AES CORPORATION (THE) 
Executive Summary In 2019, AES achieved significant milestones towards its strategic objectives, including investing in sustainable growth and innovative solutions to deliver superior results. We completed construction of 2.2 GW of new projects and signed long-term PPAs for 2.8 GW of renewable capacity. Fluence, our joint venture with Siemens, maintained its leading global market share with 1.1 GW of projects delivered or awarded in 2019. We announced the merger of Simple Energy into Uplight and formed a 10-year strategic alliance with Google to develop and implement solutions to enable broad adoption of clean energy. Finally, following our efforts to reduce recourse debt, our Parent Company's credit rating was upgraded to investment grade by Fitch. See Overview of our Strategy included in Item 1.-Business of this Form 10-K for further information. Compared with last year, diluted earnings per share from continuing operations decreased$1.03 , from$1.48 to$0.45 . This decrease was largely driven by prior year net gains on dispositions of Masinloc, Electrica Santiago and CTNG transmission lines, lower generation inArgentina andChile and higher impairments in the current year, and the impact on margin from the sale of businesses in prior periods. These decreases were partially offset by current year contributions from new businesses, lower losses on extinguishment of debt in 2019, and prior year income tax expense to finalize the impact of the TCJA. Adjusted EPS, a non-GAAP measure, increased$0.12 , from$1.24 to$1.36 , reflecting higher contributions from new businesses, includingU.S. renewables and the Colon combined cycle facility inPanama , a lower effective tax rate, and lower Parent Company interest in 2019, partially offset by the impact on margin from the sale of businesses in prior periods.
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79 | 2019 Annual Report
Review of Consolidated Results of Operations
% Change % Change
2019 vs. 2018 vs.
Years Ended December 31, 2019 2018 2017 2018 2017
(in millions, except per share amounts)
Revenue:
US and Utilities SBU $ 4,058 $ 4,230 $ 4,162 -4 % 2 %
South America SBU 3,208 3,533 3,252 -9 % 9 %
MCAC SBU 1,882 1,728 1,519 9 % 14 %
Eurasia SBU 1,047 1,255 1,590 -17 % -21 %
Corporate and Other 46 41 35 12 % 17 %
Eliminations (52 ) (51 ) (28 ) 2 % 82 %
Total Revenue 10,189 10,736 10,530 -5 % 2 %
Operating Margin:
US and Utilities SBU 754 733 693 3 % 6 %
South America SBU 873 1,017 862 -14 % 18 %
MCAC SBU 487 534 465 -9 % 15 %
Eurasia SBU 188 227 422 -17 % -46 %
Corporate and Other 39 58 23 -33 % NM
Eliminations 8 4 - 100 % NM
Total Operating Margin 2,349 2,573 2,465 -9 % 4 %
General and administrative expenses (196 ) (192 ) (215 ) 2 % -11 %
Interest expense (1,050 ) (1,056 ) (1,170 ) -1 % -10 %
Interest income 318 310 244 3 % 27 %
Loss on extinguishment of debt (169 ) (188 ) (68 ) -10 % NM
Other expense (80 ) (58 ) (58 ) 38 % - %
Other income 145 72 120 NM -40 %
Gain (loss) on disposal and sale of
business interests 28 984 (52 ) -97 % NM
Asset impairment expense (185 ) (208 ) (537 ) -11 % -61 %
Foreign currency transaction gains
(losses) (67 ) (72 ) 42 -7 % NM
Other non-operating expense (92 ) (147 ) - -37 % NM
Income tax expense (352 ) (708 ) (990 ) -50 % -28 %
Net equity in earnings (losses) of
affiliates (172 ) 39 71 NM -45 %
INCOME (LOSS) FROM CONTINUING OPERATIONS 477 1,349 (148 ) -65 % NM
Loss from operations of discontinued
businesses, net of income tax expense of
$0 , $2 , and $21 , respectively - (9 ) (18 ) -100 % -50 %
Gain (loss) from disposal of discontinued
businesses, net of income tax expense of
$0 , $44 , and $0 , respectively 1 225 (611 ) -100 % NM
NET INCOME (LOSS) 478 1,565 (777 ) -69 % NM
Less: Income from continuing operations
attributable to noncontrolling interests
and redeemable stock of subsidiaries (175 ) (364 ) (359 ) -52 % 1 %
Less: Loss (income) from discontinued
operations attributable to noncontrolling
interests - 2 (25 ) -100 % NM
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES
CORPORATION $ 303 $ 1,203 $ (1,161 ) -75 % NM
AMOUNTS ATTRIBUTABLE TO THE AES
CORPORATION COMMON STOCKHOLDERS:
Income (loss) from continuing operations,
net of tax $ 302 $ 985 $ (507 ) -69 % NM
Income (loss) from discontinued
operations, net of tax 1 218 (654 ) -100 % NM
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES
CORPORATION $ 303 $ 1,203 $ (1,161 ) -75 % NM
Net cash provided by operating activities $ 2,466 $ 2,343 $ 2,504 5 % -6 %
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 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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80 | 2019 Annual Report Consolidated Revenue and Operating Margin Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 Revenue (in millions) [[Image Removed: chart-75364a216a29506b917.jpg]] Consolidated Revenue - Revenue decreased$547 million , or 5%, in 2019 compared to 2018. Excluding the unfavorable FX impact of$133 million , primarily inSouth America , this decrease was driven by: •$229 million inSouth America primarily driven by lower generation and prices inArgentina and lower contract sales and generation inChile ;
•
plant in March 2018 and the Northern Ireland businesses in June 2019 ; and
• $172 million in US and Utilities primarily driven by the closure of
generation facilities at DPL in the first half of 2018 and
other favorable market conditions present in 2018 as compared to 2019 at
Southland, partially offset by price increases due to the 2018 rate orders
at IPL and DPL and an increase in energy pass-through costs in
These unfavorable impacts were partially offset by an increase of$156 million in MCAC driven by the commencement of operations at the Colon combined cycle facility inPanama inSeptember 2018 . Operating Margin (in millions) [[Image Removed: chart-4700445e42345a1ebc0.jpg]] Consolidated Operating Margin - Operating margin decreased$224 million , or 9%, in 2019 compared to 2018. Excluding the unfavorable impact of FX of$46 million , primarily inSouth America , this decrease was driven by: •$107 million inSouth America primarily due to the drivers discussed above; •$46 million in MCAC due to the outage at Changuinola as a result of upgrading the tunnel lining and lower hydrology inPanama as compared to
the prior year, partially offset by the business interruption insurance
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81 | 2019 Annual Report recoveries at the Andres facility inDominican Republic , higher contract sales atPanama , and the commencement of operations at the Colon combined cycle facility inPanama ; and •$31 million in Eurasia primarily due to the drivers discussed above,
partially offset by lower depreciation at the
classification as held-for-sale.
These unfavorable impacts were partially offset by a$21 million increase in US and Utilities mostly driven by the 2018 rate orders at IPL and DPL, partially offset by the lost margin from the sale and closure of generation facilities atShady Point and DPL, and increased rock ash disposal atPuerto Rico . Year EndedDecember 31, 2018 Compared to Year EndedDecember 31, 2017 Revenue (in millions) [[Image Removed: chart-cf799142edeca21e159.jpg]] Consolidated Revenue - Revenue increased$206 million , or 2%, in 2018 compared to 2017. Excluding the unfavorable FX impact of$52 million , primarily inSouth America partially offset by Eurasia, this increase was driven by: •$357 million inSouth America primarily due to higher contract sales and
prices in
in Chile , as well as higher capacity prices in Argentina resulting from
market reforms enacted in 2017;
•
the Colon combined cycle facility as well as improved hydrology at
higher pass-through fuel prices in
due to commencement of operations at the Los Mina combined cycle facility
in
•
sales at Southland, higher regulated rates commencing in
DPL, higher wholesale volume due to the new CCGT coming online as well as
higher retail demand at IPL, and higher prices due to tariff reset and
higher energy prices in
closure of several generation facilities at DPL.
These favorable impacts were partially offset by decreases of$366 million in Eurasia due to the sale of the Masinloc power plant inMarch 2018 , as well as the sale of the Kazakhstan CHPs and expiration of the Kazakhstan HPP concession agreement in 2017.
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82 | 2019 Annual Report
Operating Margin
(in millions)
[[Image Removed: chart-42b6b311961e908848a.jpg]]
Consolidated Operating Margin - Operating margin increased $108 million , or 4%,
in 2018 compared to 2017. Excluding the favorable impact of FX of $8 million ,
primarily driven by Eurasia, this increase was driven by:
• $154 million in South America primarily due to the drivers discussed above
and the absence of maintenance costs for planned outages in 2018 versus
maintenance performed in Q3 2017 at Gener Chile;
•
•
and the favorable impact of a one time reduction in the ARO liability at
DPL's closed plants, Stuart and Killen.
These favorable impacts were partially offset by a decrease of $204 million in
Eurasia due to the drivers discussed above.
See Item 7.- Management's Discussion and Analysis of Financial Condition and
Results of Operations-SBU Performance Analysis of this Form 10-K for
additional discussion and analysis of operating results for each SBU.
Consolidated Results of Operations - Other
General and administrative expenses
General and administrative expenses include expenses related to corporate staff
functions and initiatives, executive management, finance, legal, human resources
and information systems, as well as global development costs.
General and administrative expenses increased $4 million , or 2%, to $196 million
for 2019 compared to $192 million for 2018, with no material drivers.
General and administrative expenses decreased $23 million , or 11%, to $192
million for 2018 compared to $215 million for 2017, primarily due to reduced
people costs, professional fees and business development activity.
Interest expense
Interest expense decreased $6 million , or 1%, to $1,050 million for 2019,
compared to $1,056 million for 2018 primarily due to the reduction of debt
mainly at the Parent Company and DPL, reduced interest rates on refinanced debt
at DPL, and favorable foreign currency translation at Tietê, partially offset by
lower capitalized interest due to the commencement of operations at Colon
facility in September 2018 , a decrease in AFUDC for the Eagle Valley CCGT
project at IPL, and the loss of hedge accounting at Alto Maipo in 2018, which
resulted in favorable unrealized mark-to-market adjustments recognized within
interest expense.
Interest expense decreased $114 million , or 10%, to $1,056 million for 2018,
compared to $1,170 million for 2017 primarily due to the reduction of debt at
the Parent Company, favorable impacts from interest rate swaps in Chile , and
increased capitalized interest at Alto Maipo.
Interest income
Interest income increased $8 million , or 3%, to $318 million for 2019, compared
to $310 million for 2018 primarily in South America driven by a higher average
interest rate on CAMMESA receivables.
