FINANCE AND ADMINISTRATION

Transcription

1 ANNUAL REPORT 2012

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3 ANNUAL REPORT 2012

4 CONTENTS COMPANY OVERVIEW Introduction Letter from the Chairman Identification of the Company Brief History The AES Gener Group of Companies Ownership and Control FINANCE AND ADMINISTRATION Administration Investment and Financing Policies Credit Rating Financial Highlights of 2012 Earnings Distribution Dividend Policy Share Transactions Summary of Shareholders Comments and Proposals Insurance Brand Names and Internet Domains COMMERCIAL OPERATIONS Chilean Electric System Colombian Electric System Non-electric Business

5 55 71 OPERATIONS AND MAINTENANCE BUSINESS DEVELOPMENT Electric Business in Chile International Electric Business Projects under construction Projects under development CORPORATE SOCIAL RESPONSIBILITY FINANCIAL STATEMENTS ADDITIONAL INFORMATION Corporate Values and Business Ethics Responsibility to the Community Responsibility to Shareholders and Investors Responsibility to Workers Responsibility to Customers Responsibility to Suppliers and Contractors Consolidated Financial Statements Discussion and Analysis of Consolidated Financial Statements Subsidiaries Financial Statements, Summarized Relevant Events Information on Related Companies Addresses and Telephone Numbers of Power Plants Signing and Statement of Responsibility

6 01 CHAPTER

7 COMPANY OVERVIEW

8 01 / COMPANY OVERVIEW INTRODUCTION AES Gener S.A. (AES Gener or the Company) is an open stock corporation whose mission is to generate electricity in Chile safely, reliably, and sustainably, meeting its commitments with customers, shareholders, employees, communities, suppliers, and other individual and group stakeholders. As of December 31, 2012, with all of its plants in operation (1), the Company provides electricity to the Sistema Interconectado Central (SIC, Central Grid) through four run-of-river hydroelectric plants, one coal-fired thermoelectric plant, five diesel-fired thermoelectric plants, and one cogeneration plant, all of which are owned directly by AES Gener. Through its subsidiaries, it also provides the SIC with electricity from a combined cycle plant that can operate on either natural gas or diesel oil, and from a diesel oil-fired plant, both of which are owned by Sociedad Eléctrica Santiago S.A. (Eléctrica Santiago), as well as from a coal-fired thermoelectric plant owned by Empresa Eléctrica Ventanas S.A. (Eléctrica Ventanas). (1) Some of these plants have more than one generating unit. 6

9 ANNUAL REPORT AES GENER 2012 It also supplies the grid with power through its related company Empresa Eléctrica Guacolda S.A. (Guacolda), which operates four coal-fired units on Guacolda Island in Huasco in the Region of Atacama. Additionally, the Company provides electricity to the Sistema Interconectado del Norte Grande (SING, Northern Grid) through its subsidiaries Norgener S.A. (Norgener) and Empresa Eléctrica Angamos S.A. (Eléctrica Angamos). Norgener has a coal-fired thermoelectric plant in the city of Tocopilla, while Eléctrica Angamos has a plant, also coal-fired, located in the municipality of Mejillones. This combination of electric generation options provides AES Gener with competitive advantages in the Chilean electric market, as it does not depend exclusively on a particular energy source to produce electricity. In addition to its activities in the Chilean electricity industry, AES Gener produces electricity in Colombia through its subsidiary AES Chivor, which has a hydroelectric plant at the Boyacá reservoir, and in Argentina through its subsidiary TermoAndes S.A. (TermoAndes), which has a natural gas-fired combined cycle plant in Salta. TermoAndes is also connected to the SING through a transmission line owned by the subsidiary InterAndes, and to the Sistema Argentino de Interconexión, or SADI, the Argentine Grid. AES Gener transports natural gas through its companies GasAndes S.A. and GasAndes Argentina S.A. At the end of 2012, the Company finished construction on a coalfired plant, Ventanas IV, which belongs to the subsidiary Empresa Eléctrica Campiche S.A. (Eléctrica Campiche) and is located in Ventanas in Chile s Region V. Another development in 2012 was the start of construction on the Tunjita hydroelectric plant in Colombia, which belongs to AES Chivor; and on the 5th unit at the Guacolda complex in Huasco, Region III, owned by AES Gener s related company Guacolda. As of December 31, 2012, 70.67% of AES Gener stock is owned by Inversiones Cachagua Ltda., a subsidiary of AES Corp (AES), an international power and infrastructure company that does business in 25 countries. Its headquarters is located in Arlington, Virginia, in the U.S. 7

