The condensed consolidated financial statements included in Item 1.-Financial Statements of this Form 10-Q and the discussions contained herein should be read in conjunction with our 2020 Form 10-K. Forward-Looking Information The following discussion may contain forward-looking statements regarding us, our business, prospects and our results of operations, including our expectations regarding the impact of the COVID-19 pandemic on our business, that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. These statements include, but are not limited to, statements regarding management's intents, beliefs, and current expectations and typically contain, but are not limited to, the terms "anticipate," "potential," "expect," "forecast," "target," "will," "would," "intend," "believe," "project," "estimate," "plan," and similar words. Forward-looking statements are not intended to be a guarantee of future results, but instead constitute current expectations based on reasonable assumptions. Factors that could cause or contribute to such differences include, but are not limited to, those described in Item 1A.-Risk Factors of this Form 10-Q, Item 1A.-Risk Factors and Item 7.-Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2020 Form 10-K and subsequent filings with theSEC . Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with theSEC that advise of the risks and factors that may affect our business. Overview of Our Business We are a diversified power generation and utility company organized into the following four market-oriented SBUs: US and Utilities (United States ,Puerto Rico andEl Salvador );South America (Chile ,Colombia ,Argentina andBrazil ); MCAC (Mexico ,Central America and theCaribbean ); and Eurasia (Europe andAsia ). For additional information regarding our business, see Item 1.-Business of our 2020 Form 10-K. We have two lines of business: generation and utilities. Each of our SBUs participates in our first business line, generation, in which we own and/or operate power plants to generate and sell power to customers, such as utilities, industrial users, and other intermediaries. Our US and Utilities SBU participates in our second business line, utilities, in which we own and/or operate utilities to generate or purchase, distribute, transmit and sell electricity to end-user customers in the residential, commercial, industrial, and governmental sectors within a defined service area. In certain circumstances, our utilities also generate and sell electricity on the wholesale market. Executive Summary Compared with last year, first quarter diluted earnings per share from continuing operations decreased$0.44 to a loss of$0.22 . This decrease reflects higher impairments in the current period, unrealized losses on foreign currency derivatives inArgentina , and the prior year impacts of a gain on sale of land in theU.S. and incremental capitalized interest inChile ; partially offset by higher margins at our South America SBU largely due to net gains from early contract terminations at Angamos and higher generation at Chivor due to the life extension project completed in the prior year, lower Parent interest expense due to realized gains on de-designated interest rate swaps and lower interest rates, gain on remeasurement of our interest in sPower's development platform, the prior year other-than-temporary impairment at OPGC, and lower income tax expense. Adjusted EPS, a non-GAAP measure, decreased$0.01 to$0.28 , mainly due to the prior year impacts of a gain on sale of land in theU.S. and incremental capitalized interest inChile , and a higher adjusted tax rate in the current year; partially offset by the commencement of operations of the Southland Energy CCGTs, higher generation at Chivor due to the life extension project completed in the prior year, and lower Parent interest expense due to realized gains on de-designated interest rate swaps and lower interest rates.
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[[Image Removed: aes-20210331_g2.jpg]] (1) See Item 2.-Management's Discussion and Analysis of Financial Condition and Results of Operations-SBU Performance Analysis-Non-GAAP Measures for reconciliation and definition. (2) GWh sold in 2020.
-------------------------------------------------------------------------------- 28 |The AES Corporation |March 31, 2021 Form 10-Q Overview of Strategic Performance AES is leading the industry's transition to clean energy by investing in sustainable growth and innovative solutions. The Company is taking advantage of favorable trends in clean power generation, transmission and distribution, and LNG infrastructure to deliver superior results. Through its presence in key growth markets, AES is well-positioned to benefit from the global transition toward a more sustainable power generation mix. •In year-to-date 2021, the Company was awarded or signed 1,088 MW of renewables and energy storage under long-term PPAs: •459 MW of solar, 359 MW of wind, 35 MW of energy storage, and 24 MW of hydro inthe United States ; and •211 MW of wind inBrazil . •The Company's backlog of 6,926 MW of renewables now includes: •2,570 MW under construction and expected on-line through 2024; and •4,356 MW of renewables signed under long-term PPAs, including a 10-year agreement to supply Google's data centers inVirginia with 500 MW of 24/7 carbon-free energy. •The Company secured a 20-year agreement for 34 TBTU of excess throughput LNG capacity inCentral America , and expects to contract the remaining 45 TBTU in the near-future. The Company is developing and deploying innovative solutions such as battery-based energy storage, digital customer interfaces and energy management. •Fluence, the Company's joint venture with Siemens, is the global leader in the fast-growing energy storage market, which is expected to increase by 40% annually. •In April, Fluence agreed to partner with Northvolt, the leading European battery developer and manufacturer, to develop sustainable, next-generation battery systems for grid-scale energy storage, to lower total cost of ownership and improve functionality.
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Three
Months Ended March
31,
(in millions, except per share amounts) 2021 2020 $ change % change Revenue: US and Utilities SBU$ 949 $ 971 $ (22) -2 % South America SBU 884 712 172 24 % MCAC SBU 535 432 103 24 % Eurasia SBU 270 225 45 20 % Corporate and Other 24 28 (4) -14 % Eliminations (27) (30) 3 10 % Total Revenue 2,635 2,338 297 13 % Operating Margin: US and Utilities SBU 107 120 (13) -11 % South America SBU 352 177 175 99 % MCAC SBU 122 140 (18) -13 % Eurasia SBU 59 51 8 16 % Corporate and Other 32 32 - - % Eliminations (8) (13) 5 38 % Total Operating Margin 664 507 157 31 % General and administrative expenses (46) (38) (8) 21 % Interest expense (190) (233) 43 -18 % Interest income 68 70 (2) -3 % Loss on extinguishment of debt (1) (1) - - % Other expense (16) (4) (12) NM Other income 43 45 (2) -4 % Loss on disposal and sale of business interests (5) - (5) NM Asset impairment expense (473) (6) (467) NM Foreign currency transaction gains (losses) (35) 24 (59) NM Other non-operating expense - (44) 44 -100 % Income tax expense (8) (89) 81 -91 % Net equity in losses of affiliates (30) (2) (28) NM INCOME (LOSS) FROM CONTINUING OPERATIONS (29) 229 (258) NM
Less: Net income attributable to noncontrolling interests and redeemable stock of subsidiaries
(119) (85) (34) 40 % NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION$ (148) $ 144 $ (292) NM Net cash provided by operating activities$ 253 $ 373 $ (120) -32 % Components of Revenue, Cost of Sales, and Operating Margin - Revenue includes revenue earned from the sale of energy from our utilities and the production and sale of energy from our generation plants, which are classified as regulated and non-regulated, respectively, on the Condensed Consolidated Statements of Operations. Revenue also includes the gains or losses on derivatives associated with the sale of electricity. Cost of sales includes costs incurred directly by the businesses in the ordinary course of business. Examples include electricity and fuel purchases, operations and maintenance costs, depreciation and amortization expenses, bad debt expense and recoveries, and general administrative and support costs (including employee-related costs directly associated with the operations of the business). Cost of sales also includes the gains or losses on derivatives (including embedded derivatives other than foreign currency embedded derivatives) associated with the purchase of electricity or fuel. Operating margin is defined as revenue less cost of sales.