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83 | 2019 Annual Report Interest income increased$66 million , or 27%, to$310 million for 2018, compared to$244 million for 2017 primarily due to higher interest rates and increased long-term receivables as a result of the adoption of the new revenue recognition standard in 2018. Loss on extinguishment of debt Loss on extinguishment of debt decreased$19 million , or 10%, to$169 million for 2019, compared to$188 million for 2018. This decrease was primarily due to losses of$171 million at the Parent Company resulting from the redemption of senior notes in 2018 compared to losses of$45 million at DPL,$31 million at Mong Duong,$29 million at Gener,$28 million at Colon, and$24 million at Cochrane in 2019 resulting from the redemption or refinancing of senior notes. Loss on extinguishment of debt increased$120 million to$188 million for 2018, compared to$68 million for 2017. This increase was primarily due to higher losses at the Parent Company of$79 million from the redemption of senior notes in 2018 and a 2017 gain on early retirement of debt at AES Argentina of$65 million , partially offset by lower losses at other subsidiaries of$24 million in 2018. See Note 11-Debt included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K for further information. Other income Other income increased$73 million , to$145 million for 2019, compared to$72 million for 2018 primarily due to gains on insurance recoveries associated with property damage at the Andres facility and upgrading the tunnel lining at Changuinola. These increases were partially offset by a gain on remeasurement of contingent liabilities for projects inHawaii in 2018. Other income decreased$48 million , or 40%, to$72 million for 2018, compared to$120 million for 2017 primarily due to the 2017 favorable settlement of legal proceedings at Uruguaiana related to YPF's breach of the parties' gas supply agreement and a decrease in AFUDC in the US and Utilities SBU. These decreases were partially offset by a gain on remeasurement of contingent liabilities for projects inHawaii in 2018. Other expense Other expense increased$22 million , or 38%, to$80 million for 2019, compared to$58 million for 2018 primarily due to losses recognized at commencement of sales-type leases at Distributed Energy and the loss on disposal of assets at Changuinola associated with upgrading the tunnel lining in 2019. This was partially offset by the loss on disposal of assets resulting from damage associated with a lightning incident at the Andres facility in theDominican Republic in 2018. Other expense remained flat at$58 million for 2018 as compared to 2017 primarily due to a loss resulting from damage associated with a lightning incident at the Andres facility in theDominican Republic in 2018 and higher non-service pension and other postretirement costs in 2018. This was offset by the 2017 write-off of water rights for projects that were no longer being pursued in the South America SBU and a loss on disposal of assets at DPL as a result of the decision to close the coal-fired and diesel-fired generating units at Stuart and Killen. See Note 21- Other Income and Expense included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K for further information. Gain (loss) on disposal and sale of business interests Gain on disposal and sale of business interests decreased to$28 million for 2019, as compared to$984 million for 2018 primarily due to the 2018 gains on sale of Masinloc of$772 million , CTNG of$126 million , and Electrica Santiago of$70 million . Gain on disposal and sale of business interests was$984 million for 2018 as compared to a loss of$52 million for 2017, primarily due to the 2018 gains on sale discussed above, and the 2017 losses on sales of Kazakhstan CHPs and HPPs of$49 million and$33 million , respectively, partially offset by the 2017 recognition of a$23 million gain related to the expiration of a contingency at Masinloc. See Note 25- Held-For-Sale and Dispositions included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K for further information.
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84 | 2019 Annual ReportGoodwill impairment expense There were no goodwill impairments for the years endedDecember 31, 2019 , 2018, or 2017. See Note 9- Goodwill and Other Intangible Assets included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K for further information. Asset impairment expense Asset impairment expense decreased$23 million , or 11%, to$185 million for 2019, compared to$208 million for 2018. This decrease was primarily driven by$115 million as a result of an impairment analysis performed at Kilroot and Ballylumford upon meeting the held-for-sale criteria in 2019 and$60 million atHawaii due to a decrease in the economic useful life of the coal-fired asset, compared to prior year impairments of$157 million atShady Point due to an unfavorable economic outlook creating uncertainty around future cash flows and$37 million at Nejapa due to the landfill owner's failure to perform improvements necessary to continue extracting gas. Asset impairment expense decreased$329 million , or 61%, to$208 million for 2018, compared to$537 million for 2017 mainly driven by 2017 impairments of$186 million recognized inKazakhstan due to the classification of the CHPs and HPPs as held-for-sale and$296 million in theU.S. as a result of the decision to sell the DPL peaker assets and a decline in forward pricing atLaurel Mountain , partially offset by a 2018 impairment of$157 million due to decreased future cash flows and the decision to sellShady Point . See Note 22- Asset Impairment Expense included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K for further information. Foreign currency transaction gains (losses) Foreign currency transaction gains (losses) in millions were as follows: Years Ended December 31, 2019 2018 2017 Argentina (1)$ (73 ) $ (71 ) $ 1 Corporate (1 ) 11 3 Other 7 (12 ) 38 Total (2)$ (67 ) $ (72 ) $ 42
_____________________________
(1) Primarily associated with the peso-denominated energy receivable indexed to
the USD through the FONINVEMEM agreement which is considered a foreign
currency derivative. See Note 7-Financing Receivables included in
Item 8.-Financial Statements and Supplementary Data of this Form 10-K for
further information.
(2) Includes losses of
million on foreign currency derivative contracts for the years ended
The Company recognized net foreign currency transaction losses of$67 million for the year endedDecember 31, 2019 , primarily driven by unrealized losses on foreign currency derivatives related to government receivables inArgentina and unrealized losses associated with the devaluation of long-term receivables denominated in the Argentine peso. The Company recognized net foreign currency transaction losses of$72 million for the year endedDecember 31, 2018 , primarily due to the devaluation of long-term receivables denominated in Argentine pesos, partially offset by gains at the Parent Company related to foreign currency derivatives. The Company recognized net foreign currency transaction gains of$42 million for the year endedDecember 31, 2017 primarily driven by transactions associated with VAT activity inMexico , the amortization of frozen embedded derivatives inthe Philippines , and appreciation of the Euro inBulgaria . These gains were partially offset by foreign currency derivative losses inColombia due to a change in functional currency. Other non-operating expense Other non-operating expense was$92 million in 2019 due to the other-than-temporary impairment of the OPGC equity method investment as a result of the estimated market value of the Company's investment and other negative developments impacting future expected cash flows at the investee. Other non-operating expense was$147 million in 2018 primarily due to the$144 million other-than-temporary impairment of the Guacolda equity method investment as a result of increased renewable generation inChile lowering energy prices and impacting the ability of Guacolda to re-contract its existing PPAs after they expire. There were no significant other non-operating expenses in 2017.
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85 | 2019 Annual Report See Note 8- Investments in and Advances to Affiliates included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K for further information. Income tax expense Income tax expense decreased$356 million to$352 million in 2019 as compared to$708 million for 2018. The Company's effective tax rate was 35% for both years endedDecember 31, 2019 and 2018. The 2019 effective tax rate was impacted by the nondeductible losses on the sale of the Company's entire 100% interest in the Kilroot coal and oil-fired plant and energy storage facility and the Ballylumford gas-fired plant in theUnited Kingdom and associated asset impairments during the second quarter. Further impacting the 2019 effective tax rate were the effects of the Argentine peso devaluation to tax expense, as well as to pretax income for nondeductible unrealized losses on foreign currency derivatives related to government receivables inArgentina . The 2018 effective tax rate was impacted by the increase in the Staff Accounting Bulletin No.118 ("SAB 118") adjustment with respect to the estimate of the one-time transition tax and deferred tax remeasurement under the TCJA. This impact was partially offset by the impact of the sale of the Company's entire 51% equity interest in Masinloc. See Note 25- Held-for-Sale and Dispositions and Note 23-Income Taxes included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K for details and impacts of the sales. Income tax expense decreased$282 million to$708 million in 2018 as compared to$990 million for 2017. The Company's effective tax rates were 35% and 128% for the years endedDecember 31, 2018 and 2017, respectively. The net decrease in the 2018 effective tax rate was primarily due to greater 2017 impacts related toU.S. tax reform one-time transition tax and remeasurement of deferred tax assets, relative to the 2018 U.S. tax reform impact to adjust the provisional estimate recorded underSAB 118, which providesSEC guidance on the application of the accounting standards for the initial enactment impacts of the TCJA. This net decrease was also attributable to the impact of the sale of the Company's entire 51% equity interest in Masinloc, offset by taxation of our foreign subsidiaries underU.S. GILTI rules. 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. Foreign earnings may be taxed at rates higher than theU.S. corporate rate of 21% and are also subject to currentU.S. taxation under the GILTI rules introduced by the TCJA. 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. The Company also benefits from reduced tax rates in certain countries as a result of satisfying specific commitments regarding employment and capital investment. See Note 23- Income Taxes included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K for additional information regarding these reduced rates. Net equity in earnings (losses) of affiliates Net equity in earnings of affiliates decreased$211 million to losses of$172 million in 2019, compared to earnings of$39 million in 2018. This was primarily driven by a$158 million decrease in earnings due to a long-lived asset impairment at Guacolda, a$19 million decrease in earnings at OPGC due to a contract termination charge, and a$20 million decrease in earnings at sPower due to the impairment of certain development projects. Net equity in earnings of affiliates decreased$32 million , or 45%, to$39 million for 2018, compared to$71 million for 2017 primarily due to losses at Fluence, which was formed in the first quarter of 2018, decreased income at Guacolda, and larger gains on projects that achieved commercial operations in 2017 than in 2018 at sPower, which was purchased in the third quarter of 2017. See Note 8- Investments In and Advances to Affiliates included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K for further information. Net income (loss) from discontinued operations Net loss from discontinued operations was$1 million for the year endedDecember 31, 2019 . Net income from discontinued operations was$216 million for the year endedDecember 31, 2018 primarily due to the after-tax gain on sale of Eletropaulo of$199 million recognized in the second quarter of 2018 and the recognition of a$26 million deferred gain upon liquidation of Borsod inOctober 2018 . Net loss from discontinued operations was$629 million for the year endedDecember 31, 2017 primarily due to the after-tax loss on deconsolidation of Eletropaulo of$611 million recognized in the fourth quarter of 2017. The
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86 | 2019 Annual Report remaining loss was due to a loss contingency recognized by our equity affiliate, partially offset by the income from operations of Eletropaulo prior to the date of deconsolidation. See Note 24- Discontinued Operations included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K 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 decreased$187 million , or 52%, to$175 million in 2019, compared to$362 million in 2018. This decrease was primarily due to: • Prior year gains on sales of Electrica Santiago and CTNG inChile ; • Lower earnings inChile primarily due to current year long-lived asset impairment at Guacolda, losses on extinguishment of debt and lower contracted energy sales and prices;
• HLBV allocation of losses to noncontrolling interests at Distributed
Energy as a result of renewable projects reaching COD in 2019; and
• Lower earnings in
at Changuinola as a result of upgrading the tunnel lining.
These decreases were partially offset by: • Prior year other-than-temporary impairment of Guacolda.
Net income attributable to noncontrolling interests and redeemable stock of
subsidiaries decreased
• Favorable impact of a legal settlement at Uruguaiana in 2017; and
• Lower earnings due to deconsolidation of Eletropaulo in
the sale of Masinloc in
These decreases were partially offset by: • Gains on sales of Electrica Santiago and CTNG inChile ; • Higher earnings inColombia primarily due to higher contract sales and prices; and • Higher earnings inVietnam due to the adoption of the new revenue recognition standard. Net income attributable toThe AES Corporation Net income attributable toThe AES Corporation decreased$900 million , or 75%, to$303 million in 2019, compared to$1,203 million in 2018. This decrease was primarily due to: • Prior year gains on the sales of Masinloc, Eletropaulo (reflected within discontinued operations), CTNG and Electrica Santiago, net of tax;
• Current year long-lived asset impairments at Guacolda,
Ballylumford, and other-than-temporary impairment at OPGC;
• Current year loss on sale at Kilroot and Ballylumford;
• Current year losses on extinguishment of debt at DPL,AES Gener ,Mong Duong and Colon;
• Current year losses recognized at commencement of sales-type leases at
Distributed Energy;
• The impact of sold businesses in our Eurasia SBU;
• Lower margins at
• Lower margins at Changuinola, driven by the outage as a result of
upgrading the tunnel lining and lower hydrology in Panama .