10 01 / COMPANY OVERVIEW LETTER FROM THE CHAIRMAN DEAR SHAREHOLDERS: It gives me great pleasure to report to you on the business activities of AES Gener S.A. (AES Gener) during This year was marked by major operational, business, and financial achievements that would not have been possible without the professionalism and dedication of our people, or without the strategic vision of our company s executives. The efforts of our collaborators have been key to the success of our expansion plan that has been underway in recent years. The plan involves the construction and startup of 10 projects, which have boosted our installed capacity by 49%. It includes Unit 4 at the Ventanas Complex, whose operational testing began at the end of Another one of our highlights was the company s record generation level due to the commissioning of new projects and greater availability at our plants, which reached a yearly rate of 91%. With these figures, the AES Gener Group s annual generation increased by 52% from 2007 to 2012, helping to support the country s growth and satisfy its needs. Innovation and excellence are undoubtedly components essential to the work of our people. These fundamentals add significant value to our company s operations, and they are the reason behind one of the most important highlights of 2012, the recognition AES Gener received for its successful leadership, construction, innovation, and operational excellence at the Angamos plant. In less than one year, this plant received international recognition twice, winning the International Edison Award from the Edison Electric Institute, as well as the Plant of the Year Award from the specialized periodical Power Magazine. Our operations would not be top quality if our main concern were not focused on our first value: safety. I am proud to say that our company s accident rate declined from 2011 to 2012 (from 0.41% to 0.39%) even though our work force increased. It is with great satisfaction that we note that our company s accident rates are significantly below the national average, which was 5.5% in In addition, I am particularly pleased to reaffirm AES Gener s commitment to the environment. In this context and fully complying with the standards required by the authorities, in 2012 the investments and the installation works of emission control equipment (retrofits) began in units I and II of both the Ventanas and Norgener plants. The consolidated total investment is US$220 million, investment that will be completed during 2014 as required by law. In commercial matters, I would like to note the company s successful strategy in attaining today the balance between projected efficient energy from our plants and the supply agreements in the future. In 2012 we had to deal with an imbalance on the Central Grid (or SIC) that resulted in a 26% decline in the gross margin compared to that of 2011 due to higher supply contracts than could be met with efficient generation. We were able to correct this situation when the Ventanas IV power plant went into operation in March of Also, despite this imbalance, AES Gener signed new longterm agreements that started in 2012, knowing that the long-term benefits would outweigh the short-term costs under this scenario. In addition, we must not overlook the fact that the company was required to supply contracts signed by Campanario, which went into bankruptcy in Looking back over 2012 financial matters, we should note the upgrade in the credit rating assigned to AES Gener by Fitch, from BBB- up to BBB. Another highlight is the financial contribution from our Colombian operations, which reached a record EBITDA of US$245 million. So, despite the huge hurdles the company faced in 2012, such as the energy imbalance on the SIC and the halting of TermoAndes energy exports to the SING, we finished the year with solid results. Exceptional progress was made in the financing for the Cochrane and Alto Maipo projects, and financing for Guacolda V was closed in October. 8

11 ANNUAL REPORT AES GENER 2012 I would particularly like to mention the coal-fired Ventanas IV plant, which completed the different processes we had scheduled for It was synchronized to the SIC in December of 2012, and it was successfully commissioned for commercial operations on March 15, We started several new projects in the second phase of our expansion plan in 2012, and we expect to add new projects in AES Chivor started work on the 20 MW Tunjita run-of-river hydroelectric plant in July, and progress stood at 12.7% by the end of Construction also got underway on the fifth unit of related company Guacolda s 152 MW plant in October; works are currently in the leveling, clearing, and surveying stage. One of our most noteworthy achievements of 2012 is the progress on the 532 MW Cochrane thermoelectric project, which will supply energy to the northern grid (the SING) from its location in the Region of Antofagasta. The preliminary works on Cochrane have begun under the engineering and construction contract with Posco Engineering & Construction. Long-term supply agreements have already been signed with large mining companies for a large portion of the power that will be generated at the plant. The company was also able to finalize the financing for the project, which will be executed using the project finance model. The Mitsubishi Corporation became a major shareholder in Eléctrica Cochrane after acquiring 40% of its stock in November. Another of our emblematic projects is the 531 MW Alto Maipo runof-river plant located in the Metropolitan Region of Santiago, which received the electricity concession permit from the government in December of The company progressed with the preliminary works for this plant in 2012, and three construction agreements were signed for the main works of supplying and assembling the generation equipment for the two plants, as well as for civil and underground works. We at AES Gener are fully aware that, in order to develop our projects successfully and to obtain favorable results year after year, we must see the whole picture and stick to the company s values. That is why we have developed a solid policy of corporate social responsibility (CSR) to complement our operational, financial, environmental, and commercial excellence. We have built this policy on the three pillars of education, employability, and infrastructure for the community. After a thorough analysis of the needs of each city or township that serves as locations for our facilities, present or future, the company has started important social programs that it has implemented hand in hand with the community in order to add social value to the communities where we have operations or are building projects. Our CSR policy works through our Fundación AES Gener foundation, which has brought several programs to fruition that have positioned the company as a key player in the work of community ties. The goal is to develop and contribute to a better quality of life for our neighbors, going far beyond our day-to-day operations. While it is true that we faced a number of commercial and operational hurdles in Chile in 2012 that decreased our gross earnings in the two Chilean markets this year, we have no doubt 9

12 01 / COMPANY OVERVIEW that this has been a year full of operational, commercial, financial, environmental, and developmental achievements. Each and every one of these achievements has gone hand in hand with our commitment to supply reliable energy in a way that is sustainable with the environment and with the communities in which we operate and with which we have worked intensely, trying always to be good neighbors and to contribute solidly to the growth of the entire country. Therefore, I would like to express my deep gratitude for the trust you have placed in the Board of Directors and in the company in general. I would also like to extend this appreciation to each and every worker at AES Gener who, through their daily efforts, contribute to the growth of our organization. You can rest assured today that AES Gener remains steadfast in its commitment to operating under the highest standards of operational excellence, seeking constant improvement, and never losing sight of our top value: safety. We are certain that this will keep us on the track toward competitive, sustainable development, for the company and for Chile. Thank you all for a great ANDRÉS GLUSKI W. Chairman of the Board 10

13 ANNUAL REPORT AES GENER 2012 IDENTIFICATION OF THE COMPANY COMPANY NAME AES Gener S.A. CHILEAN TAXPAYER ID NUMBER TYPE OF COMPANY Open Stock Company REGISTRATION IN THE SECURITIES REGISTRY No ADDRESS Rosario Norte 532, Piso 19, Las Condes, Santiago, Chile TELEPHONE (56-2) Fax (56-2) P.O. BOX WEB PAGE STOCK EXCHANGE STICKER SYMBOL No. 3514, Santiago AESGENER 11