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Revenue (in millions) [[Image Removed: aes-20210331_g3.jpg]] Consolidated Revenue - Revenue increased$297 million , or 13%, for the three months endedMarch 31, 2021 , compared to the three months endedMarch 31, 2020 . Excluding the unfavorable FX impact of$28 million , primarily inSouth America , this increase was driven by: •$212 million inSouth America primarily driven by the revenue recognized at Angamos for the early termination of contracts with Minera Escondida andMinera Spence , and by higher availability inColombia from higher reservoir levels; •$104 million in MCAC driven by higher LNG sales in theDominican Republic , and higher pass-through fuel prices inMexico ; and •$32 million in Eurasia mainly driven by higher sales and generation inBulgaria . These favorable impacts were partially offset by a decrease of$22 million in US and Utilities driven by unrealized losses from open positions of commodity derivatives at Southland, partially offset by higher sales at Southland Energy due to the timing of the commencement of the PPA periods. Operating Margin (in millions) [[Image Removed: aes-20210331_g4.jpg]] Consolidated Operating Margin - Operating margin increased$157 million , or 31%, for the three months endedMarch 31, 2021 , compared to the three months endedMarch 31, 2020 . Excluding the unfavorable FX impact of$23 million , primarily inSouth America , this increase was mainly driven by: •$201 million inSouth America primarily due to the drivers discussed above. This favorable impact was partially offset by a decrease of: •$17 million in MCAC driven by a decrease in generation inPanama primarily due to the disconnection of the Estrella del Mar I power barge in the prior year, decreased availability and higher fixed costs inMexico , and decreased availability in theDominican Republic due to an outage at Itabo, partially offset by higher LNG sales in theDominican Republic driven by the Eastern Pipeline COD in 2020; and •$13 million in US and Utilities primarily due to the drivers discussed above. -------------------------------------------------------------------------------- 31 |The AES Corporation |March 31, 2021 Form 10-Q See Item 2.-Management's Discussion and Analysis of Financial Condition and Results of Operations-SBU Performance Analysis of this Form 10-Q for additional discussion and analysis of operating results for each SBU. Consolidated Results of Operations - Other General and administrative expenses General and administrative expenses increased$8 million , or 21%, to$46 million for the three months endedMarch 31, 2021 , compared to$38 million for the three months endedMarch 31, 2020 , primarily due to business development activity, including costs at Clean Energy that had previously been incurred at sPower and reported within earnings from equity affiliates, and higher people costs. Interest expense Interest expense decreased$43 million , or 18%, to$190 million for the three months endedMarch 31, 2021 , compared to$233 million for the three months endedMarch 31, 2020 . This decrease is primarily due to realized gains on de-designated interest rate swaps and lower interest rates related to refinancing at the Parent Company, partially offset by incremental capitalized interest inChile in the prior period and lower capitalized interest due to the commencement of operations at theAlamitos andHuntington Beach facilities inFebruary 2020 . Interest income Interest income decreased$2 million , or 3%, to$68 million for the three months endedMarch 31, 2021 , compared to$70 million for the three months endedMarch 31, 2020 with no material drivers. Other income and expense Other income decreased$2 million , or 4%, to$43 million for the three months endedMarch 31, 2021 , compared to$45 million for the three months endedMarch 31, 2020 , primarily due to the prior year gain on sale ofRedondo Beach land at Southland. This was partially offset by the current year gain on remeasurement of our equity interest in the sPower development platform to its acquisition-date fair value, recognized as part of the merger to formAES Clean Energy Development . Other expense increased$12 million to$16 million for the three months endedMarch 31, 2021 , compared to$4 million for the three months endedMarch 31, 2020 , primarily due to a loss recognized at commencement of a sales-type lease atAES Distributed Energy . See Note 14-Other Income and Expense and Note 18-Acquisitions included in Item 1.-Financial Statements of this Form 10-Q for further information. Loss on disposal and sale of business interests Loss on disposal and sale of business interests was$5 million for the three months endedMarch 31, 2021 , primarily due to additional loss on the sale of Uruguaiana. There was no gain or loss on disposal and sale of business interest during the three months endedMarch 31, 2020 . Asset impairment expense Asset impairment expense increased$467 million to$473 million for the three months endedMarch 31, 2021 , compared to$6 million for the three months endedMarch 31, 2020 . This increase was primarily due to a$475 million impairment atPuerto Rico associated with the economic costs and reputational risks of disposal of coal combustion residuals off island. See Note 15-Asset Impairment Expense included in Item 1.-Financial Statements of this Form 10-Q for further information. Foreign currency transaction gains (losses) Three Months Ended March 31, (in millions) 2021 2020 Chile$ 8 $ 22 Argentina (41) 3 Other (2) (1) Total (1)$ (35) $ 24
___________________________________________
(1)Includes losses of
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32 |The AES Corporation |March 31, 2021 Form 10-QThe Company recognized net foreign currency transaction losses of$35 million for the three months endedMarch 31, 2021 , primarily due to unrealized losses on foreign currency derivatives related to government receivables inArgentina , partially offset by unrealized derivative gains on foreign currency derivatives inSouth America due to the depreciating Colombian peso. The Company recognized net foreign currency transaction gains of$24 million for the three months endedMarch 31, 2020 , primarily due to realized and unrealized gains on foreign currency derivatives inSouth America due to the depreciating Colombian peso. Other non-operating expense Other non-operating expense was$44 million for the three months endedMarch 31, 2020 . InMarch 2020 , the Company recognized a$43 million other-than-temporary impairment of the OPGC equity method investment due to the economic slowdown. There were no other non-operating expenses during the three months endedMarch 31, 2021 . See Note 6- Investments in and Advances to Affiliates included in Item 1.-Financial Statements of this Form 10-Q for further information. Income tax expense Income tax expense decreased$81 million , or 91%, to$8 million for the three months endedMarch 31, 2021 , compared to$89 million for the three months endedMarch 31, 2020 . The Company's effective tax rates were 89% and 28% for the three months endedMarch 31, 2021 and 2020, respectively. This net increase in the effective tax rate was primarily due to the impact of the asset impairment atPuerto Rico in 2021. The prior year effective tax rate was impacted by the recognition of tax benefit related to a depreciating Peso in certain of our Mexican subsidiaries, partially offset by the impact of the other-than-temporary impairment of the OPGC equity method investment. See Note 15-Asset Impairment Expense included in Item 1.-Financial Statements of this Form 10-Q for details of the asset impairment and Note 6-Investments In and Advances to Affiliates included in Item 1.-Financial Statements of this Form 10-Q for further information regarding the other-than-temporary impairment. Our effective tax rate reflects the tax effect of significant operations outside theU.S. , which are generally taxed at rates different than theU.S. statutory rate of 21%. Furthermore, our foreign earnings may be subjected to incrementalU.S. taxation under the GILTI rules. A future proportionate change in the composition of income before income taxes from foreign and domestic tax jurisdictions could impact our periodic effective tax rate. Net equity in losses of affiliates Net equity in losses of affiliates increased$28 million to$30 million for the three months endedMarch 31, 2021 , compared to$2 million for the three months endedMarch 31, 2020 . This increase was primarily driven by a decrease in earnings at Mesa La Paz of$13 million due to higher income taxes caused by the fluctuation of the Mexican peso and a decrease in earnings at Guacolda of$8 million due to the suspension of equity method accounting inSeptember 2020 . See Note 6- Investments in and Advances to Affiliates included in Item 1.-Financial Statements of this Form 10-Q for further information. Net income attributable to noncontrolling interests and redeemable stock of subsidiaries Net income attributable to noncontrolling interests and redeemable stock of subsidiaries increased$34 million , or 40%, to$119 million for the three months endedMarch 31, 2021 , compared to$85 million for the three months endedMarch 31, 2020 . This increase was primarily due to: •Higher earnings inChile due to net gains from early contract terminations at Angamos, partially offset by higher interest expense due to prior year incremental capitalized interest; and •Higher earnings inColombia due to the life extension project at the Chivor hydroelectric plant completed in the prior year. These increases were partially offset by: •Lower earnings inPanama due to the disconnection of the Estrella del Mar power barge. -------------------------------------------------------------------------------- 33 |The AES Corporation |March 31, 2021 Form 10-Q Net income (loss) attributable toThe AES Corporation Net income attributable toThe AES Corporation decreased$292 million , to a loss of$148 million for the three months endedMarch 31, 2021 , compared to income of$144 million for the three months endedMarch 31, 2020 . This decrease was primarily due to: •Long-lived asset impairment atPuerto Rico ; •Prior year gain on sale of land held by AES Redondo Beach at Southland; •Unrealized losses on foreign currency derivatives related to government receivables inArgentina ; and •Prior year incremental capitalized interest inChile . These decreases were partially offset by: •Higher margins at our South America SBU due to net gains from early contract terminations at Angamos; •Lower Parent interest expense due to realized gains on de-designated interest rate swaps and lower interest rates; •Prior year other-than-temporary impairment at OPGC; •Gain on remeasurement of our equity interest in the sPower development platform to acquisition-date fair value; and •Lower income tax expense. SBU Performance Analysis Non-GAAP Measures Adjusted Operating Margin, Adjusted PTC, and Adjusted EPS are non-GAAP supplemental measures that are used by management and external users of our condensed consolidated financial statements such as investors, industry analysts, and lenders. During the year endedDecember 31, 2020 , the Company changed the definitions of Adjusted Operating Margin, Adjusted PTC, and Adjusted EPS to exclude net gains at Angamos, one of our businesses in the South America SBU, associated with the early contract terminations with Minera Escondida andMinera Spence . We believe the inclusion of the effects of this non-recurring transaction would result in a lack of comparability in our results of operations and would distort the metrics that our investors use to measure us. During the three months endedMarch 31, 2021 , the Company changed the definitions of Adjusted Operating Margin, Adjusted PTC, and Adjusted EPS to remove the adjustment for costs directly associated with a major restructuring program, including, but not limited to, workforce reduction efforts, relocations, and office consolidation. As this adjustment was specific to the major restructuring program announced by the Company in 2018, we believe removing this adjustment from our non-GAAP definitions provides simplification and clarity for our investors. Adjusted Operating Margin We define Adjusted Operating Margin as Operating Margin, adjusted for the impact of NCI, excluding (a) unrealized gains or losses related to derivative transactions; (b) benefits and costs associated with dispositions and acquisitions of business interests, including early plant closures; and (c) net gains at Angamos, one of our businesses in the South America SBU, associated with the early contract terminations with Minera Escondida andMinera Spence . The allocation of HLBV earnings to noncontrolling interests is not adjusted out of Adjusted Operating Margin. See Review of Consolidated Results of Operations for the definition of Operating Margin. The GAAP measure most comparable to Adjusted Operating Margin is Operating Margin. We believe that Adjusted Operating Margin better reflects the underlying business performance of the Company. Factors in this determination include the impact of NCI, where AES consolidates the results of a subsidiary that is not wholly owned by the Company, as well as the variability due to unrealized gains or losses related to derivative transactions and strategic decisions to dispose of or acquire business interests. Adjusted Operating Margin should not be construed as an alternative to Operating Margin, which is determined in accordance with GAAP.