These decreases were partially offset by:
• Prior year income tax expense to finalize the initial impact of
reform enacted in
• Prior year loss on extinguishment of debt at the Parent Company;
• Prior year long-lived asset impairments atShady Point and Nejapa, and other-than-temporary impairment at Guacolda;
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87 | 2019 Annual Report
• Current year gains on insurance proceeds associated with the lightning
incident at the Andres facility in 2018 and the Changuinola tunnel leak;
• Current year gain on sale of a portion of our interest in sPower's
operating assets and gain on disposal of Stuart and Killen at DPL; and
• Higher earnings at our US and Utilities SBU, primarily as a result of
renewable projects that came online in the current year.
Net income attributable to
operations), CTNG, and Electrica Santiago in 2018, and losses on the sales
of Kazakhstan CHPs and HPPs in 2017;
• Loss on deconsolidation of Eletropaulo (reflected within discontinued
operations) in 2017;
• Impact of
• Asset impairments at DPL,
• Lower interest expense at the Parent Company and Gener; and
• Higher margins at our
These increases were partially offset by: • Higher tax expense in 2018 due to the new GILTI rules in theU.S. ;
• Asset impairment at
Guacolda;
• Higher losses on extinguishment of debt;
• Foreign exchange losses in 2018 primarily due to the devaluation of the
Argentine peso and foreign currency gains in 2017;
• Favorable impact of a legal settlement at Uruguaiana in 2017; and
• Lower margins at our Eurasia SBU as a result of the sales of Masinloc and
Kazakhstan . SBU Performance Analysis Segments We are organized into 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 ). 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 Consolidated Financial Statements such as investors, industry analysts and lenders. For the year endedDecember 31, 2019 , the Company changed the definitions of Adjusted PTC and Adjusted EPS to exclude gains and losses recognized at commencement of sales-type leases. We believe these transactions are economically similar to sales of business interests and excluding these gains or losses better reflects the underlying business performance of the Company. 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) costs directly associated with a major restructuring program, including, but not limited to, workforce reduction efforts, relocations and office consolidation. The allocation of HLBV earnings to noncontrolling interests is not adjusted out of Adjusted Operating Margin. See Review of Consolidated Results of Operations for definitions of Operating Margin and cost of sales. 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
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88 | 2019 Annual Report
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.
Reconciliation of Adjusted Operating Margin (in millions) Years Ended December 31,
2019 2018 2017
Operating Margin $ 2,349 $ 2,573 $ 2,465
Noncontrolling interests adjustment (1) (670 ) (686 ) (689 )
Unrealized derivative losses 11 19 (5 )
Disposition/acquisition losses 15 21 22
Restructuring costs (2) - 1 22
Total Adjusted Operating Margin $ 1,705 $
1,928
_____________________________
(1) The allocation of HLBV earnings to noncontrolling interests is not adjusted
out of Adjusted Operating Margin.
(2) In February 2018 , the Company announced a reorganization as a part of itsongoing strategy to simplify its portfolio, optimize its cost structure and
reduce its carbon intensity.
[[Image Removed: chart-92bc8c4e82865520aaf.jpg]]
Adjusted PTC
We define Adjusted PTC as pre-tax income from continuing operations attributable
to The 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) costs directly
associated with a major restructuring program, including, but not limited to,
workforce reduction efforts, relocations and office consolidation. 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 Consolidated
Statement of Operations, 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 to The 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 and strategic decisions to dispose of or acquire
business interests, retire debt or implement restructuring initiatives, which
affect results in a given period or periods. In addition, Adjusted PTC
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
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89 | 2019 Annual Report 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 toThe AES Corporation , which is determined in accordance with GAAP. Reconciliation of Adjusted PTC (in millions) Years Ended
2019
2018 2017
Income (loss) from continuing operations, net of tax,
attributable to
$ 302 $ 985 $ (507 ) Income tax expense attributable to The AES Corporation 250 563 828 Pre-tax contribution 552
1,548 321 Unrealized derivative and equity securities losses (gains)
113 33 (3 )
Unrealized foreign currency losses (gains) 36 51 (59 )
Disposition/acquisition losses (gains) 12 (934 ) 123
Impairment expense 406 307 542
Loss on extinguishment of debt 121 180 62
Restructuring costs (1) - - 31
Total Adjusted PTC $ 1,240 $ 1,185 $ 1,017 _____________________________
(1) In
ongoing strategy to simplify its portfolio, optimize its cost structure and
reduce its carbon intensity.
[[Image Removed: chart-80ce8b20641b563187d.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, 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) costs directly associated with a major restructuring program, including, but
not limited to, workforce reduction efforts, relocations and office
consolidation; and (g) tax benefit or expense related to the enactment effects
of 2017 U.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
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90 | 2019 Annual Report remeasurement, unrealized foreign currency gains or losses, losses due to impairments and strategic decisions to dispose of or acquire business interests, retire debt or implement restructuring initiatives, 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. The Company reported a loss from continuing operations of$0.77 per share for the year endedDecember 31, 2017 . For purposes of measuring diluted loss per share under GAAP, common stock equivalents were excluded from weighted average shares as their inclusion would be anti-dilutive. However, for purposes of computing Adjusted EPS, the Company has included the impact of anti-dilutive common stock equivalents. The table below reconciles the weighted average shares used in GAAP diluted loss per share to the weighted average shares used in calculating the non-GAAP measure of Adjusted EPS. No reconciliation is necessary for the years endedDecember 31, 2019 and 2018 as the Company reported income from continuing operations. Reconciliation of Denominator Used For Adjusted Earnings Per Share Year Ended December 31, 2017 (in millions, except per share data) Loss Shares $ per share GAAP DILUTED LOSS PER SHARE Loss from continuing operations attributable to The$ (507 ) 660$ (0.77 ) AES Corporation common stockholders EFFECT OF ANTI-DILUTIVE SECURITIES Restricted stock units - 2 0.01 NON-GAAP DILUTED LOSS PER SHARE$ (507 )
662
Reconciliation of Adjusted EPS Years Ended
2019 2018 2017
Diluted earnings (loss) per share from continuing operations$ 0.45 $ 1.48 $ (0.76 ) Unrealized derivative and equity securities losses 0.17 (1) 0.05 - Unrealized foreign currency losses (gains) 0.05 (2) 0.09 (3) (0.10 ) Disposition/acquisition losses (gains) 0.02 (4) (1.41 ) (5) 0.19 (6) Impairment expense 0.61 (7) 0.46 (8) 0.82 (9) Loss on extinguishment of debt 0.18 (10) 0.27 (11) 0.09 (12) Restructuring costs - - 0.05 U.S. Tax Law Reform Impact (0.01 ) 0.18 (13) 1.08 (14) Less: Net income tax expense (benefit) (0.11 ) (15) 0.12 (16) (0.29 ) (17) Adjusted EPS$ 1.36 $ 1.24 $ 1.08
_____________________________
(1) Amount primarily relates to unrealized derivative losses in
million, or $0.13 per share, mainly associated with foreign currency
derivatives on government receivables.
(2) Amount primarily relates to unrealized FX losses in Argentina of $25
million , or $0.04 per share, mainly associated with the devaluation of
long-term receivables denominated in Argentine pesos, and unrealized FX
losses at the Parent Company of
associated with intercompany receivables denominated in Euro.
(3) Amount primarily relates to unrealized FX losses of
per share, associated with the devaluation of long-term receivables
denominated in Argentine pesos, and unrealized FX losses of
pounds at the Parent Company.
(4) Amount primarily relates to losses recognized at commencement of sales-type
leases at Distributed Energy of
sale of Kilroot and Ballylumford of
partially offset by gain on sale of a portion of our interest in sPower's
operating assets of $28 million , or $0.04 per share, gain on disposal of
Stuart and Killen at DPL of $20 million , or $0.03 per share, and gain onsale of ownership interest in Simple Energy as part of the Uplight merger of
$12 million , or$0.02 per share. (5) Amount primarily relates to gain on sale of Masinloc of$772 million , or
gain on sale of Electrica Santiago of
on remeasurement of contingent consideration at AES Oahu of
Advancion energy storage to the Fluence joint venture of
Eletropaulo of
disposal of the Beckjord facility and additional shutdown costs related to
Stuart and Killen at DPL of
(6) Amount primarily relates to loss on sale of Kazakhstan CHPs of
or
Sul of
closures at DPL of
on Masinloc contingent consideration of
gain on sale of
(7) Amount primarily relates to asset impairments at Kilroot and Ballylumford of
share; impairments at our Guacolda and sPower equity affiliates, impacting
equity earnings by
of
(8) Amount primarily relates to asset impairments at
million, or
and other-than-temporary impairment of Guacolda of
share.
(9) Amount primarily relates to asset impairments at Kazakhstan CHPs of
million, or
share,
million, or
(10) Amount primarily relates to losses on early retirement of debt at DPL of
$45 million , or $0.07 per share, AES Gener of $35 million , or $0.05 per
share, Mong Duong of $17 million , or $0.03 per share, and Colon of $14
million , or $0.02 per share.
(11) Amount primarily relates to loss on early retirement of debt at the Parent
Company of $171 million , or $0.26 per share.
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91 | 2019 Annual Report
(12) Amount primarily relates to losses on early retirement of debt at the
Parent Company of
million, or
partially offset by a gain on early retirement of debt at AES Argentina of
(13) Amount relates to a
one-time transition tax on foreign earnings of $194 million , or $0.29 per
share, partially offset by a SAB 118 income tax benefit to finalize the
provisional estimate of remeasurement of deferred tax assets and
liabilities to the lower corporate tax rate of $77 million , or $0.11 per
share.
(14) Amount relates to a one-time transition tax on foreign earnings of $675
million, or
and liabilities to the lower corporate tax rate of
per share.
(15) Amount primarily relates to the income tax benefits associated with the
impairments at OPGC of
million, or
Kilroot and Ballylumford of
benefits associated with losses on early retirement of debt of
or
related to 2018 gains on sales of business interests, primarily Masinloc,
of
(16) Amount primarily relates to the income tax expense under the GILTI
provision associated with the gains on sales of business interests,
primarily Masinloc, of
expense associated with gains on sale of CTNG of
share, and Electrica Santiago of
offset by income tax benefits associated with the loss on early retirement
of debt at the Parent Company of
income tax benefits associated with the impairment at
million, or
(17) Amount primarily relates to the income tax benefits associated with asset
impairments of
US and Utilities SBU
The following table summarizes Operating Margin, Adjusted Operating Margin and
Adjusted PTC (in millions) for the periods indicated:
$ Change % Change
For the Years Ended % Change 2019 2018 vs. 2018 vs.