14 01 / COMPANY OVERVIEW BRIEF HISTORY AES Gener S.A. was founded on June 19, 1981 in a public deed registered by Santiago Notary Public Patricio Zaldivar Mackenna. The name of the Company at the time was Compañía Chilena de Generación Eléctrica S.A. (Chilectra Generación S.A.). Its by-laws were approved by the Chilean Securities and Insurance Authority in Resolution 410-S of July 17, 1981 and were published in Diario Oficial No. 31,023 on July 23 of the same year. The Company is registered in the Business Registry of the Santiago Property Registrar on pages 13,107 No. 7,274 of The origins of the Company, however, date back to 1889, only eight years after Thomas Alva Edison invented the light bulb. That was when the Chilean Electric Tramway and Light Company was founded in Santiago; its assets later merged in 1921 with those of the Compañía Nacional de Fuerza Eléctrica, created in 1919, to form the Compañía Chilena de Electricidad (Chilectra). This was a privately owned company until 1970, when it was nationalized and taken over by the Corporation for the Development of Production (CORFO). In June 1981, it was restructured into a parent company, Chilectra S.A., and three subsidiaries: Chilectra Metropolitana S.A., a distribution company serving the Santiago metropolitan area; Chilectra Quinta Región S.A., a distribution company serving Valparaiso and the Aconcagua Valley; and Chilectra Generación S.A., an electricity generation company and owner of the former Chilectra s transmission assets. Chilectra Generación S.A. began operating as an independent company on August 1, In 1986, CORFO began privatizing the company, and by January 1988, 100% of its ownership had been transferred to the private sector. At the Annual Shareholders Meeting in September 1989, it was agreed to change the Company s name to Chilgener S.A. At that time, the Company had an installed capacity of 579 MW distributed throughout Chile s Metropolitan and Valparaiso Regions. Nine years later, in March of 1998, the Company s shareholders agreed once again to change its name, this time to Gener S.A. The primary reason for the change was to reflect the Company s new international standing as it expanded its operations to new markets and businesses both in Chile and abroad. In addition to participating in the electricity generation business in Chile, Argentina, Colombia, and the Dominican Republic, Gener has also expanded into other activities such as the generation of steam; the extraction and sale of coal; the exploration, extraction, and transportation of natural gas; the exploration and production of oil; the production and sale of densified biofuel; shipping and port services; and engineering services provided primarily to the electricity and sanitation sectors. 12

15 ANNUAL REPORT AES GENER 2012 In April 2000, Gener began the search for a strategic partner or investor that would enable it to continue growing within the industry s new structure. This decision was based on the growth and development restrictions imposed on the Company by its smaller size and debt capacity as compared to its large international competitors. At the end of this process, AES Corp, through its subsidiary Inversiones Cachagua Ltda., launched a tender offer for a controlling percentage of the Company. Additionally, it entered into an agreement with the French company TotalFinaElf under which the latter agreed to purchase Gener s electricity assets in Argentina if the tender offer was successful. Both operations were subject to a due diligence process. On December 28, 2000, the Santiago Stock Exchange auctioned Gener shares, and Inversiones Cachagua Ltda. purchased 61.11% of the Company s capital stock. On the following day in the United States, Gener s ADRs, representing a 34.56% stake in the Company, were exchanged for AES Corp shares. After taking control of the Company, Inversiones Cachagua Ltda. held a second public offering in Chile in February 2001, acquiring an additional 2.87% of the Company s stock. At this point, Inversiones Cachagua s ownership equaled 98.54% and would later increase to 98.65% through other minor purchases on the stock market. In April 2006, Inversiones Cachagua sold 7.59% of its shares in AES Gener to other investors; it sold 0.91% in May 2007, and repeated the operation in October, selling an additional 10.18% and remaining with a 80.11% stake in the Company. In June 2008, AES Gener concluded the preemptive right period of a capital increase process for approximately US$272 million. Inversiones Cachagua took part in the process and increased its ownership to 80.16% by the end of the preemptive period. However, in November 2008, Inversiones Cachagua sold 9.55% of AES Gener on the stock market, reducing its stake to 70.61%. Finally, AES Gener carried out a new capital increase for approximately US$246 million, whose preemptive right period ended in February Inversiones Cachagua took part in the process and increased its participation slightly. As of December 31, 2012, Inversiones Cachagua s stake in the Company totaled 70.67%. As part of the AES group, Gener changed its name to AES Gener S.A. in 2001 and began to sell assets in order to concentrate the Company s business activities in power generation, primarily in Chile. In 2004, through a capital increase, Inversiones Cachagua s stake in the Company increased to 98.79%. 13

16 THE AES GENER GROUP OF COMPANIES 99.99% 94% 92.04% Sociedad Eléctrica Santiago S.A. 0.01% 6% Gener 7.96% Energen S.A. Argentina S.A % 86.99% 50% Empresa Eléctrica Guacolda S.A 33.01% TermoAndes S.A. InterAndes S.A % 13% 13% 99.99% 99.99% Gasoducto GasAndes S.A. Gasoducto GasAndes Argentina S.A. Empresa Eléctrica Ventanas S.A. Empresa Eléctrica Angamos S.A. 0.01% 0.01% NOTE: This chart lists each company with its full legal name (e.g. AES Gener S.A. and Sociedad Eléctrica Santiago S.A.). In the rest of this annual report, except for the financial statements, an abbreviated form of the names is used to refer to the companies (e.g. AES Gener and Eléctrica Santiago). Additionally, AES Gener Group refers to AES Gener and its subsidiaries and related companies. 14