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Three Months Ended
March 31, Reconciliation of Adjusted Operating Margin (in millions) 2021 2020 Operating Margin$ 664 $ 507 Noncontrolling interests adjustment (1) (209) (169) Unrealized derivative losses 44 (12) Disposition/acquisition losses 2 2 Net gains from early contract terminations at Angamos (110) - Total Adjusted Operating Margin
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(1)The allocation of HLBV earnings to noncontrolling interests is not adjusted out of Adjusted Operating Margin.
[[Image Removed: aes-20210331_g5.jpg]] Adjusted PTC We define Adjusted PTC as pre-tax income from continuing operations attributable toThe AES Corporation excluding gains or losses of the consolidated entity due to (a) unrealized gains or losses related to derivative transactions and equity securities; (b) unrealized foreign currency gains or losses; (c) gains, losses, benefits and costs associated with dispositions and acquisitions of business interests, including early plant closures, and gains and losses recognized at commencement of sales-type leases; (d) losses due to impairments; (e) gains, losses and costs due to the early retirement of debt; and (f) net gains at Angamos, one of our businesses in the South America SBU, associated with the early contract terminations with Minera Escondida andMinera Spence . Adjusted PTC also includes net equity in earnings of affiliates on an after-tax basis adjusted for the same gains or losses excluded from consolidated entities. Adjusted PTC reflects the impact of NCI and excludes the items specified in the definition above. In addition to the revenue and cost of sales reflected in Operating Margin, Adjusted PTC includes the other components of our income statement, such as general and administrative expenses in the Corporate segment, as well as business development costs, interest expense and interest income, other expense and other income, realized foreign currency transaction gains and losses, and net equity in earnings of affiliates. The GAAP measure most comparable to Adjusted PTC is income from continuing operations attributable toThe AES Corporation . We believe that Adjusted PTC better reflects the underlying business performance of the Company and is the most relevant measure considered in the Company's internal evaluation of the financial performance of its segments. Factors in this determination include the variability due to unrealized gains or losses related to derivative transactions or equity securities remeasurement, unrealized foreign currency gains or losses, losses due to impairments, strategic decisions to dispose of or acquire business interests or retire debt, and the non-recurring nature of the impact of the early contract terminations at Angamos, which affect results in a given period or periods. In addition, earnings before tax represents the business performance of the Company before the application of statutory income tax rates and tax adjustments, including the effects of tax planning, corresponding to the various jurisdictions in which the Company operates. Given its large number of businesses and complexity, the Company concluded that Adjusted PTC is a more transparent measure that better assists investors in determining which businesses have the greatest impact on the Company's results. Adjusted PTC should not be construed as an alternative to income from continuing operations attributable to
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Three Months Ended
March 31, Reconciliation of Adjusted PTC (in millions) 2021 2020
Income (loss) from continuing operations, net of tax, attributable to
(36) 55 Pre-tax contribution (184) 199 Unrealized derivative and equity securities losses (gains) 69 (16) Unrealized foreign currency losses (gains) 6 9 Disposition/acquisition losses (gains) (15) 1 Impairment losses 475 53 Loss on extinguishment of debt 6 4 Net gains from early contract terminations at Angamos (110) - Total Adjusted PTC$ 247 $ 250 [[Image Removed: aes-20210331_g6.jpg]] Adjusted EPS We define Adjusted EPS as diluted earnings per share from continuing operations excluding gains or losses of both consolidated entities and entities accounted for under the equity method due to (a) unrealized gains or losses related to derivative transactions and equity securities; (b) unrealized foreign currency gains or losses; (c) gains, losses, benefits and costs associated with dispositions and acquisitions of business interests, including early plant closures, and the tax impact from the repatriation of sales proceeds, and gains and losses recognized at commencement of sales-type leases; (d) losses due to impairments; (e) gains, losses and costs due to the early retirement of debt; (f) net gains at Angamos, one of our businesses in the South America SBU, associated with the early contract terminations with Minera Escondida andMinera Spence ; and (g) tax benefit or expense related to the enactment effects of 2017U.S. tax law reform and related regulations and any subsequent period adjustments related to enactment effects. The GAAP measure most comparable to Adjusted EPS is diluted earnings per share from continuing operations. We believe that Adjusted EPS better reflects the underlying business performance of the Company and is considered in the Company's internal evaluation of financial performance. Factors in this determination include the variability due to unrealized gains or losses related to derivative transactions or equity securities remeasurement, unrealized foreign currency gains or losses, losses due to impairments, strategic decisions to dispose of or acquire business interests or retire debt, the one-time impact of the 2017 U.S. tax law reform and subsequent period adjustments related to enactment effects, and the non-recurring nature of the impact of the early contract terminations at Angamos, which affect results in a given period or periods. Adjusted EPS should not be construed as an alternative to diluted earnings per share from continuing operations, which is determined in accordance with GAAP.
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Three Months Ended
March 31, Reconciliation of Adjusted EPS 2021 2020 Diluted earnings (loss) per share from continuing operations$ (0.22) $ 0.22 Unrealized derivative and equity securities losses (gains) 0.10 (1) (0.02) Unrealized foreign currency losses 0.01 0.01 Disposition/acquisition gains (0.02) (2) - Impairment losses 0.71 (3) 0.08 (4) Loss on extinguishment of debt 0.01 - Net gains from early contract terminations at Angamos (0.16) (5) - Less: Net income tax benefit (0.15) (6) - Adjusted EPS$ 0.28 $ 0.29
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(1)Amount primarily relates to unrealized derivative losses inArgentina mainly associated with foreign currency derivatives on government receivables of$38 million , or$0.06 per share, and net unrealized derivative losses on power and commodities swaps at Southland of$33 million , or$0.05 per share. (2)Amount primarily relates to gain on remeasurement of our equity interest in sPower to acquisition-date fair value of$36 million , or$0.05 per share, partially offset by day-one loss recognized at commencement of a sales-type lease atAES Distributed Energy of$13 million , or$0.02 per share. (3)Amount primarily relates to asset impairment atPuerto Rico of$475 million , or$0.71 per share. (4)Amount primarily relates to other-than-temporary impairment of OPGC of$43 million , or$0.06 per share. (5)Amount relates to net gains at Angamos associated with the early contract terminations with Minera Escondida andMinera Spence of$110 million , or$0.16 per share. (6)Amount primarily relates to income tax benefits associated with the impairment atPuerto Rico of$119 million , or$0.18 per share, partially offset by income tax expense related to net gains at Angamos associated with the early contract terminations with Minera Escondida andMinera Spence of$28 million , or$0.04 per share. US and Utilities SBU The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated: Three Months Ended March 31, 2021 2020 $ Change % Change Operating Margin$ 107 $ 120 $ (13) -11 % Adjusted Operating Margin (1) 126 84 42 50 % Adjusted PTC (1) 44 71 (27) -38 %
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(1) A non-GAAP financial measure, adjusted for the impact of NCI. See SBU Performance Analysis-Non-GAAP Measures for definition and Item 1.-Business included in our 2020 Form 10-K for the respective ownership interest for key businesses. Operating Margin for the three months endedMarch 31, 2021 decreased$13 million , or 11%, which was driven primarily by the following (in millions): Decrease at Southland mainly due to higher unrealized losses from open positions of commodity derivatives$ (44) Increase at Southland Energy primarily due to CCGT units operating a full quarter in 2021 and the commencement of the PPA periods, partially offset by decrease in gain from commodity derivatives
29
Increase at DPL due to higher regulated retail margin primarily due to higher volumes from favorable weather and higher transmission rates
7 Other
(5)
Total US and Utilities SBU Operating Margin Decrease
Adjusted Operating Margin increased$42 million primarily due to the drivers above, adjusted for NCI and excluding unrealized gains and losses on derivatives. Adjusted PTC decreased$27 million , primarily driven by the gain in 2020 on sale of land held by AES Redondo Beach at Southland and a decrease at sPower primarily related to higher allocated losses from tax equity partnerships in 2021, partially offset by the increase in Adjusted Operating Margin described above. South America SBU The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated: Three Months Ended March 31, 2021 2020 $ Change % Change Operating Margin$ 352 $ 177 $ 175 99 % Adjusted Operating Margin (1) 112 95 17 18 % Adjusted PTC (1) 88 119 (31) -26 %
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(1) A non-GAAP financial measure, adjusted for the impact of NCI. See SBU Performance Analysis-Non-GAAP Measures for definition and Item 1.-Business included in our 2020 Form 10-K for the respective ownership interest for key businesses.