December 31, 2019 2018 2017 $ Change 2019
vs. 2018 vs. 2018 2017 2017
Operating Margin
21 3 % $ 40 6 %
Adjusted Operating
Margin (1) 659 678 623 (19 ) -3 % 55 9 %
Adjusted PTC (1) 569 511 424 58 11 % 87 21 %
_____________________________
(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 for the respective ownership interest for key businesses.
Fiscal year 2019 versus 2018 Operating Margin increased$21 million , or 3%, which was driven primarily by the following (in millions): Increase at IPL primarily driven by higher retail rates following the 2018 rate order, partially offset by lower volumes due to unfavorable $
59
weather and higher maintenance expense related to distribution line clearance Increase at DPL due to the 2018 distribution rate order, including the decoupling rider which is designed to eliminate the impacts of weather
22
and demand, partially offset by changes to DPL's ESP
Decrease due to the sale and closure of generation facilities at
(47 )
Stuart and Killen
Increase of rock ash disposal in Puerto Rico (23 )
Other 10
Total US and Utilities SBU Operating Margin Increase $
21
Adjusted Operating Margin decreased$19 million primarily due to the drivers above, adjusted for NCI and excluding unrealized gains and losses on derivatives and costs and benefits associated with early plant closures. Adjusted PTC increased$58 million , primarily driven by an increase in earnings attributable to AES as a result of contributions from new renewable projects and lower interest expense at DPL, partially offset by the decrease in Adjusted Operating Margin described above and a decrease in AFUDC for theEagle Valley CCGT project at IPL.
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92 | 2019 Annual Report Fiscal year 2018 versus 2017 Operating Margin increased$40 million , or 6%, which was driven primarily by the following (in millions): Increase at DPL primarily due to higher regulated rates following the approval of the 2017 ESP and the 2018 distribution rate order and $
35
favorable weather Increase at DPL driven by a one-time credit to depreciation expense, primarily as a result of a reduction in the ARO liability at DPL's closed
32
plants, Stuart and Killen Increase at IPL due to higher wholesale margins driven byEagle Valley
23
coming online and higher retail margins due to favorable weather Increase at Southland driven by higher market energy sales, partially offset by a decrease in capacity sales and lower ancillary services due
12
to the expiration of long-term agreements Decrease atHawaii primarily due to higher coal prices and lower gain on (24 ) valuation of MTM commodity swaps Decrease at IPL due to higher maintenance expense due to increased (21 ) current year outages Impact of the sale and closure of generation plants at DPL (12 ) Other (5 ) Total US and Utilities SBU Operating Margin Increase $
40
Adjusted Operating Margin increased$55 million primarily due to the drivers above, adjusted for a$24 million unrealized loss on coal derivatives inHawaii , partially offset by restructuring charges in the prior year. Adjusted PTC increased$87 million , primarily driven by the increase in Adjusted Operating Margin described above, as well as an increase in the Company's share of earnings at Distributed Energy due to new solar project growth, lower interest expense, and the HLBV allocation of noncontrolling interest earnings at Buffalo Gap, partially offset by lower allowance for equity funds used during construction atIPALCO . South America SBU The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated: % Change % Change For the Years Ended $ Change 2019 2019 vs. $ Change 2018 2018 vs. December 31, 2019 2018 2017 vs. 2018 2018 vs. 2017 2017 Operating Margin$ 873 $ 1,017 $ 862 $ (144 ) -14 % $ 155 18 % Adjusted Operating Margin (1) 499 612 500 (113 ) -18 % 112 22 % Adjusted PTC (1) 504 519 446 (15 ) -3 % 73 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 for the respective ownership interest for key businesses.
Fiscal year 2019 versus 2018 Operating Margin decreased$144 million , or 14%, which was driven primarily by the following (in millions): Decrease inArgentina primarily driven by lower generation and lower energy and capacity prices as defined by resolution 1/2019, which$ (59 ) modified generators' remuneration schemes Decrease due to the depreciation of the Colombian peso and Brazilian real against the USD, offset by savings in fixed costs as a result of the (38 ) depreciation of the Argentine peso Decrease inChile primarily due to lower contracted energy sales and lower efficient plant availability, partially offset by lower spot prices (30 ) on energy purchases Decrease due to the sale of Electrica Santiago and the transmission lines (21 ) in 2018 Decrease inChile primarily due to higher fixed costs associated with IT initiatives and realized FX losses related to forward instruments, (11 ) partially offset by savings on employee expenses Decrease in Tietê primarily driven by lower spot sales and prices,
(10 )
partially offset by higher contracted energy sales
Increase in
30
system hydrology Increase in Tietê due to new solar plants in operation
10
Other (15 ) Total South America SBU Operating Margin Decrease $
(144 )
Adjusted Operating Margin decreased$113 million primarily due to the drivers above, adjusted for NCI. Adjusted PTC decreased$15 million , mainly driven by the decrease in Adjusted Operating Margin described above, partially offset by realized FX gains inArgentina andChile in 2019 as compared to losses in 2018, and higher equity earnings in 2019 related to better operating results at Guacolda.
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93 | 2019 Annual Report Fiscal year 2018 versus 2017 Operating Margin increased$155 million , or 18%, which was driven primarily by the following (in millions): Increase inArgentina mainly related to higher capacity prices resulting from market reforms enacted in 2017 and lower fixed costs primarily due $
71
to the devaluation of the Argentine peso Increase inColombia mainly related to higher contract pricing in 2018
64
and higher generation Margin on new PPAs inChile at Gener, Angamos and Cochrane
50
Lower fixed costs at Gener associated with planned maintenance performed
21
in Q3 2017 Impact of the sale of Electrica Santiago (38 ) Lower contract sales to distribution companies inChile , net of higher (24 ) revenue associated with a contract termination Other
11
Total South America SBU Operating Margin Increase $
155
Adjusted Operating Margin increased$112 million primarily due to the drivers above, adjusted for NCI. Adjusted PTC increased$73 million , mainly due to the increase in Adjusted Operating Margin described above and lower interest inChile , partially offset by a$28 million decrease associated with a gain recognized in the prior year from the settlement of a legal dispute with YPF at Uruguaiana, higher interest expense inBrazil , lower equity earnings inChile and higher realized foreign currency losses inArgentina . MCAC SBU The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated: % Change $ Change % Change For the Years Ended $ Change 2019 vs. 2019 vs. 2018 vs. 2018 vs. December 31, 2019 2018 2017 2018 2018 2017 2017 Operating Margin$ 487 $ 534 $ 465 $ (47 ) -9 %$ 69 15 % Adjusted Operating Margin (1) 352 391 358 (39 ) -10 % 33 9 % Adjusted PTC (1) 367 300 277 67 22 % 23 8 %
_____________________________
(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 for the respective ownership interest for key businesses.
Fiscal year 2019 versus 2018 Operating Margin decreased$47 million , or 9%, which was driven primarily by the following (in millions): Lower availability due to the outage of Changuinola for the tunnel lining$ (123 ) upgrade Lower availability driven by lower hydrology inPanama (40 ) Decrease inDominican Republic due to lower energy prices (18 ) Lower energy costs and business interruption insurance recovered due to
45
the lightning incident at the Andres facility in 2018
Higher contract sales at
41
higher prices Higher sales atPanama driven by the commencement of operations at the
40
Colon combined cycle facility inSeptember 2018 Increase inMexico due to pension plan pass-through adjustment
12
Other (4 ) Total MCAC SBU Operating Margin Decrease $
(47 )
Adjusted Operating Margin decreased$39 million primarily due to the drivers above, adjusted for NCI. Adjusted PTC increased$67 million , mainly driven by the insurance recoveries associated with property damage at Andres and Changuinola, partially offset by a decrease in Adjusted Operating Margin described above.
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94 | 2019 Annual Report Fiscal year 2018 versus 2017 Operating Margin increased$69 million , or 15%, which was driven primarily by the following (in millions): Increase inDominican Republic due to higher spot prices $
32
Higher contracted energy sales in
21
September 2018 Higher availability driven by improved hydrology inPanama
17
Higher contracted energy sales in
12
June 2017 and lower forced maintenance outages Decrease inMexico due to pension plan pass-through adjustments and (8 ) higher fuel costs Other (5 ) Total MCAC SBU Operating Margin Increase $
69
Adjusted Operating Margin increased$33 million primarily due to the drivers above, adjusted for NCI. Adjusted PTC increased$23 million , mainly driven by the increase in Adjusted Operating Margin as described above, partially offset by lower capitalized interest due to project completions inPanama andDominican Republic and lower foreign currency gains inMexico . Eurasia SBU The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated: % Change % Change For the Years Ended $ Change 2019 vs. 2019 vs. $ Change 2018 2018 vs. December 31, 2019 2018 2017 2018 2018 vs. 2017 2017 Operating Margin$ 188 $ 227 $ 422 $ (39 ) -17 %$ (195 ) -46 % Adjusted Operating Margin (1) 148 194 306 (46 ) -24 % (112 ) -37 % Adjusted PTC (1) 159 222 290 (63 ) -28 % (68 ) -23 %
_____________________________
(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 for the respective ownership interest for key businesses.
Fiscal year 2019 versus 2018 Operating Margin decreased$39 million , or 17%, which was driven primarily by the following (in millions): Impact of sold businesses Kilroot and Ballylumford$ (46 ) Impact of the sale of the Masinloc power plant inMarch 2018
(24 )
Lower depreciation at the
20
Other
11
Total Eurasia SBU Operating Margin Decrease $
(39 )
Adjusted Operating Margin decreased$46 million due to the drivers above, adjusted for NCI. Adjusted PTC decreased$63 million , driven primarily by the decrease in Adjusted Operating Margin discussed above, as well as a decrease in earnings at OPGC and the sale of Elsta, our equity affiliate inthe Netherlands . Fiscal year 2018 versus 2017 Including favorable FX impacts of$8 million , Operating Margin decreased$195 million , or 46%, which was driven primarily by the following (in millions): Impact of the sale of the Masinloc power plant inMarch 2018 $
(122 ) Impact of the sale of the Kazakhstan CHPs and the expiration of HPP concession in 2017
(36 )
Decrease in
(33 )
Other (4 )
Total Eurasia SBU Operating Margin Decrease $ (195 )
Adjusted Operating Margin decreased$112 million , primarily due to the drivers above, adjusted for NCI. Adjusted PTC decreased$68 million , primarily driven by the decrease in Adjusted Operating Margin discussed above, partially offset by the positive impact inVietnam due to increased interest income from the higher financing component of contract consideration as a result of adoption of the new revenue recognition standard in 2018.