17 99.99% Norgener S.A % 99.99% 100% 100% 100% 0,01% Inversiones 0.01% AES Chivor Gener Blue AES Chivor Nueva Alto Maipo Genergía 47.50% S.A. SpA Water Ltda. y Cía. SCA 0.63% Ventanas Power Ltda. E. S. P % S.A. 0.63% 99.99% 60.00% 99.99% 99.99% Empresa Eléctrica Campiche S.A. Empresa Eléctrica Cochrane SpA Inversiones Termoenergía de Chile Ltda. Genergía S.A. 0.01% Subsidiaries Related Companies 15

18 OWNERSHIP AND CONTROL AES Gener is an open stock corporation whose shares are traded on three stock exchanges: the Santiago Stock Exchange, the Valparaiso Securities Exchange, and the Chilean Electronic Stock Exchange. As of December 31, 2012, shareholders equity stood at US$2.481 billion, divided into 8,069,699,033 shares and distributed among 1,610 shareholders. At the end of the fiscal year, Inversiones Cachagua Ltda. held a 70.67% stake in AES Gener. The American company AES Corp. controls AES Gener indirectly through its approximately 99.9% ownership of Inversiones Cachagua Ltda. Due to the fact that the ownership of AES Corp is highly disperse, the names of the individuals who own shares of that international corporation are omitted from this report. SHAREHOLDERS OWNERSHIP AS OF DECEMBER 31, 2012 NAME SHARES OWNERSHIP Inversiones Cachagua Limitada 5,703,106, % Banco de Chile through other companies 177,028, % Celfin Capital S.A. Stock Brokers 171,606, % Provida C Pension Fund 152,964, % Banco Itaú through investors 139,820, % Capital C Pension Fund 105,602, % Provida A Pension Fund 105,179, % Capital A Pension Fund 102,824, % Cuprum A Pension Fund 102,392, % Banco Santander - JP Morgan 94,717, % Habitat C Pension Fund 92,305, % Provida B Pension Fund 88,202, % Total 12 largest shareholders 7,035,749, % Other shareholders (1,598) 1,033,949, % TOTAL SHARES 8,069,699, % 16

19 SHAREHOLDERS BY TYPE AS OF DECEMBER 31, % Others 70.7% AES Corp. TYPE OF SHAREHOLDER NUMBER OF SHAREHOLDERS NUMBER OF SHARES OWNERSHIP Chilean individual 1,317 29,381, % Foreign individual 1 1, % Foreign legal entity 9 419,202, % Chilean legal entity 283 7,621,114, % 15.4% Pension Funds (AFPs) OWNERSHIP BY TYPE TOTAL SHAREHOLDERS 1,610 8,069,699, % As of December 31, 2012, shareholders equity stood at US$2,481 billion, divided into 8,069,699,033 shares and distributed among 1,610 shareholders. 17

20 02 CHAPTER

21 FINANCE AND ADMINISTRATION

22 02 / FINANCE AND ADMINISTRATION ADMINISTRATION BOARD OF DIRECTORS as of December 31, 2012 REGULAR DIRECTORS (1) Andrés Gluski / CHAIRMAN Master in Economics, University of Virginia, USA Ph.D. in Economics and International Finance, University of Virginia, USA Passport No.: Venezuelan citizen Arminio Borjas Attorney at Law, Universidad Católica Andrés Bello, Venezuela Passport No.: D Venezuelan citizen Iván Díaz-Molina Civil Engineer, Universidad Nacional de Córdoba, Argentina Master of Science, Carnegie-Mellon University, USA Chilean ID No.: Argentine citizen Juan Andrés Camus Business Administrator, Pontificia Universidad Católica de Chile, Chile Chilean ID No.: Chilean citizen Radovan Razmilic Road, Canal, and Port Engineer, Universidad Politécnica Superior de Madrid, Spain RUT: Chilean citizen Tom O Flynn (2) MBA in Finance, University of Chicago, USA Passport No.: U.S. citizen

23 ANNUAL REPORT AES GENER 2012 ALTERNATE DIRECTORS Edgardo Campelo Public Accountant, Universidad de Buenos Aires, Argentina Passport No.: N Argentine citizen Fernando Pujals Mechanical Engineer, Universidad Nacional de Rosario, Argentina MBA, IMD, Switzerland Passport No.: M Argentine citizen Gardner Walkup Petroleum Engineering, Stanford University, USA Chemical Engineering, University of California at Davis, USA. U.S. citizen Joel Abramson Bachelor of Arts in International Politics and Economics, Middlebury College, USA Passport No.: U.S. citizen Jorge Rauber Electrical Engineer, Universidad Nacional de la Plata, Argentina Passport No.: N Argentine citizen Patricio Testorelli Attorney at Law, Universidad Católica Argentina, Argentina Master in Business Law, Universidad Austral, Argentina Passport No.: Argentine citizen Varsovia Valenzuela Business Administration, Pontificia Universidad Católica de Chile, Chile Chilean ID No.: Chilean citizen (1) Regular Director Edward C. Hall submitted his resignation on November 19, Mr. Andrew Vesey was designated as his replacement on February 26, (2) Regular Director Victoria Dux Harker submitted her resignation on July 25, 2012, designating Mr. Tom O Flynn as her replacement under an agreement adopted by the Board on September 26,