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$ 154 Higher margin inColombia related to higher reservoir level as a result of the life extension project executed during Q1 2020
39
Lower energy and capacity prices partially offset by commencement of operations
of wind facilities in
(13)
Lower margin in
(5)
Total South America SBU Operating Margin Increase
Adjusted Operating Margin increased$17 million due to the drivers above, adjusted for NCI and the net gains on early contract terminations at Angamos. Adjusted PTC decreased$31 million , mainly driven by higher realized foreign currency losses atArgentina and the impact of gains on foreign currency derivative instruments booked atChile in the prior period, higher interest expense primarily associated with incremental capitalized interest at Alto Maipo in the prior period, and lower equity earnings at Guacolda due to the suspension of equity method accounting inSeptember 2020 . See Note 6-Investments in and Advances to Affiliates included in Item 1.-Financial Statements of this Form 10-Q for further information. These negative impacts were partially offset by the increase in Adjusted Operating Margin described above. MCAC SBU The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated: Three Months Ended March 31, 2021 2020 $ Change % Change Operating Margin$ 122 $ 140 $ (18) -13 % Adjusted Operating Margin (1) 84 93 (9) -10 % Adjusted PTC (1) 61 78 (17) -22 %
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(1) A non-GAAP financial measure, adjusted for the impact of NCI. See SBU Performance Analysis-Non-GAAP Measures for definition and Item 1.-Business included in our 2020 Form 10-K for the respective ownership interest for key businesses. Operating Margin for the three months endedMarch 31, 2021 decreased$18 million , or 13%, which was driven primarily by the following (in millions): Decrease inPanama mainly driven byEstrella del Mar I power barge disconnection inJuly 2020 , partially offset by wind project acquired in Q2 2020$ (10)
Decrease in
(7)
Decrease in
(6) Increase inDominican Republic driven by higher availability due to the outage of Andres in 2020 and higher LNG sales driven by Eastern Pipeline COD in 2020, partially offset by lower contract and spot margin in Andres and DPP 6 Other (1) Total MCAC SBU Operating Margin Decrease$ (18) Adjusted Operating Margin decreased$9 million due to the drivers above, adjusted for NCI. Adjusted PTC decreased$17 million , mainly driven by the decrease in Adjusted Operating Margin described above and lower equity earnings inMexico mainly due to higher income tax as a result of the fluctuation of the Mexican peso in the prior period. -------------------------------------------------------------------------------- 38 |The AES Corporation |March 31, 2021 Form 10-Q Eurasia SBU The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated: Three Months Ended March 31, 2021 2020 $ Change % Change Operating Margin$ 59 $ 51 $ 8 16 % Adjusted Operating Margin (1) 44 38 6 16 % Adjusted PTC (1) 51 44 7 16 % _____________________________ (1) A non-GAAP financial measure, adjusted for the impact of NCI. See SBU Performance Analysis-Non-GAAP Measures for definition and Item 1.-Business included in our 2020 Form 10-K for the respective ownership interest for key businesses. Operating Margin for the three months endedMarch 31, 2021 increased$8 million , or 16%, which was driven primarily by the following (in millions): Improved operational performance and Euro appreciation in Maritza$ 6 Other 2 Total Eurasia SBU Operating Margin Increase$ 8 Adjusted Operating Margin increased$6 million due to the drivers above, adjusted for NCI. Adjusted PTC increased$7 million , mainly driven by the increase in Adjusted Operating Margin described above. Key Trends and Uncertainties During the remainder of 2021 and beyond, we expect to face the following challenges at certain of our businesses. Management expects that improved operating performance at certain businesses, growth from new businesses and global cost reduction initiatives may lessen or offset their impact. If these favorable effects do not occur, or if the challenges described below and elsewhere in this section impact us more significantly than we currently anticipate, or if volatile foreign currencies and commodities move more unfavorably, then these adverse factors (or other adverse factors unknown to us) may have a material impact on our operating margin, net income attributable toThe AES Corporation , and cash flows. We continue to monitor our operations and address challenges as they arise. For the risk factors related to our business, see Item 1.-Business and Item 1A.-Risk Factors of our 2020 Form 10-K. COVID-19 Pandemic The COVID-19 pandemic has impacted global economic activity, including electricity and energy consumption, and caused significant volatility in financial markets. The following discussion highlights our assessment of the impacts of the pandemic on our current financial and operating status, and our financial and operational outlook based on information known as of this filing. Also see Item 1A.-Risk Factors of our 2020 Form 10-K. Throughout the COVID-19 pandemic we have conducted our essential operations without significant disruption. We derive approximately 85% of our total revenues from our regulated utilities and long-term sales and supply contracts or PPAs at our generation businesses, which contributes to a relatively stable revenue and cost structure at most of our businesses. In 2020, the impact of the COVID-19 pandemic on the energy market materialized in our operational locations in the second quarter and was generally better than our revised expectations for the second of half of the year. Across our global portfolio, our utilities businesses have generally performed in line with our expectations consistent with a recovery from the COVID-19 pandemic in the first quarter of 2021. While we cannot predict the length and magnitude of the pandemic or how it could impact global economic conditions, a delayed or disrupted recovery with respect to demand may adversely impact our financial results for 2021. Our credit exposures have continued in-line with historical levels and within the customary 45-60 day grace period. We have not experienced any material credit-related impacts from our PPA offtakers due to the COVID-19 pandemic. Our supply chain management has remained robust during this challenging time and we continue to closely manage and monitor developments. We continue to experience certain minor delays in some of our development projects, primarily in permitting processes and the implementation of interconnections, due to governments and other authorities having limited capacity to perform their functions. -------------------------------------------------------------------------------- 39 |The AES Corporation |March 31, 2021 Form 10-QThe Company continues to monitor the potential impact of the COVID-19 pandemic on our financial results and operations. Additionally, governments continue to look for ways to increase revenues,which could result in tax law changes in the future. Macroeconomic and Political During the past few years, some countries where our subsidiaries conduct business have experienced macroeconomic and political changes. In the event these trends continue, there could be an adverse impact on our businesses.Chile - In recent years,Chile has experienced significant social unrest resulting in anOctober 2020 referendum that determined that a new constitution will be drafted by a constitutional convention following further votes expected inMay 2021 and in 2022. In addition, other initiatives to address the social unrest are under consideration and could result in regulatory or policy changes that may affect our results of operations inChile . InNovember 2019 , the Chilean government enacted Law 21,185 that establishes aStabilization Fund for regulated energy prices. As discussed in Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations-Key Trends and Uncertainties of the 2020 Form 10-K,AES Gener executed an agreement inDecember 2020 for the sale of the receivables generated pursuant the Tariff Stabilization Law, of which$55 million was collected in 2021.Puerto Rico - As discussed in Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations-Key Trends and Uncertainties of the 2020 Form 10-K, our subsidiaries inPuerto Rico have a long-term PPA with state-owned PREPA, which has been facing economic challenges that could result in a material adverse effect on our business inPuerto Rico .AES Puerto Rico and AES Ilumina's non-recourse debt of$238 million and$31 million , respectively, continue to be in technical default and are classified as current as ofMarch 31, 2021 as a result of PREPA's bankruptcy filing inJuly 2017 . The Company is in compliance with its debt payment obligations as ofMarch 31, 2021 . The Company's receivable balances inPuerto Rico as ofMarch 31, 2021 totaled$53 million , of which$1 million was overdue. Despite the Title III protection, PREPA has been making substantially all of its payments to the generators in line with historical payment patterns. New factors arose in the first quarter of 2021 associated with the economic costs and operational and reputational risks of disposal of coal combustion residuals off island. In addition, new legislative initiatives surrounding the prohibition of coal generation assets inPuerto Rico were introduced. Collectively, these factors along with management's decision on how to best achieve our decarbonization goals resulted in an indicator of impairment at its asset group inPuerto Rico . The Company performed an impairment analysis and determined that the carrying amount of its coal-fired long-lived assets was not recoverable. As a result, the Company recognized asset impairment expense of$475 million . Reference Rate Reform - As discussed in Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations-Key Trends and Uncertainties of the 2020 Form 10-K, inJuly 2017 , theUK Financial Conduct Authority announced that it intends to phase out LIBOR by the end of 2021. In theU.S. , the Alternative Reference Rate Committee at theFederal Reserve identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative rate for LIBOR; alternative reference rates in other key markets are under development. OnNovember 30, 2020 , theICE Benchmark Association ("IBA") announced it had begun consultation on its intention to cease publication of two specific LIBOR rates byDecember 31, 2021 , while extending the timeline for the overnight, one-month, three-month, six-month, and 12-month USD LIBOR rates throughJune 30, 2023 . OnMarch 5, 2021 , IBA published a feedback statement for the consultation, announcing its intention to cease the publication of these rates on the specified dates. AES holds a substantial amount of debt and derivative contracts