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95 | 2019 Annual Report Key Trends and Uncertainties During 2020 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 impact 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 this Form 10-K. Macroeconomic and Political The macroeconomic and political environments in some countries where our subsidiaries conduct business have changed during 2019. This could result in significant impacts to tax laws and environmental and energy policies. Additionally, we operate in multiple countries and as such are subject to volatility in exchange rates at the subsidiary level. See Item 7A.- Quantitative and Qualitative Disclosures About Market Risk for further information.Argentina - In the run up to the 2019 Presidential elections, the Argentine peso devalued significantly and the government ofArgentina imposed capital controls and announced a restructuring ofArgentina's debt payments. Restrictions on the flow of capital have limited the availability of international credit, and economic conditions inArgentina have further deteriorated, triggering additional devaluation of the Argentine peso and a deterioration of the country's risk profile. OnOctober 27, 2019 ,Alberto Fernández was elected president. The entering administration has started evaluating measures to respond to the Argentine economic crisis. OnFebruary 27, 2020 , the Secretariat of Energy passed Resolution No. 31/2020 that includes the denomination of tariffs in local currency indexed by local inflation, and reductions in capacity payments received by generators. These regulatory changes are expected to have a negative impact on our financial results. Although the situation remains unresolved, it has not had a material impact on our current exposures to date, and payments on the long-term receivables for the FONINVEMEM Agreements are current. For further information, see Note 7-Financing Receivables included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K.Chile - InOctober 2019 ,Chile saw significant protests associated with economic conditions resulting in the declaration of a state of emergency in several major cities. InNovember 2019 , the Chilean government enacted Law 21,185 that establishes aStabilization Fund for regulated energy prices. Historically, the government updated the prices for regulated energy contracts every six months to reflect the indexation the contracts have to exchange rates and commodities prices. The new law freezes regulated prices and does not allow the pass-through of these contractual indexation updates to customers beyond the pricing in effect atJuly 1, 2019 , until new lower-cost renewable contracts are incorporated into pricing in 2023. Consequently, costs incurred in excess of theJuly 1, 2019 price will be accumulated and borne by generators.AES Gener has deferred collection of approximately$30 million of revenue at year end. It is expected such amounts deferred will be fully repaid to generators prior toDecember 31, 2027 . In addition, the Chilean energy ministry has not yet released regulations pursuant to this law; therefore, certain aspects of the impact of Law 21,185 are uncertain at this time. Other initiatives to address the concerns of the protesters, including potential constitutional amendments, are under consideration byCongress and could result in regulatory changes that may affect our results of operations inChile .Puerto Rico - 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 . The Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA") was enacted to create a structure for exercising federal oversight over the fiscal affairs ofU.S. territories and created procedures for adjusting debt accumulated by thePuerto Rico government and, potentially, other territories ("Title III"). PROMESA also expedites the approval of key energy projects and other critical projects inPuerto Rico .
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96 | 2019 Annual Report PROMESA allowed for the establishment of an Oversight Board with broad powers of budgetary and financial control overPuerto Rico . The Oversight Board filed for bankruptcy on behalf of PREPA under Title III inJuly 2017 . As a result of the bankruptcy filing,AES Puerto Rico and AES Ilumina's non-recourse debt of$287 million and$33 million , respectively, continue to be in default and are classified as current as ofDecember 31, 2019 . The Company is in compliance with its debt payment obligations as ofDecember 31, 2019 . The Company's receivable balances inPuerto Rico as ofDecember 31, 2019 totaled$74 million , of which$20 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. OnJanuary 2, 2020 , the Governor ofPuerto Rico signed a bill that prohibits the disposal and unencapsulated beneficial use of coal combustion residuals inPuerto Rico . Prior to this bill's approval, the Company had put in place arrangements to dispose or beneficially use its coal ash and combustion residual outside ofPuerto Rico . Significant earthquakes and subsequent aftershocks hitPuerto Rico in lateDecember 2019 andJanuary 2020 . These events did not result in damage to our assets inPuerto Rico . We expect thatAES Puerto Rico will continue to play a critical role in ensuring reliability for customers. Considering the information available as of the filing date, Management believes the carrying amount of our long-lived assets inPuerto Rico of$538 million is recoverable as ofDecember 31, 2019 . Reference Rate Reform - 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. 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. United States Tax Law Reform Federal Taxes - InDecember 2017 ,the United States enacted the TCJA. The legislation significantly revised theU.S. corporate income tax system by, among other things, lowering the corporate income tax rate, introducing new limitations on interest expense deductions, subjecting foreign earnings in excess of an allowable return to currentU.S. taxation, and adopting a semi-territorial corporate tax system. These changes impacted our 2018 and 2019 effective tax rates and may materially impact our effective tax rate in future periods. Furthermore, we anticipate that growth in ourU.S. businesses and higherU.S. tax expense may fully utilize our remaining net operating loss carryforwards in the near term, which could lead to material cash tax payments inthe United States . Our interpretation of the TCJA may change as theU.S. Treasury and the Internal Revenue Service issue additional guidance. Such changes may be material. For example, the Company anticipates that regulations proposed in 2019 related to the GILTI high-tax exception will be finalized in and made effective for 2020. Our 2020 tax rate will be materially impacted if such final regulations are not issued in 2020. Our interim tax rates may also be impacted if such regulations are finalized later in 2020. State Taxes - The reactions of the individual states to federal tax reform are still evolving. Most states will assess whether and how the federal changes will be incorporated into their state tax legislation. As we expect higher taxable income in the future at the federal level, this may also lead to higher state taxable income. Our current state tax provisions predominantly have full valuation allowances against state net operating losses. These positions will be re-assessed in the future as state tax law evolves and may result in material changes in position. 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 Item 1-Executive Summary.
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97 | 2019 Annual Report 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 . These units will remain connected to the grid as "strategic operating reserve" for up to five years after ceasing operations, will receive a reduced capacity payment and will be dispatched, if necessary, to ensure the electric system's reliability. See Item 1-Business-South America SBU-Chile for further discussion. Considering the information available as of the filing date, Management believes the carrying amount of our coal-fired long-lived assets inChile of$2.8 billion is recoverable as ofDecember 31, 2019 . 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 . Unless the Act is amended or a waiver from its provisions is obtained,AES Puerto Rico will need to convert fuel sources to continue operating. PREPA andAES Puerto Rico have begun discussing conversion options, but any plan would be subject to lender and regulatory approval, including that of the Oversight Board that filed for bankruptcy on behalf of PREPA. We considered the Act an indicator of impairment for the long-lived assets atAES Puerto Rico in the second quarter; however, the carrying value of the asset group was recoverable. See Impairments for further information. 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 this Form 10-K. Regulatory Maritza PPA Review - The DG Comp continues to review whether Maritza's PPA with NEK is compliant with theEuropean Commission's state aid rules. Although no formal investigation has been launched by DG Comp to date, Maritza has engaged in discussions with the DG Comp case team and representatives ofBulgaria to discuss the agency's review. In the near term, Maritza expects that it will engage in discussions withBulgaria to attempt to reach a negotiated resolution concerning DG Comp's review. The anticipated discussions could involve a range of potential outcomes, including but not limited to termination of the PPA and payment of some level of compensation to 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 anticipated discussions between Maritza andBulgaria , nor can we predict how DG Comp might resolve its review if the discussions fail to result in an agreement concerning the review. 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 assurances that this matter will be resolved favorably; if it is not, there could be a material adverse impact on Maritza's and the Company's respective financial statements. Considering the information available as of the filing date, Management believes the carrying value of our long-lived assets at Maritza of approximately$1.1 billion is recoverable as ofDecember 31, 2019 . DP&L Rate Case - OnNovember 21, 2019 , the PUCO issued an order modifying DP&L's ESP by removing the DMR. EffectiveDecember 18, 2019 , the PUCO partially approved DP&L's subsequent request to revert to the prior ESP rates and maintain several other riders that were previously in effect; however, certain of those riders were disallowed. In the first quarter of 2020, DP&L filed a separate petition seeking authority to record regulatory assets to accrue revenues that would have otherwise been collected under the ESP through the Decoupling Rider. The outcome of this petition is unknown at this time. See Item 1.-Business-US and Utilities SBU-DPL of this Form 10-K for further information. Foreign Exchange 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. In 2018 and 2019, there was a significant devaluation in the Argentine peso against the USD, which had an impact on our 2018 and 2019 results. Continued material devaluation of the Argentine peso against the USD could
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98 | 2019 Annual Report have an impact on our future results. The Argentine economy continues to be considered highly inflationary underU.S. GAAP; as such, all of our Argentine businesses are reported using the USD as the functional currency. For additional information, refer to Item 7A.-Quantitative and Qualitative Disclosures About Market Risk. Changuinola Tunnel Leak In early 2019, the Company confirmed loss of water in specific tunnel sections of the Changuinola power plant, a 223 MW hydroelectric power facility inPanama . As a result, about one third of the tunnel, or 1.6 kilometers, required upgraded lining to ensure long-term performance of the facility. The upgrade to the lining was completed and the affected units were placed back in service inJanuary 2020 . See Note 21-Other Income and Expense included included in Item 8.-Financial Statements and Supplementary Data, and Other Income and Expense included in Item 7.- Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K for further information. Impairments Long-lived Assets and Equity Affiliates - During the year endedDecember 31, 2019 , the Company recognized asset and other-than-temporary impairment expenses of$277 million . See Note 8-Investments In and Advances To Affiliates and Note 22- Asset Impairment Expense included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K for further information. After recognizing these impairment expenses, the carrying value of our investments in equity affiliates and long-lived assets that were assessed for impairment in 2019 totaled$892 million atDecember 31, 2019 . Events or changes in circumstances that may necessitate recoverability tests and potential impairments of long-lived assets 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 end of its estimated useful life.Goodwill - The Company considers a reporting unit at risk of impairment when its fair value does not exceed its carrying amount by more than 10%. During the annual goodwill impairment test performed as ofOctober 1, 2019 , the Company determined that the fair value of its Gener reporting unit exceeded its carrying value by 3%. Therefore, Gener's$868 million goodwill balance was considered to be "at risk" as ofDecember 31, 2019 , largely due to the Chilean Government's announcement to phase out coal generation by 2040, and a decline in long-term energy prices. Through 2028, Gener's plants remain largely contracted, with most of its PPAs expiring between 2029 and 2042. The Company utilized the income approach in deriving the fair value of the Gener reporting unit, which included estimated cash flows based on the estimated useful lives of the underlying generating asset class. These cash flows were discounted using a weighted average cost of capital of 7%, which was determined based on the Capital Asset Pricing Model. See Item 7.-Critical Accounting Policies and Estimates-Fair Value of Nonfinancial Assets and Liabilities and Note 9-Goodwill and Other Intangible Assets included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K for further information. The Company monitors its reporting units at risk of impairment for interim impairment indicators, and believes that the estimates and assumptions used in the calculations are reasonable as ofDecember 31, 2019 . Should the fair value of any of the Company's reporting units fall below its carrying amount because of reduced operating performance, market declines, changes in the discount rate, regulatory changes, or other adverse conditions, goodwill impairment charges may be necessary in future periods. Capital Resources and Liquidity Overview As ofDecember 31, 2019 , the Company had unrestricted cash and cash equivalents of$1 billion , of which$13 million was held at the Parent Company and qualified holding companies. The Company had$400 million in short-term investments, held primarily at subsidiaries, and restricted cash and debt service reserves of$543 million . The Company also had non-recourse and recourse aggregate principal amounts of debt outstanding of$16.7 billion and$3.4 billion , respectively. Of the$1.9 billion of our current non-recourse debt,$1.5 billion was presented as such
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99 | 2019 Annual Report because it is due in the next twelve months and$320 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 other covenants or other conditions contained in the non-recourse debt documents 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 of the subsidiary to which the debt relates, through opportunistic refinancing activity, or some combination thereof. We have$5 million of 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 of$180 million under its senior secured credit facility. On a consolidated basis, of the Company's$20.4 billion of total gross debt outstanding as ofDecember 31, 2019 , approximately$3.3 billion bore interest at variable rates that were not subject to a derivative instrument which fixed the interest rate.Brazil holds$1.1 billion 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. AtDecember 31, 2019 , 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$865 million 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. AtDecember 31, 2019 , we had$342 million in letters of credit outstanding provided under our unsecured credit facility, and$19 million in letters of credit outstanding provided under our senior secured credit facility. These letters of credit operate to guarantee performance relating to certain project development and construction activities and
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100 | 2019 Annual Report business operations. During the year endedDecember 31, 2019 , 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 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 ofDecember 31, 2019 , the Company had approximately$109 million of 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 beyondDecember 31, 2020 , 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 to revenues recognized on regulated energy contracts that were impacted by theStabilization Fund created by the Chilean government. See Note 7- Financing Receivables included in Item 8.-Financial Statements and Supplementary Data, Item 1.-Business-South America SBU-Argentina-Regulatory Framework and Market Structure, and Item 7.-Management's Discussion and Analysis of Financial Condition and Results of Operation-Key Trends and Uncertainties-Macroeconomic and Political-Chile of this Form 10-K for further information. As ofDecember 31, 2019 , the Company had approximately$1.4 billion of loans receivable primarily related to a facility constructed under a BOT contract inVietnam . This loan receivable represents contract consideration related to the construction of the facility, which was substantially completed in 2015, and will be collected over the 25-year term of the plant's PPA. See Note 20-Revenue included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K for further information. Cash Sources and Uses The primary sources of cash for the Company in the year endedDecember 31, 2019 were debt financings, cash flows from operating activities, and sales of short-term investments. The primary uses of cash in the year endedDecember 31, 2019 were repayments of debt, capital expenditures, and purchases of short-term investments. The primary sources of cash for the Company in the year endedDecember 31, 2018 were debt financings, cash flows from operating activities, proceeds from the sales of business interests, and sales of short-term investments. The primary uses of cash in the year endedDecember 31, 2018 were repayments of debt, capital expenditures, and purchases of short-term investments. The primary sources of cash for the Company in the year endedDecember 31, 2017 were debt financings, sales of short-term investments, and cash flows from operating activities. The primary uses of cash in the year endedDecember 31, 2017 were repayments of debt, purchases of short-term investments, and capital expenditures.