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25 EXECUTIVES as of December 31, 2012 Luis Felipe Cerón / CHIEF EXECUTIVE OFFICER Civil Industrial Engineer, Pontificia Universidad Católica de Chile, Chile Master of Science in Accounting and Finance, The London School of Economics, England Chilean ID No.: Chilean citizen Javier Giorgio / CHIEF OPERATIONS OFFICER Electronic Engineer, Universidad Tecnológica Nacional, Argentina MBA, Universidad del Cema, Argentina Chilean ID No.: Argentine citizen Daniel Stadelmann / CHIEF FINANCIAL OFFICER Bachelor of Science in Administration and Finance,, University of St. Gallen, Switzerland MBA, IMD, Switzerland Chilean ID No.: Chilean citizen Iván Jara / CHIEF ENGINEERING AND CONSTRUCTION OFFICER Civil Mechanical Engineer, Universidad de Chile, Chile MBA, Universidad Adolfo Ibañez, Chile Chilean ID No.: Chilean citizen Michael Whittle / CHIEF DEVELOPMENT OFFICER Bachelor of Arts, Claremont McKenna College, USA Master of Science in Foreign Service, Georgetown University, USA Passport No.: U.S. citizen Alberto Zavala / LEGAL COUNSEL Attorney at Law, Pontificia Universidad Católica de Chile, Chile Chilean ID No.: Chilean citizen Mariana Soto / CHIEF CORPORATE AFFAIRS OFFICER Attorney at Law, Universidad de Chile, Chile Chilean ID No.: Chilean citizen 23

26 02 / FINANCE AND ADMINISTRATION REMUNERATIONS AND ACTIVITIES BOARD OF DIRECTORS The Board of Directors is the official organization that, in accordance with the Chilean Corporation Law Code and the Company s by-laws, is responsible for the administration of the Company. It is composed of seven regular members and their respective alternates, all of whom are elected for a three-year term at the ordinary shareholders meeting and are eligible for reelection. AES Gener s by-laws specify that its Directors are not to be remunerated for their duties as such. During fiscal year 2012, the Company s Directors did not receive remuneration of any kind for additional duties; for expenses of representation, travel, or gifts; or any other stipend. However, those Directors that are also Board Committee members received remuneration as detailed in the following section. The Board of Directors did not incur expenses for consultation services in BOARD COMMITTEE MEMBERS The members of the Company s Board Committee are Mr. Iván Díaz-Molina (Chairman and Independent Director), Mr. Juan Andrés Camus, and Mr. Radovan Razmilic. REMUNERATIONS AND BUDGET At the ordinary shareholders meeting held on April 27, 2012, it was agreed to set Board Committee members fees at 160 UF per month. The Committee did not make use of the annual expense budget of US$25,000 approved at the ordinary shareholders meeting for the 2012 fiscal year. Remunerations were paid to the Directors who are Board Committee members in the amounts shown in the following table. BOARD COMMITTEE REMUNERATIONS (UF) Juan Andrés Camus 1,920 1,920 Iván Díaz-Molina 1,920 1,920 Radovan Razmilic 1,920 1,120 Jorge Rodríguez Total 5,760 5,760 24

27 ANNUAL REPORT AES GENER 2012 ANNUAL REPORT ON BOARD COMMITTEE ACTIVITIES In accordance with Article 50 bis of the Chilean Corporations Law Code, amended by Law 20,382, the Board Committee met on 7 occasions in 2012 to make decisions regarding the Company s operations and contracts with related companies in accordance with Title XVI of Law 18,046 governing corporations. It also discussed other matters within its legal capacity and subsequently notified the Board of Directors of its decisions and recommendations. The operations between related companies examined by the Committee were in accord with market conditions and in the interest of the corporation, so the Committee recommended their approval by the Board of Directors. At the January 5 meeting, the Committee examined the information on the following operations with related companies: i) The annual renewal of the insurance policy held with AES Global Insurance, an AES Corp related company, covering AES Gener and its subsidiaries against all risk and business interruption. The Board Committee examined the information presented and, wanting more information, unanimously agreed to request that the company s management recommend three independent consultants to the Committee, from which it will select one to carry out an insurance market study to determine the premiums that could be paid for the coverage needed under current market conditions. ii) The fees paid in 2010 and 2011 to the parent company AES Corp. for internal auditing services for the company and its subsidiaries. The fees were unanimously approved by the Committee. At the March 28 meeting, the Committee was informed of, examined, and approved the company s balance sheet and financial statements for the fiscal year ended December 31, 2011, as well as the external auditor s report. During the meeting, it also agreed: i) To recommend to the Board that Ernst & Young auditing firm be proposed at the Company s next ordinary shareholders meeting as external auditors for fiscal year ii) To approve the hiring of Ernst & Young to provide services other than auditing that are not expressly forbidden, such as tax, legal, and risk consultancy, provided that Ernst & Young report, in each case and on each occasion, that its provision of that particular service will not affect its independence. iii) Agreement on internal auditing services with the parent company AES Corp. The Committee recommended that the agreement be signed on the condition that it contains efficiency indicators for the internal auditing services to be provided, stating the hours to be used and the maximum fees to be paid. At the January 25 meeting, the Committee examined the information and approved the renewal of the technical service agreement with AES Servicios América S.R.L., a subsidiary of AES Corp, covering administration of the SAP system. 25