referencing LIBOR as an interest rate benchmark. Although the full impact of the reform remains unknown, we have begun to engage with AES counterparties to discuss specific action items to be undertaken in order to prepare for amendments when they become due. Global Tax Legislation - The macroeconomic and political environments in theU.S. and some countries where our subsidiaries conduct business have changed during 2020 and 2021. This could result in significant impacts to tax law. For example, the American Rescue Plan Act of 2021 was signed into law onMarch 11, 2021 . The$1.9 trillion Act includes COVID-19 relief as well as broader stimulus, but also includes several revenue-raising and business tax provisions. Two corporate income tax increases partially offset the cost of the -------------------------------------------------------------------------------- 40 |The AES Corporation |March 31, 2021 Form 10-Q bill: the elimination of a beneficial foreign tax credit rule, set to take effect in 2021, and the expansion of executive compensation deduction limits effective in 2027. Further, in the first quarter of 2021,President Biden announced the "American Jobs Plan", a$2 trillion spending package that would include funding for clean energy focused infrastructure investments, and the "Made in America Tax Plan", which seeks to increase theU.S. corporate tax rate and effect international tax reforms. Additionally, Congressional democrats introduced the "No Tax Breaks for Offshoring" and "Stop Tax Haven Abuse Acts", both of which seek to increaseU.S. taxes related to the non-U.S. activities ofU.S. headquartered companies. The Company believes it would benefit from the clean energy initiatives though the tax implications may be unfavorable in the short term. Additional details regarding these potential changes in law are expected to be made available in the second quarter. Decarbonization Initiatives Several initiatives have been announced by regulators and offtakers in recent years, with the intention of reducing GHG emissions generated by the energy industry. Our strategy of shifting towards clean energy platforms, including renewable energy, energy storage, LNG and modernized grids is designed to position us for continued growth while reducing our carbon intensity. The shift to renewables has caused certain customers to migrate to other low-carbon energy solutions and this trend may continue. Certain of our contracts contain clauses designed to compensate for early contract terminations, but we cannot guarantee full recovery. Although the Company cannot currently estimate the financial impact of these decarbonization initiatives, new legislative or regulatory programs further restricting carbon emissions could require material capital expenditures, result in a reduction of the estimated useful life of certain coal facilities, or have other material adverse effects on our financial results. For further discussion of our strategy of shifting towards clean energy platforms see Overview of Strategic Performance. Chilean Decarbonization Plan - The Chilean government has announced an initiative to phase out coal power plants by 2040 and achieve carbon neutrality by 2050. OnJune 4, 2019 ,AES Gener signed an agreement with the Chilean government to cease the operation of two coal units for a total of 322 MW as part of the phase-out. Under the agreement,Ventanas 1 (114 MW) will cease operation inNovember 2022 andVentanas 2 (208 MW) inMay 2024 ; however,AES Gener has announced its intention to accelerate the disconnection of these units. OnDecember 26, 2020 , the Chilean government issued Supreme Decree Number 42, which allows coal plants to remain connected to the grid in "strategic reserve status" for five years after ceasing operations, receive a reduced capacity payment, and dispatch, if necessary, to ensure the electric system's reliability. OnDecember 29, 2020 ,Ventanas 1 ceased operation and entered "strategic reserve status."Ventanas 2 is also expected to enter "strategic reserve status" inAugust 2021 . Considering the information available as of the filing date, management believes the carrying amount of our coal-fired long-lived assets inChile of$1.9 billion is recoverable as ofMarch 31, 2021 . Puerto Rico Energy Public Policy Act - OnApril 11, 2019 , the Governor ofPuerto Rico signed the Puerto Rico Energy Public Policy Act ("the Act") establishing guidelines for grid efficiency and eliminating coal as a source for electricity generation byJanuary 1, 2028 . The Act supports the accelerated deployment of renewables through the Renewable Portfolio Standard and the conversion of coal generating facilities to other fuel sources, with compliance targets of 40% by 2025, 60% by 2040, and 100% by 2050.AES Puerto Rico's long-term PPA with PREPA expiresNovember 30, 2027 . PREPA andAES Puerto Rico have discussed various strategic alternatives, but have not reached any agreement. As described under Macroeconomic and Political above, additional factors arose in the first quarter of 2021 with respect to the disposal of coal combustion residuals, which contributed to the Company recognizing an asset impairment expense of$475 million .Hawaii - InJuly 2020 , theHawaii State Legislature passed Senate Bill 2629 that prohibits AES Hawaii from generating electricity from coal afterDecember 31, 2022 . This bill will restrict the Company from contracting the asset beyond the expiration of its existing PPA. Considering the information available as of the filing date, management believes the carrying amount of our coal-fired long-lived assets inHawaii of$30 million is recoverable as ofMarch 31, 2021 . For further information about the risks associated with decarbonization initiatives, see Item 1A.-Risk Factors-Concerns about GHG emissions and the potential risks associated with climate change have led to increased regulation and other actions that could impact our businesses included in the 2020 Form 10-K. -------------------------------------------------------------------------------- 41 |The AES Corporation |March 31, 2021 Form 10-Q Regulatory AES Maritza PPA Review - DG Comp is conducting a preliminary review of whether AES Maritza's PPA with NEK is compliant with theEuropean Union's State Aid rules. No formal investigation has been launched by DG Comp to date. However, AES has begun engaging in discussions with the DG Comp case team and the Government ofBulgaria ("GoB") to attempt to reach a negotiated resolution of DG Comp's review ("PPA Discussions"). Separately, earlier this year, GoB submitted its proposed plan for the reform and liberalization of its electricity market to theEuropean Commission (the "Market Reform Plan"). The proposed Market Reform Plan is part of GoB's plan to introduce a market-wide capacity remuneration mechanism, which would require approval by DG Comp. The Market Reform Plan proposes a deadline ofJune 30, 2021 for the termination of AES Maritza's PPA, and anticipates discussions with AES Maritza about that issue. There can be no assurance that, as part of the PPA Discussions, the other parties will not seek a prompt termination of the PPA. We do not believe termination of the PPA is justified. Nevertheless, the PPA Discussions will involve a range of potential outcomes, including but not limited to the termination of the PPA and payment of some level of compensation to AES Maritza. Any negotiated resolution would be subject to mutually acceptable terms, lender consent, and DG Comp approval. At this time, we cannot predict the outcome of the PPA Discussions or when those discussions will conclude. Nor can we predict how DG Comp might resolve its review if the PPA Discussions fail to result in an agreement concerning the agency's review. AES Maritza believes that its PPA is legal and in compliance with all applicable laws, and it will take all actions necessary to protect its interests, whether through negotiated agreement or otherwise. However, there can be no assurance that this matter will be resolved favorably; if it is not, there could be a material adverse effect on the Company's financial condition, results of operation, and cash flows. Considering the information available as of the filing date, management believes the carrying value of our long-lived assets at Maritza of approximately$1 billion is recoverable as ofMarch 31, 2021 . AES Indiana Replacement Generation - OnFebruary 26, 2021 , as a result of the plans to retire approximately 630 MW of coal-fired generation atPetersburg units 1 and 2 in 2021 and 2023, respectively,AES Indiana filed a petition with the IURC for approvals and cost recovery associated with these retirements, including: (1) approval ofAES Indiana's creation of regulatory assets for the net book value ofPetersburg units 1 and 2 upon retirement; (2) amortization of the regulatory assets based uponAES Indiana's depreciation rates; and (3) recovery of the regulatory assets through inclusion inAES Indiana's rate base and ongoing amortization inAES Indiana's future rate cases. AES Indiana Excess Distributed Generation Rates - OnMarch 1, 2021 ,AES Indiana filed a petition with the IURC for approval of its proposed rate for the procurement of excess distributed generation ("EDG") and related customer EDG credit issues. The EDG rate will replace the current net metering program and will be offered beginningJuly 2022 , when net metering is no longer available to new customers. AES Ohio Transmission Service - InMarch 2020 , AES Ohio filed an application for a formula-based rate for its transmission service, which was approved and made effectiveMay 3, 2020 , subject to further proceeding and potential refunds. InDecember 2020 , a unanimous settlement was reached regarding these rates and filed with theFERC , which was approved onApril 15, 2021 . Foreign Exchange Rates We operate in multiple countries and as such are subject to volatility in exchange rates at varying degrees at the subsidiary level and between our functional currency, the USD, and currencies of the countries in which we operate. For additional information, refer to Item 3.-Quantitative and Qualitative Disclosures About Market Risk. Impairments Long-lived Assets - During the three months endedMarch 31, 2021 , the Company recognized asset impairment expense of$473 million . See Note 15-Asset Impairment Expense included in Item 1.