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101 | 2019 Annual Report
A summary of cash-based activities are as follows (in millions):
Year Ended December 31,
Cash Sources: 2019 2018 2017
Issuance of non-recourse debt$ 5,828 $ 1,928 $ 3,222 Net cash provided by operating activities 2,466 2,343
2,504
Borrowings under the revolving credit facilities 2,026 1,865
2,156
Sale of short-term investments 666 1,302
3,540
Proceeds from the sale of business interests, net of cash and restricted cash sold 178 2,020 108 Insurance proceeds 150 17 15 Issuance of recourse debt - 1,000 1,025 Other 137 218 123 Total Cash Sources$ 11,451 $ 10,693 $ 12,693 Cash Uses: Repayments of non-recourse debt$ (4,831 ) $ (1,411 ) $ (2,360 ) Capital expenditures (2,405 ) (2,121 ) (2,177 ) Repayments under the revolving credit facilities (1,735 ) (2,238 ) (1,742 ) Purchase of short-term investments (770 ) (1,411 ) (3,310 ) Repayments of recourse debt (450 ) (1,933 ) (1,353 ) Distributions to noncontrolling interests (427 ) (340 ) (424 ) Dividends paid on AES common stock (362 ) (344 ) (317 ) Contributions and loans to equity affiliates (324 ) (145 ) (89 ) Acquisitions of business interests, net of cash (192 ) (66 ) (609 ) and restricted cash acquired Payments for financed capital expenditures (146 ) (275 ) (179 ) Payments for financing fees (126 ) (39 ) (100 ) Other (114 ) (155 ) (205 ) Total Cash Uses$ (11,882 ) $ (10,478 ) $ (12,865 ) Net increase (decrease) in Cash, Cash$ (431 ) $ 215 $ (172 ) Equivalents, and Restricted Cash Consolidated Cash Flows The following table reflects the changes in operating, investing, and financing cash flows for the comparative twelve month periods (in millions): December 31, $ Change Cash flows provided by (used in): 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Operating activities$ 2,466 $ 2,343 $ 2,504 $ 123 $ (161 ) Investing activities (2,721 ) (505 ) (2,599 ) (2,216 ) 2,094 Financing activities (86 ) (1,643 ) 43 1,557 (1,686 ) Operating Activities Fiscal Year 2019 versus 2018 Net cash provided by operating activities increased$123 million for the year endedDecember 31, 2019 , compared toDecember 31, 2018 .
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102 | 2019 Annual Report
Operating Cash Flows
(in millions)
[[Image Removed: chart-18c6150fc0501d4f724a01.jpg]]
(1) 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 theConsolidated Statements of Cash Flows in Item 8.-Financial Statements
and Supplementary Data of this Form 10-K.
(2) The change in working capital is defined as the variance in totalchanges in operating assets and liabilities as shown on the Consolidated
Statements of Cash Flows in Item 8.-Financial Statements and
Supplementary Data of this Form 10-K.
Amounts included in the chart above include the results of discontinued
operations, where applicable.
• Adjusted net income decreased
our
current year gains on insurance recoveries associated with the lightning
incident at the Andres facility in 2018 and the Changuinola tunnel leak,
and higher margins at our US and Utilities SBU.
• Working capital requirements decreased $147 million , primarily due to
higher collections of overdue receivables from distribution companies in
the Dominican Republic , higher collections of insurance receivables atAndres, and lower supplier payments and VAT recoveries at Gener. These
impacts were partially offset by a decrease in income tax liabilities at
Argentina as a result of lower operating margin and income tax rates, and
higher supplier payments and prior year collections at Puerto Rico .
Fiscal Year 2018 versus 2017
Net cash provided by operating activities decreased $161 million for the year
ended December 31, 2018 , compared to December 31, 2017 .
Operating Cash Flows
(in millions)
[[Image Removed: chart-0aa81fade6a7e81af2e.jpg]]
(1) 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 theConsolidated Statements of Cash Flows in Item 8.-Financial Statements
and Supplementary Data of this Form 10-K.
(2) The change in working capital is defined as the variance in totalchanges in operating assets and liabilities as shown on the Consolidated
Statements of Cash Flows in Item 8.-Financial Statements and
Supplementary Data of this Form 10-K.
Amounts included in the chart above include the results of discontinued
operations, where applicable.
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103 | 2019 Annual Report
• Adjusted net income decreased
our Eurasia SBU and a 2017 favorable impact at Uruguaiana as a result of a
legal settlement. These impacts were partially offset by higher margins in
2018 at our South America , MCAC and US and Utilities SBUs.
• Working capital requirements increased $121 million , primarily due tohigher insurance receivables at Andres, deconsolidation of Eletropaulo,
lower collections at Los Mina and Itabo, and the timing of payments on coal
purchases at Gener. These impacts were partially offset by the collections
on the construction performance obligation from the offtaker at
higher CAMMESA collections at Alicura, and the timing of payments on coal
purchases at Puerto Rico .
Investing Activities
Fiscal Year 2019 versus 2018
Net cash used in investing activities increased $2.2 billion for the year ended
December 31, 2019 compared to December 31, 2018 .
Investing Cash Flows
(in millions)
[[Image Removed: chart-979cfc1b53d95c25834a01.jpg]]
• Proceeds from dispositions decreased $1.8 billion , primarily due to the
sales of Masinloc, Electrica Santiago, CTNG, Eletropaulo, and the DPL
Peaker assets in 2018; partially offset by the sale of a portion of our
interest in a portfolio of sPower's operating assets and the sale of the
Kilroot and Ballylumford plants in the United Kingdom in 2019.
• Contributions and loans to equity affiliates increased
primarily due to project funding requirements at sPower.
• Capital expenditures increased
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104 | 2019 Annual Report
Capital Expenditures
(in millions)
[[Image Removed: chart-cc6129bcadf393f0f04.jpg]]
• Growth expenditures increased $130 million , primarily due to higherinvestments in solar projects at Distributed Energy and renewable energy
projects in Argentina ; partially offset by a decrease in payments for the
Southland re-powering projects.
• Maintenance expenditures increased
result of the steam turbine lightning damage, at DPL from storm damages,
and at Changuinola due to the upgrade of the tunnel lining.
• Environmental expenditures decreased
to lower spending for NAAQS, NPDES and CCR rule compliance.
Fiscal Year 2018 versus 2017 Net cash used in investing activities decreased$2.1 billion for the year endedDecember 31, 2018 compared toDecember 31, 2017 . Investing Cash Flows (in millions) [[Image Removed: chart-afc4231f8d79a158b4e.jpg]] • Proceeds from dispositions increased by$1.9 billion , primarily due to the
sales of Masinloc, Electrica Santiago, Eletropaulo, CTNG and the DPL Peaker
assets in 2018, partially offset by the sale of the Kazakhstan CHPs in 2017
and transaction costs incurred for the Beckjord sale.
• Payments for the acquisitions of business interests decreased by
million, primarily due to the acquisitions of sPower and Alto Sertão II in
2017.
• Cash resulting from net purchases of short-term investments decreased by
$339 million , primarily due to the sale of Eletropaulo.
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105 | 2019 Annual Report
• Capital expenditures decreased
Capital Expenditures
(in millions)
[[Image Removed: chart-b1378f7d0dee51a2b67.jpg]]
• Growth expenditures increased $114 million , primarily due to higherspending for the Southland re-powering project; partially offset by lower
spending resulting from the completion of the Colon project and the
completion of the combined cycle project at Los Mina.
• Maintenance expenditures decreased $129 million , primarily due to the
deconsolidation of Eletropaulo in Q4 2017.
• Environmental expenditures decreased
to lower spending for NPDES compliance.
Financing Activities Fiscal Year 2019 versus 2018 Net cash used in financing activities decreased$1.6 billion for the year endedDecember 31, 2019 compared toDecember 31, 2018 . Financing Cash Flows (in millions) [[Image Removed: chart-29b517c648c2dd20974a01.jpg]]
See Note 11-Debt in Item 8.-Financial Statements and Supplementary Data of this
Form 10-K for more information regarding significant debt transactions.
• The
higher net repayments of Parent Company debt in the prior year.
• The $387 million impact from Parent Company revolver transactions isprimarily from higher repayments in the prior year, and higher borrowings
in 2019 for general corporate cash management activities.
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106 | 2019 Annual Report
• The
due to net issuances at Gener, Alto Maipo and DPL, which were partially
offset by net repayments at Tietê, and lower net issuances in 2018 at
IPALCO .
• The $278 million impact from non-recourse revolver transactions isprimarily due to higher net borrowings at DPL and prior year net repayments
at
Fiscal Year 2018 versus 2017 Net cash used in financing activities decreased$1.7 billion for the year endedDecember 31, 2018 compared toDecember 31, 2017 . Financing Cash Flows (in millions) [[Image Removed: chart-b115272afcc8bc51ccc.jpg]]
See Note 11-Debt in Item 8.-Financial Statements and Supplementary Data of this
Form 10-K for more information regarding significant debt transactions.