28 02 / FINANCE AND ADMINISTRATION iii) ii) iii) To recommend to the Board that it request that Ernst & Young auditing company replace the partner in charge of the company s account every four years as an appropriate control measure. The partner in charge of the AES Gener account should be changed starting with the 2012 fiscal year. At the same meeting, the Committee examined the information and approved the annual renewal of the insurance policy held with AES Global Insurance, an AES Corp. related company, covering AES Gener and all of its subsidiaries against all risk and business interruption. At the May 23 meeting, the Committee appointed Iván Díaz- Molina President of the Board Committee. At the June 27 meeting, the Committee examined the information and approved the corporate restructuring process, which included the merger of Energy Trade and Finance Corporation with AES Chivor y Cía. SCA E.S.P., and the issuance of a loan from the latter company to AES Gener. At the August 16 meeting, the Committee examined the information and approved the following operations with related companies: i) Modification of the conditions for signing the agreement selling water rights in the Rahue and Cautín Rivers to BESALCO, which conditions had been approved at the December 11, 2011, Board meeting. The Committee recommended that the agreement be signed, with only Director Juan Andrés Camus abstaining(l). ii) Modification of the mercantile account agreement signed between AES Gener and its subsidiary Eléctrica Santiago. The Committee unanimously recommended that the agreement be signed. At the November 28 meeting, the Committee examined the information and approved the release of the coal purchase agreement between AES Gener and AES Hawaii, a subsidiary of AES Corp. EXECUTIVES Total remuneration for the Company s executive officers during 2012 amounted to US$5,077 million. This includes fixed monthly remuneration and variable bonuses based on corporate earnings and performance, which are also awarded to the other AES Gener employees. The Company s incentive plan for its executives consists of an annual variable bonus based on corporate earnings and performance; the amount of the bonus is determined on a yearly basis according to the aforementioned parameters. It should be noted that Company policy stipulates that AES Gener executives who are members of related companies Boards of Directors do not receive remuneration for their duties as directors, or that they may decline the allowance due them as individuals. In 2012, the Company disbursed a total of MUS$262 in severance pay for its main executives. (1) Juan Andrés Camus is also Director of BESALCO Construcciones S.A. 26

29 ANNUAL REPORT AES GENER 2012 INVESTMENT AND FINANCING POLICIES In accordance with the agreement reached at the extraordinary general shareholders meeting held on July 4, 2001, the Company s by-laws make no reference to investment, financing, or commercial policies either for the Company or for its subsidiaries. Not withstanding the above, the by-laws state that in order for the Company to fulfill its corporate purpose, it may manage the investments that it makes in each and every one of the companies that it forms or to which it makes contributions; it may supervise and coordinate the management of the companies that it forms and to which it makes contributions; and it may provide, to the companies that it forms or to which it makes contributions, management services; auditing services; financial, commercial, technical, and legal consulting services; and, in general, services of any kind that are deemed necessary for best performance. The by-laws also state that whenever it forms companies by contributing assets directly related to the generation of electricity, AES Gener will retain at least 51% of the ownership. Credit Rating In April, Fitch Ratings upgraded AES Gener s international credit rating from BBB- to BBB with a stable outlook, and upgraded its national credit rating from A to A+, also with a stable outlook. Fitch stated in its rating report that the upgrade reflected the improvement in the Company s operations and financing, the stabilization of its cash flow, and its solid credit metrics. Feller Rate also confirmed the Company s current local A rating in August. The agency did, however, raise its credit outlook from stable to positive based on expectations that AES Gener s commercial position will be back in equilibrium after Ventanas IV plant goes into operation, and on the financing structure of projects using the project finance method, for which AES Gener has not had to provide additional security. At the end of the fiscal year, both Fitch Ratings and Feller Rate classified the Company s shares as First Class, level 2. Standard & Poor s and Moody s both held the Company s current international ratings steady, maintaining their BBB- and Baa3 investment grades, respectively, with stable outlooks. The following table presents a summary of AES Gener s national and international credit ratings as of December 31, 2012: INTERNATIONAL NATIONAL Standard & Poor s BBB- stable outlook Feller Rate A positive outlook Fitch Ratings BBB stable outlook Fitch Ratings A+ stable outlook Moody s Baa3 stable outlook The subsidiary AES Chivor s 2011 rating with Standard & Poor s was confirmed in 2012 at investment grade BBB- with a stable outlook. Moody s also held their rating steady at Ba1 with a stable outlook. Fitch Ratings upgraded Eléctrica Santiago s credit rating in January 2013 from A- to A with a stable outlook as a reflection of both the ongoing improvement in that company s individual credit profile as well as the improved rating of controlling company AES Gener. Feller Rate confirmed its BBB rating of the company in September 2012, with a stable outlook. According to the report issued by Fitch Ratings, subsidiary TermoAndes local credit rating maintained at A with a stable outlook. 27

30 FINANCIAL HIGHLIGHTS OF 2012 HEDGING STRATEGY Since the U.S. dollar is AES Gener s functional currency, it was decided in 2012 to continue with the strategy for hedging exchange rates, which limits the Company s exposure to exchange risks with the Chilean peso. Although most of the Company s power supply agreements have rates denominated in dollars, they are actually paid in Chilean pesos at an exchange rate that is fixed for a specific period of time. Therefore, a strategy was established using exchange rate futures to hedge against the Company s net exposure to the dollar/peso exchange rate. Our subsidiary AES Chivor in Colombia, which uses the Colombian peso as its functional currency, also continued with an exchange rate strategy to hedge against the Company s exposure to the volatility of the Colombian currency. This strategy also uses exchange rate futures, which cover up to 75% of accounts receivable from bilateral power sale agreements, whose tariffs are stated in Colombian pesos once expenses have been deducted in the local currency. CREDIT LINE In order to give the Company greater liquidity and flexibility, it was decided to maintain the UF 6,000,000 five-year credit line taken out in October 2011 with a syndicate of Chilean banks. At the end of 2012, this credit line has not been used. INVESTOR RELATIONS During 2012, AES Gener carried out and took part in a number of activities aimed at maintaining an ongoing flow of accurate, reliable communications with current and potential shareholders and investors, market analysts, and other interested parties. The Company also continued with its biannual meetings to present its results, as well as on-site visits to provide thorough information on our operations on the market. AES Gener also participated in various national and international conferences. FINANCING OF COCHRANE AND ALTO MAIPO PROJECTS AES Gener has continued in 2012 with developing the Cochrane coal-fired thermoelectric project (532 MW, SING Grid) and the Alto Maipo hydroelectric project (531 MW, SIC Grid), and has thoroughly analyzed the options to choose the best financing structure to build these projects. These projects should be financed under the Project Finance structure, which is a non-recourse loan for the Company. This structure was used successfully to finance the Nueva Ventanas and Angamos plants. It should be noted that the financing agreement for the Cochrane project, using the project finance method, was finalized in March of