-Financial Statements of this Form 10-Q for further information. After recognizing this impairment expense, the carrying value of long-lived assets that were assessed for impairment totaled$260 million atMarch 31, 2021 . Events or changes in circumstances that may necessitate recoverability tests and potential impairments of long-lived assets or goodwill may include, but are not limited to, adverse changes in the regulatory environment, unfavorable changes in power prices or fuel costs, increased competition due to additional capacity in the grid, technological advancements, declining trends in demand, evolving industry expectations to transition away from fossil fuel sources for generation, or an expectation it is more likely than not the asset will be disposed of before the -------------------------------------------------------------------------------- 42 |The AES Corporation |March 31, 2021 Form 10-Q end of its estimated useful life. Environmental The Company is subject to numerous environmental laws and regulations in the jurisdictions in which it operates. The Company faces certain risks and uncertainties related to these environmental laws and regulations, including existing and potential GHG legislation or regulations, and actual or potential laws and regulations pertaining to water discharges, waste management (including disposal of coal combustion residuals) and certain air emissions, such as SO2, NOx, particulate matter, mercury and other hazardous air pollutants. Such risks and uncertainties could result in increased capital expenditures or other compliance costs which could have a material adverse effect on certain of ourU.S. or international subsidiaries and our consolidated results of operations. For further information about these risks, see Item 1A.-Risk Factors-Our operations are subject to significant government regulation and our business and results of operations could be adversely affected by changes in the law or regulatory schemes; Several of our businesses are subject to potentially significant remediation expenses, enforcement initiatives, private party lawsuits and reputational risk associated with CCR; Our businesses are subject to stringent environmental laws, rules and regulations; and Concerns about GHG emissions and the potential risks associated with climate change have led to increased regulation and other actions that could impact our businesses included in the 2020 Form 10-K. CSAPR - CSAPR addresses the "good neighbor" provision of the CAA, which prohibits sources within each state from emitting any air pollutant in an amount which will contribute significantly to any other state's nonattainment, or interference with maintenance of, any NAAQS. The CSAPR required significant reductions in SO2 and NOx emissions from power plants in many states in which subsidiaries of the Company operate. The Company is required to comply with the CSAPR in certain states, includingIndiana andMaryland . The CSAPR is implemented, in part, through a market-based program under which compliance may be achievable through the acquisition and use of emissions allowances created by theEPA . The Company complies with CSAPR through operation of existing controls and purchases of allowances on the open market, as needed. InOctober 2016 , theEPA published a final rule to update the CSAPR to address the 2008 ozone NAAQS ("CSAPR Update Rule"). The CSAPR Update Rule found that NOx ozone season emissions in 22 states (includingIndiana ,Maryland ,Ohio , andPennsylvania ) affected the ability of downwind states to attain and maintain the 2008 ozone NAAQS, and, accordingly, theEPA issued federal implementation plans that both updated existing CSAPR NOx ozone season emission budgets for electric generating units within these states and implemented these budgets through modifications to the CSAPR NOx ozone season allowance trading program. Implementation started in the 2017 ozone season (May-September 2017 ). Affected facilities receive fewer ozone season NOx allowances in 2017 and later, possibly resulting in the need to purchase additional allowances. Additionally, onSeptember 13, 2019 , the D.C. Circuit remanded a portion ofOctober 2016 CSAPR Update Rule to theEPA . OnMarch 15, 2021 , theEPA released a pre-publication version of a final rule to address the 2020 D.C. Circuit decision. TheEPA is issuing new or amended federal implementation plans for 12 states, includingIndiana ,Maryland ,Ohio , andPennsylvania , with revised CSAPR NOx ozone season emission budgets for electric generating units within these states via a newCSAPR NOx Ozone Season Group 3 Trading Program. Implementation is expected to begin during the 2021 ozone season (May throughSeptember 2021 ) with an effective date 60 days following publication in theFederal Register of the final rule.AES Indiana facilities and AES Warrior Run inMaryland will receive fewer ozone season NOx allowances for future NOx Ozone Seasons likely beginning in 2021 and later, possibly resulting in the need to purchase additional allowances. In addition, subject sources in these states will be required to surrender an equivalent number of previously allocated 2021-2024 Group 2 allowances by deadlines expected to occur in 2021. This requirement applies inclusive of assets and allowances that have since been sold and/or retired, including former AES assets inOhio andPennsylvania . While AES no longer operates electric generating units subject to the revised CSAPR Update Rule inOhio orPennsylvania , certain prior AES sources in these states will be required to surrender an equivalent number of previously allocated 2021-2024 Group 2 allowances. While the Company's additional CSAPR compliance costs to date have been immaterial, the future availability of and cost to purchase allowances to meet the emission reduction requirements is uncertain at this time, but it could be material. Climate Change Regulation - OnJuly 8, 2019 , theEPA published the final Affordable Clean Energy ("ACE") Rule, along with associated revisions to implementing regulations, in addition to final revocation of the CPP. The ACE Rule determines that heat rate improvement measures are the Best System of Emissions Reductions for existing coal-fired electric generating units. The final rule requires states with existing coal-fired electric generating units to develop state plans to establish CO2 emission limits for designated facilities. AES Indiana Petersburg and AES Warrior Run have coal-fired electric generating units that may be impacted by this regulation. OnFebruary 19 , -------------------------------------------------------------------------------- 43 |The AES Corporation |March 31, 2021 Form 10-Q 2020,Indiana published a First Notice for the Indiana ACE Rule indicating that IDEM intends to determine the best system of emissions reductions and CO2 standards for affected units. However, the impact remains largely uncertain because state plans have not yet been developed. OnJanuary 19, 2021 , the D.C. Circuit vacated and remanded to theEPA the ACE Rule, although the parties have an opportunity to request a rehearing at the D.C. Circuit or seek a review of the decision by theU.S. Supreme Court . OnMarch 5, 2021 , the D.C. Circuit issued the partial mandate effectuating the vacatur of the ACE Rule. In effect, the CPP will not take effect while theEPA is addressing the remand of the ACE rule by promulgating a new Section 111(d) rule to regulate greenhouse gases from existing electric generating units. The impact of future greenhouse gas emissions regulations remains uncertain. Cooling Water Intake - The Company's facilities are subject to a variety of rules governing water use and discharge. In particular, the Company'sU.S. facilities are subject to the CWA Section 316(b) rule issued by theEPA that seeks to protect fish and other aquatic organisms by requiring existing steam electric generating facilities to utilize the BTA for cooling water intake structures. OnAugust 15, 2014 , theEPA published its final standards to protect fish and other aquatic organisms drawn into cooling water systems at large power plants. These standards require certain subject facilities to choose among seven BTA options to reduce fish impingement. In addition, facilities that withdraw at least 125 million gallons per day for cooling purposes must conduct studies to assist permitting authorities to determine which site-specific controls, if any, are required to reduce entrainment. It is possible that this decision-making process, which includes permitting and public input, could result in the need to install closed cycle cooling systems (closed-cycle cooling towers), or other technology. Finally, the standards require that new units added to an existing facility to increase generation capacity are required to reduce both impingement and entrainment. It is not yet possible to predict the total impacts of this final rule at this time, including any challenges to such final rule and the outcome of any such challenges. However, if additional capital expenditures are necessary, they could be material. Power plants are required to comply with the more stringent of state or federal requirements. At present, theCalifornia state requirements are more stringent and have earlier compliance dates than the federalEPA requirements, and are therefore applicable to the Company'sCalifornia assets. OnSeptember 1, 2020 , in response to a request by the state's energy, utility, and grid operators and regulators, the SWRCB approved amendments to its OTC Policy. The SWRCB OTC Policy previously required the shutdown and permanent retirement of all remaining OTC generating units atAES Alamitos , AES Huntington Beach and AESRedondo Beach byDecember 31, 2020 . The amendment extends the deadline for shutdown and retirement ofAES Alamitos and AES Huntington Beach's remaining OTC generating units toDecember 31, 2023 and extends the deadline for shutdown and retirement of AES Redondo Beach's remaining OTC generating units toDecember 31, 2021 (the "AES Redondo Beach Extension"). The respective facilities' National Pollutant Discharge Elimination System permits have been revised to allow the remaining OTC generating units at AESAL, AESHB, and AESRB to continue operation beyondDecember 31, 2020 and in accordance with the current OTC Policy. InOctober 2020 , the cities ofRedondo Beach andHermosa Beach filed a state court lawsuit challenging the AES Redondo Beach Extension. The outcome of the lawsuit is unclear. OnMarch 16, 2021 theState Advisory Committee on Cooling Water Intake Structures (SACCWIS) released their draft 2021 report to SWRCB. The report summarizes theState of California's current electrical grid reliability needs and recommends a two-year extension to the compliance schedule forRedondo Beach to address system-wide grid reliability needs. The SWRCB has yet to make the final recommendation to amend the OTC Policy. The new air-cooled combined cycle gas turbine generators were constructed at theAES Alamitos and AESHuntington Beach generating stations, and there is currently no plan to replace the OTC generating units at the AES Redondo Beach generating station following the retirement. Capital Resources and Liquidity Overview As ofMarch 31, 2021 , the Company had unrestricted cash and cash equivalents of$1.9 billion , of which$565 million was held at the Parent Company and qualified holding companies. The Company had$187 million in short-term investments, held primarily at subsidiaries, and restricted cash and debt service reserves of$720 million . The Company also had non-recourse and recourse aggregate principal amounts of debt outstanding of$16.4 billion and$3.4 billion , respectively. Of the$1.5 billion of our current non-recourse debt,$1.2 billion was presented as such because it is due in the next twelve months and$276 million relates to debt considered in default due to covenant violations. None of the defaults are payment defaults but are instead technical defaults triggered by failure to comply with covenants or other requirements contained in the non-recourse debt documents, of which$269 million is due to the bankruptcy of the offtaker. We expect current maturities of non-recourse debt to be repaid from net cash provided by operating activities -------------------------------------------------------------------------------- 44 |The AES Corporation |March 31, 2021 Form 10-Q of the subsidiary to which the debt relates, through opportunistic refinancing activity, or some combination thereof. We have no recourse debt which matures within the next twelve months. From time to time, we may elect to repurchase our outstanding debt through cash purchases, privately negotiated transactions, or otherwise when management believes that such securities are attractively priced. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, and other factors. The amounts involved in any such repurchases may be material. We rely mainly on long-term debt obligations to fund our construction activities. We have, to the extent available at acceptable terms, utilized non-recourse debt to fund a significant portion of the capital expenditures and investments required to construct and acquire our electric power plants, distribution companies, and related assets. Our non-recourse financing is designed to limit cross-default risk to the Parent Company or other subsidiaries and affiliates. Our non-recourse long-term debt is a combination of fixed and variable interest rate instruments. Debt is typically denominated in the currency that matches the currency of the revenue expected to be generated from the benefiting project, thereby reducing currency risk. In certain cases, the currency is matched through the use of derivative instruments. The majority of our non-recourse debt is funded by international commercial banks, with debt capacity supplemented by multilaterals and local regional banks. Given our long-term debt obligations, the Company is subject to interest rate risk on debt balances that accrue interest at variable rates. When possible, the Company will borrow funds at fixed interest rates or hedge its variable rate debt to fix its interest costs on such obligations. In addition, the Company has historically tried to maintain at least 70% of its consolidated long-term obligations at fixed interest rates, including fixing the interest rate through the use of interest rate swaps. These efforts apply to the notional amount of the swaps compared to the amount of related underlying debt. Presently, the Parent Company's only material unhedged exposure to variable interest rate debt relates to drawings under its revolving credit facility. However, as ofMarch 31, 2021 , the Parent Company does not have any outstanding drawings under its revolving credit facility. On a consolidated basis, of the Company's$20.1 billion of total gross debt outstanding as ofMarch 31, 2021 , approximately$2.5 billion bore interest at variable rates that were not subject to a derivative instrument which fixed the interest rate.Brazil holds$736 million of our floating rate non-recourse exposure as we have no ability to fix local debt interest rates efficiently. In addition to utilizing non-recourse debt at a subsidiary level when available, the Parent Company provides a portion, or in certain instances all, of the remaining long-term financing or credit required to fund development, construction, or acquisition of a particular project. These investments have generally taken the form of equity investments or intercompany loans, which are subordinated to the project's non-recourse loans. We generally obtain the funds for these investments from our cash flows from operations, proceeds from the sales of assets and/or the proceeds from our issuances of debt, common stock and other securities. Similarly, in certain of our businesses, the Parent Company may provide financial guarantees or other credit support for the benefit of counterparties who have entered into contracts for the purchase or sale of electricity, equipment, or other services with our subsidiaries or lenders. In such circumstances, if a business defaults on its payment or supply obligation, the Parent Company will be responsible for the business' obligations up to the amount provided for in the relevant guarantee or other credit support. AtMarch 31, 2021 , the Parent Company had provided outstanding financial and performance-related guarantees or other credit support commitments to or for the benefit of our businesses, which were limited by the terms of the agreements, of approximately$1.8 billion in aggregate (excluding those collateralized by letters of credit and other obligations discussed below). As a result of the Parent Company's split rating, some counterparties may be unwilling to accept our general unsecured commitments to provide credit support. Accordingly, with respect to both new and existing commitments, the Parent Company may be required to provide some other form of assurance, such as a letter of credit, to backstop or replace our credit support.The Parent Company may not be able to provide adequate assurances to such counterparties. To the extent we are required and able to provide letters of credit or other collateral to such counterparties, this will reduce the amount of credit available to us to meet our other liquidity needs. As ofMarch 31, 2021 , we had$114 million in letters of credit outstanding provided under our unsecured credit facility and$84 million in letters of credit outstanding provided under our revolving credit facility. These letters of credit operate to guarantee performance relating to certain project development and construction activities and business operations. During the quarter endedMarch 31, 2021 , the Company paid letter of credit fees ranging from 1% to 3% per annum on the outstanding amounts. We expect to continue to seek, where possible, non-recourse debt financing in connection with the assets or businesses that we or our affiliates may develop, construct, or acquire. However, depending on local and global market conditions and the unique characteristics of individual businesses, non-recourse debt may not be available on economically attractive terms or at all. If we decide not to provide any additional funding or credit support to a subsidiary project that is under construction or has near-term debt payment obligations and that subsidiary is unable -------------------------------------------------------------------------------- 45 |The AES Corporation |March 31, 2021 Form 10-Q to obtain additional non-recourse debt, such subsidiary may become insolvent, and we may lose our investment in that subsidiary. Additionally, if any of our subsidiaries lose a significant customer, the subsidiary may need to withdraw from a project or restructure the non-recourse debt financing. If we or the subsidiary choose not to proceed with a project or are unable to successfully complete a restructuring of the non-recourse debt, we may lose our investment in that subsidiary. Many of our subsidiaries depend on timely and continued access to capital markets to manage their liquidity needs. The inability to raise capital on favorable terms, to refinance existing indebtedness, or to fund operations and other commitments during times of political or economic uncertainty may have material adverse effects on the financial condition and results of operations of those subsidiaries. In addition, changes in the timing of tariff increases or delays in the regulatory determinations under the relevant concessions could affect the cash flows and results of operations of our businesses. Long-Term Receivables As ofMarch 31, 2021 , the Company had approximately$111 million of gross accounts receivable classified as Other noncurrent assets. These noncurrent receivables mostly consist of accounts receivable inArgentina andChile that, pursuant to amended agreements or government resolutions, have collection periods that extend beyondMarch 31, 2022 , or one year from the latest balance sheet date. The majority of Argentine receivables have been converted into long-term financing for the construction of power plants. Noncurrent receivables inChile pertain primarily to revenues recognized on regulated energy contracts that were impacted by theStabilization Fund created by the Chilean government. A portion relates to the extension of existing PPAs with the addition of renewable energy. See Note 5-Financing Receivables in Item 1.-Financial Statements and Key Trends and Uncertainties-Macroeconomic and Political-Chile in Item 2.-Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q and Item 1.-Business-South America SBU-Argentina-Regulatory Framework and Market Structure included in our 2020 Form 10-K for further information. As ofMarch 31, 2021 , the Company had approximately$1.3 billion of loans receivable primarily related to a facility constructed under a build, operate, and transfer contract inVietnam . This loan receivable represents contract consideration related to the construction of the facility, which was substantially completed in 2015, and will be collected over the 25-year term of the plant's PPA. InDecember 2020 ,Mong Duong met the held-for-sale criteria and the loan receivable balance, net of CECL reserve, was reclassified to held-for-sale assets. As ofMarch 31, 2021 ,$83 million of the loan receivable balance was classified as Current held-for-sale assets and$1.2 billion was classified as Noncurrent held-for-sale assets on the Condensed Consolidated Balance Sheets. See Note 13-Revenue in Item 1.-Financial Statements of this Form 10-Q for further information. Cash Sources and Uses The primary sources of cash for the Company in the three months endedMarch 31, 2021 were proceeds from issuance of Equity Units, debt financings, sales of short-term investments, and cash flows from operating activities. The primary uses of cash in the three months endedMarch 31, 2021 were repayments of debt, capital expenditures, and purchases of short-term investments. The primary sources of cash for the Company in the three months endedMarch 31, 2020 were debt financings, cash flows from operating activities, and sales of short-term investments. The primary uses of cash in the three months endedMarch 31, 2020 were capital expenditures, repayments of debt, and purchases of short-term investments.