• The
higher net repayments of Parent Company debt.
• The $413 million impact from Parent Company revolver transactions is
primarily from lower borrowings for general corporate cash management
activities.
• The
due to lower net issuances at AES Argentina, Tietê, Colon, Alto Maipo,
Generation and
at Gener and IPALCO .
• The $370 million impact from non-recourse revolver transactions is
primarily due to higher net repayments at IPALCO and Gener.
Parent Company Liquidity
The following discussion is included as a useful measure of the liquidity
available to The 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 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 plus available borrowings under existing credit facility plus cash at
qualified holding companies. The cash held at qualified holding
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107 | 2019 Annual Report 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 comparableU.S. GAAP financial measure, Cash and cash equivalents, at the periods indicated as follows (in millions): December 31, 2019 December 31, 2018 Consolidated cash and cash equivalents $ 1,029 $ 1,166 Less: Cash and cash equivalents at subsidiaries (1,016 ) (1,142 )
Parent and qualified holding companies' cash and cash equivalents
13 24
Commitments under Parent Company credit facilities 1,000 1,100
Less: Letters of credit under the credit facilities (19 ) (78 )
Less: Borrowings under the credit facilities (180 ) -
Borrowings available under Parent Company credit
facilities 801 1,022
Total Parent Company Liquidity $ 814 $ 1,046
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. We expect that the Parent Company credit facilities' borrowings will be
repaid by the end of the year.
The Parent Company paid dividends of $0.55 per share to its common stockholders
during the year ended December 31, 2019 . 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 and $3.7 billion at December 31, 2019
and 2018, respectively. See Note 11- Debt in Item 8.-Financial Statements and
Supplementary Data of this 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 senior secured credit facility.
See Item 1A.- Risk Factors -The AES Corporation is a holding company and its
ability to make payments on its outstanding indebtedness, including its public
debt securities, is dependent upon the receipt of funds from its subsidiaries by
way of dividends, fees, interest, loans or otherwise, of this Form 10-K.
Various debt instruments at the Parent Company level, including our senior
secured 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 of December 31, 2019 ,
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.
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108 | 2019 Annual Report For example, our senior secured 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 Consolidated Balance Sheets amounts to$1.9 billion . The portion of current debt related to such defaults was$320 million atDecember 31, 2019 , all of which was non-recourse debt related to two subsidiaries -AES Puerto Rico and AES Ilumina. An additional$5 million of debt in default exists at the subsidiary AES Jordan Solar which was classified as a current held-for-sale liability atDecember 31, 2019 . 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 due to the bankruptcy of the offtaker. See Note 11- Debt in Item 8.-Financial Statements and Supplementary Data of this Form 10-K 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 ofDecember 31, 2019 , 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 senior secured 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 completed fiscal quarters. As ofDecember 31, 2019 , none of the defaults listed above individually or in the aggregate resulted in or is at risk of triggering a cross-default under the recourse debt of the Parent Company. Contractual Obligations and Parent Company Contingent Contractual Obligations A summary of our contractual obligations, commitments and other liabilities as ofDecember 31, 2019 is presented below and excludes any businesses classified as discontinued operations or held-for-sale (in millions): Less than 1 More than 5 Footnote Contractual Obligations Total year 1-3 years 3-5 years years Other Reference(4) Debt obligations (1)$ 20,448 -$ 1,888 -$ 3,160 -$ 3,661 -$ 11,739 $ - 11 Interest payments on long-term debt (2) 6,255 784 1,381 1,034 3,056 - n/a Finance lease obligations 139 4 8 8 119 - 14 Operating lease obligations 595 29 54 52 460 - 14 Electricity obligations 7,622 699 915 898 5,110 - 12 Fuel obligations 7,039 1,385 1,842 1,211 2,601 - 12 Other purchase obligations 5,624 1,551 1,261 1,067 1,745 - 12 Other long-term liabilities reflected on AES' consolidated balance sheet under GAAP (3) 546 - 230 81 219 16 n/a Total$ 48,268 $ 6,340 $ 8,851 $ 8,012 $ 25,049 $ 16
_____________________________
(1) Includes recourse and non-recourse debt presented on the Consolidated
Balance Sheet. These amounts exclude finance lease liabilities which are
included in the finance lease category.
(2) Interest payments are estimated based on final maturity dates of debt
securities outstanding at
future refinancing, early redemptions or new debt issuances. Variable rate
interest obligations are estimated based on rates as of
(3) These amounts do not include current liabilities on the Consolidated Balance
Sheet except for the current portion of uncertain tax obligations. Noncurrent
uncertain tax obligations are reflected in the "Other" column of the table
above as the Company is not able to reasonably estimate the timing of the
future payments. In addition, these amounts do not include: (1) regulatory
liabilities (See Note 10- Regulatory Assets and Liabilities ),
(2) contingencies (See Note 13- Contingencies ), (3) pension and other
postretirement employee benefit liabilities (see Note 15- Benefit Plans ),
(4) derivatives and incentive compensation (See Note 6- Derivative
Instruments and Hedging Activities ) or (5) any taxes (See Note 23- Income
Taxes ) except for uncertain tax obligations, as the Company is not able to
reasonably estimate the timing of future payments. See the indicated notes to
the Consolidated Financial Statements included in Item 8 of this Form 10-K
for additional information on the items excluded.
(4) For further information see the note referenced below in Item 8.-Financial
Statements and Supplementary Data of this Form 10-K.
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109 | 2019 Annual Report
The following table presents our Parent Company's contingent contractual
obligations as of
Maximum
Exposure Range for
Amount (in Number of Each Agreement (in
Contingent contractual obligations millions) Agreements millions)
Guarantees and commitments $ 853 37 $0 - 157
Letters of credit under the
unsecured credit facility 342 11 $1 - 296
Letters of credit under the senior
secured credit facility 19 28 $0 - 4
Asset sale related indemnities (1) 12 1 Total $ 1,226 77
_____________________________
(1) Excludes normal and customary representations and warranties in agreements
for the sale of assets (including ownership in associated legal entities)
where the associated risk is considered to be nominal.
We have a diverse portfolio of performance-related contingent contractual obligations. These obligations are designed to cover potential risks and only require payment if certain targets are not met or certain contingencies occur. The risks associated with these obligations include change of control, construction cost overruns, subsidiary default, political risk, tax indemnities, spot market power prices, sponsor support and liquidated damages under power sales agreements for projects in development, in operation and under construction. In addition, we have an asset sale program through which we may have customary indemnity obligations under certain assets sale agreements. While we do not expect that we will be required to fund any material amounts under these contingent contractual obligations beyond 2019, many of the events which would give rise to such obligations are beyond our control. We can provide no assurance that we will be able to fund our obligations under these contingent contractual obligations if we are required to make substantial payments thereunder. Critical Accounting Policies and Estimates The 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. AES' significant accounting policies are described in Note 1- General and Summary of Significant Accounting Policies to the Consolidated Financial Statements included in Item 8 of this Form 10-K. An accounting estimate is considered critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made, different estimates reasonably could have been used, or the impact of the estimates and assumptions on financial condition or operating performance is material. Management believes that the accounting estimates employed are appropriate and the resulting balances are reasonable; however, actual results could materially differ from the original estimates, requiring adjustments to these balances in future periods. Management has discussed these critical accounting policies with the Audit Committee, as appropriate. Listed below are the Company's most significant critical accounting estimates and assumptions used in the preparation of the Consolidated Financial Statements. Income Taxes - We are subject to income taxes in both theU.S. and numerous foreign jurisdictions. Our worldwide income tax provision requires significant judgment and is based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other taxing authorities. Certain of the Company's subsidiaries are under examination by relevant taxing authorities for various tax years. The Company regularly assesses the potential outcome of these examinations in each tax jurisdiction when determining the adequacy of the provision for income taxes. Accounting guidance for uncertainty in income taxes prescribes a more likely than not recognition threshold. Tax reserves have been established, which the Company believes to be adequate in relation to the potential for additional assessments. Once established, reserves are adjusted only when there is more information available or when an event occurs necessitating a change to the reserves. While the Company believes that the amounts of the tax estimates are reasonable, it is possible that the ultimate outcome of current or future examinations may be materially different than the reserve amounts. Because we have a wide range of statutory tax rates in the multiple jurisdictions in which we operate, any changes in our geographical earnings mix could materially impact our effective tax rate. Furthermore, our tax position could be adversely impacted by changes in tax laws, tax treaties or tax regulations, or the interpretation or enforcement thereof and such changes may be more likely or become more likely in view of recent economic trends in certain of the jurisdictions in which we operate.