31 EARNINGS DISTRIBUTION EARNINGS DISTRIBUTION Net income attributable to parent company shareholders, 2012 fiscal year Thousands of US$ 202,933 Less: Interim dividends paid (71,000) Balance of net income attributable to parent company shareholders, 2012 fiscal year 131,933 Retained earnings (IFRS) as of ,666 Reserves for proposed dividends as of ,757 Final 2011 dividends paid and charged to 2011 earnings (228,169) Minimum dividend provision for fiscal year Retained Earnings and Proposed Dividend Reserves Accumulated for Distribution 633,254 TOTAL ACCUMULATED EARNINGS + FUTURE DIVIDEND RESERVE 765,187 DIVIDEND POLICY As instructed in Chilean Securities and Insurance Authority (SVS) Bulletin No. 687, the Board of Directors, at meeting 575 held on March 28, 2012, agreed on the dividend policy it considers suitable for the Company s 2012 fiscal year. This policy is stated below. It is the intention of the Board of Directors to distribute up to 100% of the net income generated during 2012 in dividends among its shareholders. The Board also agreed to expressly state its intention to distribute interim dividends during the 2012 fiscal year. At the same time, the Board also stated expressly that compliance with the aforementioned dividend policy will be subject to the net income actually earned, the results of periodic projections made by the Company, the need for Company funds to finance investment projects, and restrictions on dividends in the Company s by-laws as well as those contained in existing loan agreements, which consist largely of being in compliance with the negative covenants of those loans agreements and with Company cash and investment policy. Regarding dividends in upcoming years, the Board agreed to maintain a dividend policy similar to the above over the medium term. This policy was approved at the AES Gener ordinary shareholders meeting held on April 27, The previous year s divided policy is stated below: 29

32 02 / FINANCE AND ADMINISTRATION 2011 DIVIDEND POLICY As instructed in Chilean Securities and Insurance Authority (SVS) Bulletin No. 687, the Board of Directors, at meeting 563 held on March 29, 2011, agreed on the dividend policy it considers suitable for the Company s 2011 fiscal year. This policy is stated below. It is the intention of the Board of Directors to distribute up to 100% of the net income generated during 2011 in dividends among its shareholders. In addition, the Board agreed to state expressly that it intends to distribute interim dividends during the 2011 fiscal year. The Board also stated expressly that compliance with this dividend policy is subject to net income actually earned, the results of periodic projections made by the Company, the need for Company funds to finance investment projects, and restrictions on dividends in the Company s by-laws as well as those in existing loan agreements, which consist largely of being in compliance with the negative covenants of those loans agreements and with Company cash and investment policy. Regarding dividends in upcoming years, the Board agreed to maintain a dividend policy similar to the above over the medium term. This policy was reported at the AES Gener S.A. ordinary general shareholders meeting held on April 26, DIVIDENDS PAID AGAINST FISCAL YEAR 2011 EARNINGS At the ordinary shareholders meeting held on April 27, 2012, it was agreed to distribute US$326,083, or approximately 100% of fiscal year 2011 net income, by distributing: (a) A minimum mandatory dividend of US$ per share for a total of US$97,824,926.52, or 30% of fiscal year 2011 net income. This was reduced from the interim dividend paid in September 2011, which amounted to US$ per share for a total of US$79,002, and equivalent to % of 2011 fiscal year net income. This resulted in a dividend of US$ per share, for a total of US$18,822,572.99, or 5.772% of 2011 fiscal year net earnings, which was paid starting on May 8,

33 ANNUAL REPORT AES GENER 2012 (b) A first additional dividend of US$ per share for a total of US$75,177,316.19, equivalent to % of fiscal year 2011 net income, paid starting on May 8, (c) A second additional dividend of US$ per share for a total of US$153,081,383.69, or % of fiscal year 2011 net income, which was paid starting on August 8, Then, in accordance with the dividend policy approved at the ordinary shareholders meeting held on April 27, 2012, the Board of Directors, at meeting N. 582 of October 24, 2012, agreed to distribute US$70,999,633 in interim dividends of US$ per share, to be charged to fiscal year 2012 net income. This interim dividend amounts to 35% of fiscal year 2012 net income. DIVIDENDS DISTRIBUTED IN RECENT YEARS, IN DOLLARS PER SHARE: DIVIDEND NO. TYPE OF DIVIDEND DATE OF PAYMENT AMOUNT PER SHARE CHARGED TO FISCAL YEAR % OF PROFITS 86 Final 05/07/ % 87 Additional final 07/07/ % 88 Interim 12/15/ % 89 Final 05/11/ % 90 Additional final 07/07/ % 91 Additional final 10/07/ % 92 Interim 01/05/ % 93 Final 05/06/ % 94 Eventual 05/06/ % 95 Interim 09/14/ % 96 Final 05/08/ % 97 Additional final 05/08/ % 98 Additional final 08/08/ % 99 Interim 11/15/ % 31

