in place. The aggregate guarantee amount for the
performance obligation is US$11,051,057. The Company has also issued a guarantee in favor of
the ERSP for US$8,000,000 in compliance with clause 53 of the Concession Contract.
As of March 31, 2006 and December 31, 2005, the Company has on-going construction contracts
for improvements and developments of the distribution system. Future commitments on these
contracts amount to US$508,871 and US$762,669, respectively.
The Company has a standby letter of credit for US$4,994,650 as of March 31, 2006, in favor of
ETESA to guarantee the payment of the energy purchase in the spot market.
On October 20, 2003, the Company and the workers’ union signed a second Labor Collective
Agreement for a four-year term that will expire on October 20, 2007.
Concession contract
The Company has exclusive rights to install, own and operate an energy distribution network,
and to supply energy to end customers other than large customers, currently defined as those
with peak demand on a site-by-site basis of over 100kW. Large customers can choose to buy
energy directly from generators or from the spot market.
The Company’s concession contract is valid for 15-years. One year prior to the end of the 15-year
period, the ERSP will hold a competitive bid for the sale of the majority stake in the Company
currently held by PDG. The majority shareholder has the right to set the reserve price for the
tender (by making its own bid) and will only be required to sell its share of the Company if
another higher offer is made, in which case it will be entitled to the sale proceeds. If no higher
offer is made, the majority shareholder will retain its ownership for another 15-year term subject
to the same renewal procedures. Resulting from this bidding process, the new majority
shareholder will be granted rights to the new 15 year concession contract with no requirement to
make any payments to the Panamanian Government.
The concession contract establishes provisions related to the Concessionaire’s obligation in service
supply issues, the non separation of the majority shares package, the delivery of periodic,
technical and financial information to the ERSP, compliance with the technical quality standards
(quality standards, measurement standards and operation regulations of the CND), and payment
of the control, supervision and monitoring tariff of the ERSP, which may not be transferred to
the users through the tariff.
F-46
9. Subsequent events
Through Resolution JD-5956 from April 11, 2006 the ERSP order the Company to return
US$4,033,188 to the customers as a monthly credit on their bills starting May 2006 until
December 2006 due to an excess of the authorized “Maximum Allowed Income”, charged by the
Company from July 2002 through June 2006. According to the ERSP, this alleged excess was
generated from the difference between the breakdown by tariff type of the forecast used to
determine the tariff structure and the actual breakdown.
The Company filed a reconsideration recourse on this decision due to a lack of legal grounds and
also presented a revision of the study developed by the ERSP in which the difference in the
“Maximum Allowed Income” caused by tariff type of the forecast used to determine the tariff
structure and the actual breakdown is favorable to the Company. In the opinion of the
Company’s legal counselors, this reconsideration recourse should be decided in favor of the
Company.
On April 21, 2006 the Company renewed the derivative financial instrument with Citibank, N.A.,
New York for another 90-day period. Refer to Note 5.
F-47

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