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110 | 2019 Annual Report In accordance withSAB 118, the Company made reasonable estimates of the impacts ofU.S. tax reform on its 2017 financial results, and recorded adjustments to those estimates in 2018 as analysis was completed. As ofDecember 31, 2018 , our analysis of the one-time impacts of the TCJA was complete underSAB 118. However, in the first quarter of 2019, theU.S. Treasury Department issued final regulations on the one-time transition tax which included changes from the proposed regulations issued in 2018. In addition, no taxes have been recorded on undistributed earnings for certain of our non-U.S. subsidiaries to the extent such earnings are considered to be indefinitely reinvested in the operations of those subsidiaries. Should the earnings be remitted as dividends, the Company may be subject to additional foreign withholding and state income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of the existing assets and liabilities, and their respective income tax bases. The Company establishes a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company has elected to treat GILTI as an expense in the period in which the tax is accrued. Accordingly, no deferred tax assets or liabilities are recorded related to GILTI. Sales of Noncontrolling Interests - Sales of noncontrolling interests are recognized within stockholders' equity. EffectiveJanuary 1, 2018 , the Company adopted ASU No. 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets, which clarified the accounting for the sale of business interests as either the sale of nonfinancial assets or the sale of businesses. Among other things, under the newly adopted guidance fewer transactions are expected to meet the definition of a business under the scope of ASC 810 and will fall under the scope of the sale of nonfinancial assets. Prior toJanuary 1, 2018 , the accounting for a sale of noncontrolling interests was dependent on whether the sale was considered a sale of in-substance real estate, where the gain (loss) on sale would be recognized in earnings rather than within stockholders' equity. In-substance real estate is composed of land plus improvements and integral equipment. The determination of whether property, plant and equipment is integral equipment is based on the significance of the costs to remove the equipment from its existing location (including the cost of repairing damage resulting from the removal), combined with the decrease in the fair value of the equipment as a result of those removal activities. When the combined total of removal costs and the decrease in fair value of the equipment exceeds 10% of the fair value of the equipment, the equipment is considered integral equipment. The accounting standards specifically identify power plants as an example of in-substance real estate. Where the consolidated entity in which noncontrolling interests have been sold contains in-substance real estate, management estimates the extent to which the total fair value of the assets of the entity is represented by the in-substance real estate and whether significant value exists beyond the in-substance real estate. This estimation considers all qualitative and quantitative factors relevant for each sale and, where appropriate, includes making quantitative estimates about the fair value of the entity and its identifiable assets and liabilities (including any favorable or unfavorable contracts) by analogy to the accounting standards on business combinations. As such, these estimates may require significant judgment and assumptions, similar to the critical accounting estimates discussed below for impairments and fair value. Impairments - Our accounting policies on goodwill and long-lived assets are described in detail in Note 1- General and Summary of Significant Accounting Policies , included in Item 8 of this Form 10-K. The Company makes considerable judgments in its impairment evaluations of goodwill and long-lived assets, starting with determining if an impairment indicator exists. Events that may result in an impairment analysis being performed 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 that the asset will be disposed of before the end of its previously estimated useful life. The Company exercises judgment in determining if these events represent an impairment indicator requiring the computation of the fair value of goodwill and/or the recoverability of long-lived assets. The fair value determination is typically the most judgmental part in an impairment evaluation. Please see Fair Value below for further detail. As part of the impairment evaluation process, management analyzes the sensitivity of fair value to various underlying assumptions. The level of scrutiny increases as the gap between fair value and carrying amount decreases. Changes in any of these assumptions could result in management reaching a different conclusion regarding the potential impairment, which could be material. Our impairment evaluations inherently involve
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111 | 2019 Annual Report uncertainties from uncontrollable events that could positively or negatively impact the anticipated future economic and operating conditions. Further discussion of the impairment charges recognized by the Company can be found within Note 9-Goodwill and Other Intangible Assets and Note 22- Asset Impairment Expense to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Depreciation - Depreciation, after consideration of salvage value and asset retirement obligations, is computed using the straight-line method over the estimated useful lives of the assets, which are determined on a composite or component basis. The Company considers many factors in its estimate of useful lives, including expected usage, physical deterioration, technological changes, existence and length of off-take agreements, and laws and regulations, among others. In certain circumstances, these estimates involve significant judgment and require management to forecast the impact of relevant factors over an extended time horizon. Useful life estimates are continually evaluated for appropriateness as changes in the relevant factors arise, including when a long-lived asset group is tested for recoverability. Depreciation studies are performed periodically for assets subject to composite depreciation. Any change to useful lives is considered a change in accounting estimate and is made on a prospective basis. Fair Value - For information regarding the fair value hierarchy, see Note 1- General and Summary of Significant Accounting Policies included in Item 8 of this Form 10-K. Fair Value of Financial Instruments - A significant number of the Company's financial instruments are carried at fair value with changes in fair value recognized in earnings or other comprehensive income each period. Investments are generally fair valued based on quoted market prices or other observable market data such as interest rate indices. The Company's investments are primarily certificates of deposit and mutual funds. Derivatives are valued using observable data as inputs into internal valuation models. The Company's derivatives primarily consist of interest rate swaps, foreign currency instruments, and commodity and embedded derivatives. Additional discussion regarding the nature of these financial instruments and valuation techniques can be found in Note 5- Fair Value included in Item 8 of this Form 10-K. Fair Value of Nonfinancial Assets and Liabilities - Significant estimates are made in determining the fair value of long-lived tangible and intangible assets (i.e., property, plant and equipment, intangible assets and goodwill) during the impairment evaluation process. In addition, the majority of assets acquired and liabilities assumed in a business combination and asset acquisitions by VIEs are required to be recognized at fair value under the relevant accounting guidance. The Company may engage an independent valuation firm to assist management with the valuation. The Company generally utilizes the income approach to value nonfinancial assets and liabilities, specifically a Discounted Cash Flow ("DCF") model to estimate fair value by discounting cash flow forecasts, adjusted to reflect market participant assumptions, to the extent necessary, at an appropriate discount rate. Management applies considerable judgment in selecting several input assumptions during the development of our cash flow forecasts. Examples of the input assumptions that our forecasts are sensitive to include macroeconomic factors such as growth rates, industry demand, inflation, exchange rates, power prices, and commodity prices. Whenever appropriate, management obtains these input assumptions from observable market data sources (e.g., Economic Intelligence Unit) and extrapolates the market information if an input assumption is not observable for the entire forecast period. Many of these input assumptions are dependent on other economic assumptions, which are often derived from statistical economic models with inherent limitations such as estimation differences. Further, several input assumptions are based on historical trends which often do not recur. It is not uncommon that different market data sources have different views of the macroeconomic factor expectations and related assumptions. As a result, macroeconomic factors and related assumptions are often available in a narrow range; however, in some situations these ranges become wide and the use of a different set of input assumptions could produce significantly different budgets and cash flow forecasts. A considerable amount of judgment is also applied in the estimation of the discount rate used in the DCF model. To the extent practical, inputs to the discount rate are obtained from market data sources (e.g., Bloomberg). The Company selects and uses a set of publicly traded companies from the relevant industry to estimate the discount rate inputs. Management applies judgment in the selection of such companies based on its view of the
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112 | 2019 Annual Report most likely market participants. It is reasonably possible that the selection of a different set of likely market participants could produce different input assumptions and result in the use of a different discount rate. Accounting for Derivative Instruments and Hedging Activities - We enter into various derivative transactions in order to hedge our exposure to certain market risks. We primarily use derivative instruments to manage our interest rate, commodity, and foreign currency exposures. We do not enter into derivative transactions for trading purposes. See Note 6- Derivative Instruments and Hedging Activities included in Item 8 of this Form 10-K for further information on the classification. The fair value measurement standard requires the Company to consider and reflect the assumptions of market participants in the fair value calculation. These factors include nonperformance risk (the risk that the obligation will not be fulfilled) and credit risk, both of the reporting entity (for liabilities) and of the counterparty (for assets). Due to the nature of the Company's interest rate swaps, which are typically associated with non-recourse debt, credit risk for AES is evaluated at the subsidiary level rather than at the Parent Company level. Nonperformance risk on the Company's derivative instruments is an adjustment to the initial asset/liability fair value position that is derived from internally developed valuation models that utilize observable market inputs. As a result of uncertainty, complexity, and judgment, accounting estimates related to derivative accounting could result in material changes to our financial statements under different conditions or utilizing different assumptions. As a part of accounting for these derivatives, we make estimates concerning nonperformance, volatilities, market liquidity, future commodity prices, interest rates, credit ratings (both ours and our counterparty's), and future exchange rates. Refer to Note 5- Fair Value included in Item 8 of this Form 10-K for additional details. The fair value of our derivative portfolio is generally determined using internal and third party valuation models, most of which are based on observable market inputs, including interest rate curves and forward and spot prices for currencies and commodities. The Company derives most of its financial instrument market assumptions from market efficient data sources (e.g., Bloomberg, Reuters and Platt's). In some cases, where market data is not readily available, management uses comparable market sources and empirical evidence to derive market assumptions to determine a financial instrument's fair value. In certain instances, the published curve may not extend through the remaining term of the contract and management must make assumptions to extrapolate the curve. Specifically, where there is limited forward curve data with respect to foreign exchange contracts, beyond the traded points the Company utilizes the interest rate differential approach to construct the remaining portion of the forward curve. Additionally, in the absence of quoted prices, we may rely on "indicative pricing" quotes from financial institutions to input into our valuation model for certain of our foreign currency swaps. These indicative pricing quotes do not constitute either a bid or ask price and therefore are not considered observable market data. For individual contracts, the use of different valuation models or assumptions could have a material effect on the calculated fair value. Regulatory Assets - Management continually assesses whether regulatory assets are probable of future recovery by considering factors such as applicable regulatory changes, recent rate orders applicable to other regulated entities, and the status of any pending or potential deregulation legislation. If future recovery of costs ceases to be probable, any asset write-offs would be required to be recognized in operating income. Consolidation - The Company enters into transactions impacting the Company's equity interests in its affiliates. In connection with each transaction, the Company must determine whether the transaction impacts the Company's consolidation conclusion by first determining whether the transaction should be evaluated under the variable interest model or the voting model. In determining which consolidation model applies to the transaction, the Company is required to make judgments about how the entity operates, the most significant of which are whether (i) the entity has sufficient equity to finance its activities, (ii) the equity holders, as a group, have the characteristics of a controlling financial interest, and (iii) whether the entity has non-substantive voting rights. If the entity is determined to be a variable interest entity, the most significant judgment in determining whether the Company must consolidate the entity is whether the Company, including its related parties and de facto agents, collectively have power and benefits. If AES is determined to have power and benefits, the entity will be consolidated by AES. Alternatively, if the entity is determined to be a voting model entity, the most significant judgments involve determining whether the non-AES shareholders have substantive participating rights. The assessment of shareholder rights and whether they are substantive participating rights requires significant judgment since the rights provided under shareholders' agreements may include selecting, terminating, and setting the compensation of
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113 | 2019 Annual Report management responsible for implementing the subsidiary's policies and procedures, and establishing operating and capital decisions of the entity, including budgets, in the ordinary course of business. On the other hand, if shareholder rights are only protective in nature (referred to as protective rights), then such rights would not overcome the presumption that the owner of a majority voting interest shall consolidate its investee. Significant judgment is required to determine whether minority rights represent substantive participating rights or protective rights that do not affect the evaluation of control. While both represent an approval or veto right, a distinguishing factor is the underlying activity or action to which the right relates. Pension and Other Postretirement Plans - The Company recognizes a net asset or liability reflecting the funded status of pension and other postretirement plans with current-year changes in actuarial gains or losses recognized in AOCL, except for those plans at certain of the Company's regulated utilities that can recover portions of their pension and postretirement obligations through future rates. The valuation of the Company's benefit obligation, fair value of plan assets, and net periodic benefit costs requires various estimates and assumptions, the most significant of which include the discount rate and expected return on plan assets. These assumptions are reviewed by the Company on an annual basis. Refer to Note 1- General and Summary of Significant Accounting Policies included in Item 8 of this Form 10-K for further information. Revenue Recognition - The Company recognizes revenue to depict the transfer of energy, capacity, and other services to customers in an amount that reflects the consideration to which we expect to be entitled. In applying the revenue model, we determine whether the sale of energy, capacity, and other services represent a single performance obligation based on the individual market and terms of the contract. Generally, the promise to transfer energy and capacity represent a performance obligation that is satisfied over time and meets the criteria to be accounted for as a series of distinct goods or services. Progress toward satisfaction of a performance obligation is measured using output methods, such as MWhs delivered or MWs made available, and when we are entitled to consideration in an amount that corresponds directly to the value of our performance completed to date, we recognize revenue in the amount to which we have the right to invoice. For further information regarding the nature of our revenue streams and our critical accounting policies affecting revenue recognition, see Note 1- General and Summary of Significant Accounting Policies included in Item 8 of this Form 10-K. Leases - The Company recognizes operating and finance right-of-use assets and lease liabilities on the Consolidated Balance Sheets for most leases with an initial term of greater than 12 months. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. Our subsidiaries' incremental borrowing rates are used in determining the present value of lease payments when the implicit rate is not readily determinable. Certain adjustments to the right-of-use asset may be required for items such as prepayments, lease incentives, or initial direct costs. For further information regarding the nature of our leases and our critical accounting policies affecting leases, see Note 1-General and Summary of Significant Accounting Policies included in Item 8 of this Form 10-K. New Accounting Pronouncements See Note 1- General and Summary of Significant Accounting Policies included in Item 8 of this Form 10-K for further information about new accounting pronouncements adopted during 2019 and accounting pronouncements issued, but not yet effective.
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