34 SHARE TRANSACTIONS There were no share transactions with related individuals during the 2012 and 2011 fiscal years. SHARE TRANSACTIONS (1) NO. OF SHARES TOTAL (Ch$) AVERAGE PRICE (Ch$) 1st Quarter 321,179,658 76,736,307, nd Quarter 222,505,531 51,567,340, rd Quarter 396,584, ,511,298, th Quarter 375,235,875 99,793,287, st Quarter 364,174,066 91,103,061, nd Quarter 221,673,099 61,191,560, rd Quarter 236,609,288 63,967,944, th Quarter 275,198,339 74,687,727, st Quarter 339,443,867 97,709,144, nd Quarter 314,993,767 91,064,794, rd Quarter 263,658,271 72,191,759, th Quarter 251,986,261 75,025,937, (1) Includes transactions on the Santiago Stock Exchange, the Valparaíso Securities Exchange, and the Chilean Electronic Exchange. 32

35 AVERAGE PRICE AND VOLUME OF SHARES TRADED ON THE SANTIAGO STOCK EXCHANGE IN 2012 MONTH NO. OF SHARES TOTAL (Ch$) AVERAGE PRICE (Ch$) January 147,211,975 41,184,914, February 98,642,033 28,943,023, March 79,511,567 23,496,074, April 67,329,054 20,378,320, May 88,395,334 25,313,614, June 133,357,681 37,961,869, July 58,873,126 16,544,437, August 126,659,008 33,716,657, September 53,903,974 15,297,381, October 54,072,842 15,404,599, November 100,549,261 29,943,608, December 72,380,199 22,293,604, AVERAGE 90,073,838 25,873,175, SHARE PRICE Ch$ US$ JAN-12 FEB-12 MAR-12 APR-12 MAY-12 JUN-12 JUL-12 AUG-12 SEP-12 OCT-12 NOV-12 DEC-12 0 Ch$ US$ 33

36 02 / FINANCE AND ADMINISTRATION SUMMARY OF SHAREHOLDERS COMMENTS AND PROPOSALS During 2012, the Company did not receive comments or proposals regarding the management of the Company from shareholders or their representatives owning 10% or more of shares with voting rights, in accordance with Article 74 of Law No. 18,046 governing Chilean stock corporations and Article 13 of that law s regulations. INSURANCE Insurance is an integral part of the Company s risk management. AES Gener s focus in insurance is on mitigating financial losses and guaranteeing the continuity of its business activities. Among its relevant insurance coverage are all-risk policies covering the operation and construction of all of its plants, including coverage for material damage and financial losses resulting from business interruption due to machinery breakdown, fire, acts of nature, and other risk coverage offered on the insurance market. Assets that must be imported such as coal, replacement and spare parts, and other supplies are covered under all-risk maritime, land, or air shipping policies. In addition, AES Gener has general liability insurance coverage for itself and its employees, as well as its contractors and subcontractors. It also provides insurance policies for its workers that exceed the coverage required under Chilean law, including life insurance. 34

37 ANNUAL REPORT AES GENER 2012 BRAND NAMES AND INTERNET DOMAINS The Company has duly registered trademarks or trademark applications in process for all of its brand names and those of its subsidiaries, including registration of the different company names and corporate slogans. The Company has also registered its brands Internet domain names to protect its intangible interests and assets. 35

38 03 CHAPTER

39 BUSINESS OPERATIONS

40 03 / BUSINESS OPERATIONS CHILEAN ELECTRIC SYSTEM OVERVIEW Since 1982, the Chilean electricity industry has been based on a private initiative and property structure, with a competitive framework for the generation market and new transmission facilities, and a regulated framework for distribution and transmission based on an efficient company model. In accordance with the country s constitution and current legislation, certain government agencies, including those related to the electricity sector, perform a regulatory and oversight role. These agencies are grouped under the Ministries of Energy and the Environment, and include, among others, the Comisión Nacional de Energía (the National Energy Commission or CNE), which establishes, regulates, and coordinates energy policy. It also publishes the semi-annual indicative investment plan for generation and transmission activities, whose reports provide important data which the industry s companies use in their decision making. Other agencies include the Superintendencia de Electricidad y Combustibles (Electricity and Fuels Commission or SEC), the agency that oversees and supervises compliance with regulations governing the quality and reliability of service provided to people and/or assets; the Servicio de Evaluación de Impacto Ambiental (Environmental Impact Assessment Service), which carries out an environmental assessment of investment projects prior to their execution to ensure that the projects meet applicable environmental standards and that they handle properly any environmental impacts they may have; and other Environmental Ministry agencies still being implemented that administer the environmental assessment system. The Dirección General de Aguas (General Water Authority, DGA), an agency in the Ministry of Public Works, issues and regulates the water-use rights for hydroelectric generation, while the Ministry of Energy grants the concessions for generating, transmitting, and distributing electricity for public use. The construction and commissioning of hydroelectric and thermoelectric plants require environmental permits regulated by Chilean law, and legislation requires that thermoelectric plants be granted a construction permit as well. While the Chilean electric system is subject to the ordinary courts of law, it also has a Panel of Experts, an independent technical agency whose role is to study and promptly resolve controversies that may arise between companies within the electricity sector, or between one or more of these companies and the energy authorities. The electricity sector s different activities are regulated by the General Electricity Services Law, DFL 1/1982 enacted by the Mining Ministry, with its subsequent amendments, Law No. 19,940/2004, known as Short Law I, and Law No. 20,018/2005, or Short Law II, which did not modify the fundamentals of Chile s 38