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Three Months Ended March 31, Cash Sources: 2021 2020 Issuance of preferred stock$ 1,017 $ - Borrowings under the revolving credit facilities 792 1,194 Issuance of non-recourse debt 307 406 Sale of short-term investments 257 254 Net cash provided by operating activities 253 373 Contributions from noncontrolling interests 94 - Issuance of recourse debt 7 - Proceeds from the sale of assets - 15 Other 32 2 Total Cash Sources$ 2,759 $ 2,244 Cash Uses: Repayments under the revolving credit facilities$ (793) $ (315) Capital expenditures (432) (576) Repayments of non-recourse debt (320) (92) Purchase of short-term investments (130) (277) Dividends paid on AES common stock (100) (95) Contributions and loans to equity affiliates (64) (115) Distributions to noncontrolling interests (17) (22) Acquisitions of noncontrolling interests (13) - Repayments of recourse debt (7) (18) Other (104) (96) Total Cash Uses$ (1,980) $ (1,606) Net increase in Cash, Cash Equivalents, and Restricted Cash $
779
Consolidated Cash Flows The following table reflects the changes in operating, investing, and financing cash flows for the comparative three month period (in millions): Three Months Ended
Cash flows provided by (used in): 2021 2020 $ Change Operating activities$ 253 $ 373 $ (120) Investing activities (387) (735) 348 Financing activities 993 1,030 (37) Operating Activities Net cash provided by operating activities decreased$120 million for the three months endedMarch 31, 2021 , compared to the three months endedMarch 31, 2020 . Operating Cash Flows (1) (in millions) [[Image Removed: aes-20210331_g7.jpg]] (1)Amounts included in the chart above include the results of discontinued operations, where applicable. (2)The change in adjusted net income is defined as the variance in net income, net of the total adjustments to net income as shown on the Condensed Consolidated Statements of Cash Flows in Item 1-Financial Statements of this Form 10-Q. (3)The change in working capital is defined as the variance in total changes in operating assets and liabilities as shown on the Condensed Consolidated Statements of Cash Flows in Item 1-Financial Statements of this Form 10-Q. -------------------------------------------------------------------------------- 47 |The AES Corporation |March 31, 2021 Form 10-Q •Adjusted net income increased$323 million primarily due to higher margins at ourSouth America and Eurasia SBUs and decreases in income tax expense and interest expense, partially offset by lower margins at our MCAC and US and Utilities SBUs. •Working capital requirements increased$443 million , primarily due to the timing of the GSF liability payment at Tietê and a decrease in deferred income at Angamos due to revenue recognized from early contract terminations with Minera Escondida andMinera Spence in the prior year. Investing Activities Net cash used in investing activities decreased$348 million for the three months endedMarch 31, 2021 , compared to the three months endedMarch 31, 2020 . Investing Cash Flows (in millions) [[Image Removed: aes-20210331_g8.jpg]] •Proceeds from short-term investing activities increased$150 million , primarily at Tietê as a result of lower net short-term investment purchases in 2021. •Contributions and loans to equity affiliates decreased$51 million , primarily due to project funding requirements at sPower in the prior year. •Capital expenditures decreased$144 million , discussed further below. Capital Expenditures (in millions) [[Image Removed: aes-20210331_g9.jpg]] •Growth expenditures decreased$115 million , primarily driven by the completion of renewable energy projects inArgentina , Alto Maipo, and Distributed Energy, as well as the completion of the Southland repowering project. This impact was partially offset by higher investments atIPALCO and DPL and in renewable projects atAES Gener and Clean Energy. •Maintenance expenditures decreased$25 million , primarily due to prior year expenditures at Andres as a result of the steam turbine lightning damage, and due to the timing of payments in the prior year related to projects atIPALCO . •Environmental expenditures decreased$4 million , primarily due to the timing of payments in the prior year related to projects atIPALCO . -------------------------------------------------------------------------------- 48 |The AES Corporation |March 31, 2021 Form 10-Q Financing Activities Net cash provided by financing activities decreased$37 million for the three months endedMarch 31, 2021 , compared to the three months endedMarch 31, 2020 . Financing Cash Flows (in millions) [[Image Removed: aes-20210331_g10.jpg]]
See Notes 7-Debt and 11-Equity in Item 1-Financial Statements of this Form 10-Q
for more information regarding significant debt and equity transactions. •The$1 billion impact from issuance of preferred stock is due to the issuance of Equity Units at the Parent Company. •The$94 million impact from contributions from noncontrolling interests is primarily due to contributions from minority interests atAES Gener . •The$695 million impact from Parent Company revolver transactions is primarily due to higher net repayments in the current year. •The$328 million impact from non-recourse debt transactions is primarily due to lower net borrowings at Southland Energy,Panama ,Argentina , andAES Gener , partially offset by an increase in net borrowings at AES Brasil. •The$185 million impact from non-recourse revolver transactions is primarily due to lower net borrowings atAES Gener and in theDominican Republic . Parent Company Liquidity The following discussion is included as a useful measure of the liquidity available toThe AES Corporation , or the Parent Company, given the non-recourse nature of most of our indebtedness. Parent Company Liquidity, as outlined below, is a non-GAAP measure and should not be construed as an alternative to Cash and cash equivalents, which is determined in accordance with GAAP. Parent Company Liquidity may differ from similarly titled measures used by other companies. The principal sources of liquidity at the Parent Company level are dividends and other distributions from our subsidiaries, including refinancing proceeds, proceeds from debt and equity financings at the Parent Company level, including availability under our revolving credit facility, and proceeds from asset sales. Cash requirements at the Parent Company level are primarily to fund interest and principal repayments of debt, construction commitments, other equity commitments, common stock repurchases, acquisitions, taxes, Parent Company overhead and development costs, and dividends on common stock. The Company defines Parent Company Liquidity as cash available to the Parent Company, including cash at qualified holding companies, plus available borrowings under our existing credit facility. The cash held at qualified holding companies represents cash sent to subsidiaries of the Company domiciled outside of theU.S. Such subsidiaries have no contractual restrictions on their ability to send cash to the Parent Company. Parent Company Liquidity is reconciled to its most directly comparable GAAP financial measure, Cash and cash equivalents, at the periods indicated as follows (in millions):
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December 31, March 31, 2021 2020 Consolidated cash and cash equivalents$ 1,886 $ 1,089 Less: Cash and cash equivalents at subsidiaries (1,321) (1,018) Parent Company and qualified holding companies' cash and cash 565 71
equivalents
Commitments under the Parent Company credit facility 1,000 1,000 Less: Letters of credit under the credit facility (84) (77) Less: Borrowings under the credit facility - (70) Borrowings available under the Parent Company credit facility 916 853 Total Parent Company Liquidity $
1,481
The Company utilizes its Parent Company credit facility for short term cash needs to bridge the timing of distributions from its subsidiaries throughout the year.The Parent Company paid dividends of$0.1505 per outstanding share to its common stockholders during the first quarter of 2021 for dividends declared inDecember 2020 . While we intend to continue payment of dividends, and believe we will have sufficient liquidity to do so, we can provide no assurance that we will continue to pay dividends, or if continued, the amount of such dividends. Recourse Debt Our total recourse debt was$3.4 billion as ofMarch 31, 2021 andDecember 31, 2020 . See Note 7-Debt in Item 1.-Financial Statements of this Form 10-Q and Note 11-Debt in Item 8.-Financial Statements and Supplementary Data of our 2020 Form 10-K for additional detail. We believe that our sources of liquidity will be adequate to meet our needs for the foreseeable future. This belief is based on a number of material assumptions, including, without limitation, assumptions about our ability to access the capital markets, the operating and financial performance of our subsidiaries, currency exchange rates, power market pool prices, and the ability of our subsidiaries to pay dividends. In addition, our subsidiaries' ability to declare and pay cash dividends to us (at the Parent Company level) is subject to certain limitations contained in loans, governmental provisions and other agreements. We can provide no assurance that these sources will be available when needed or that the actual cash requirements will not be greater than anticipated. We have met our interim needs for shorter-term and working capital financing at the Parent Company level with our revolving credit facility. See Item 1A.-RiskFactors-The AES Corporation's ability to make payments on its outstanding indebtedness is dependent upon the receipt of funds from our subsidiaries of the Company's 2020 Form 10-K for additional information. Various debt instruments at the Parent Company level, including our revolving credit facility, contain certain restrictive covenants. The covenants provide for, among other items, limitations on other indebtedness, liens, investments and guarantees; limitations on dividends, stock repurchases and other equity transactions; restrictions and limitations on mergers and acquisitions, sales of assets, leases, transactions with affiliates and off-balance sheet and derivative arrangements; maintenance of certain financial ratios; and financial and other reporting requirements. As ofMarch 31, 2021 , we were in compliance with these covenants at the Parent Company level. Non-Recourse Debt While the lenders under our non-recourse debt financings generally do not have direct recourse to the Parent Company, defaults thereunder can still have important consequences for our results of operations and liquidity, including, without limitation: •reducing our cash flows as the subsidiary will typically be prohibited from distributing cash to the Parent Company during the time period of any default; •triggering our obligation to make payments under any financial guarantee, letter of credit or other credit support we have provided to or on behalf of such subsidiary; •causing us to record a loss in the event the lender forecloses on the assets; and •triggering defaults in our outstanding debt at the Parent Company. For example, our revolving credit facility and outstanding debt securities at the Parent Company include events of default for certain bankruptcy-related events involving material subsidiaries. In addition, our revolving credit agreement at the Parent Company includes events of default related to payment defaults and accelerations of outstanding debt of material subsidiaries. Some of our subsidiaries are currently in default with respect to all or a portion of their outstanding indebtedness. The total non-recourse debt classified as current in the accompanying Condensed Consolidated
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50 |The AES Corporation |March 31, 2021 Form 10-Q Balance Sheets amounts to$1.5 billion . The portion of current debt related to such defaults was$276 million atMarch 31, 2021 , all of which was non-recourse debt related to three subsidiaries -AES Puerto Rico , AES Ilumina, and AESJordan Solar . None of the defaults are payment defaults, but are instead technical defaults triggered by failure to comply with other covenants or other conditions contained in the non-recourse debt documents, of which$269 million is due to the bankruptcy of the offtaker. See Note 7-Debt in Item 1.-Financial Statements of this Form 10-Q for additional detail. None of the subsidiaries that are currently in default are subsidiaries that met the applicable definition of materiality under the Parent Company's debt agreements as ofMarch 31, 2021 , in order for such defaults to trigger an event of default or permit acceleration under the Parent Company's indebtedness. However, as a result of additional dispositions of assets, other significant reductions in asset carrying values or other matters in the future that may impact our financial position and results of operations or the financial position of the individual subsidiary, it is possible that one or more of these subsidiaries could fall within the definition of a "material subsidiary" and thereby trigger an event of default and possible acceleration of the indebtedness under the Parent Company's outstanding debt securities. A material subsidiary is defined in the Parent Company's revolving credit facility as any business that contributed 20% or more of the Parent Company's total cash distributions from businesses for the four most recently ended fiscal quarters. As ofMarch 31, 2021 , none of the defaults listed above, individually or in the aggregate, results in or is at risk of triggering a cross-default under the recourse debt of the Parent Company. Critical Accounting Policies and Estimates The condensed consolidated financial statements of AES are prepared in conformity withU.S. GAAP, which requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. The Company's significant accounting policies are described in Note 1 - General and Summary of Significant Accounting Policies of our 2020 Form 10-K. The Company's critical accounting estimates are described in Item 7.-Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2020 Form 10-K. An accounting estimate is considered critical if the estimate requires management to make an assumption about matters that were highly uncertain at the time the estimate was made, different estimates reasonably could have been used, or if changes in the estimate that would have a material impact on the Company's financial condition or results of operations are reasonably likely to occur from period to period. Management believes that the accounting estimates employed are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The Company has reviewed and determined that these remain as critical accounting policies as of and for the three months endedMarch 31, 2021 .
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