THE AES CORPORATION

AES
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AES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

02/28/2020 | 06:09am


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 in Argentina and Chile 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, including U.S. renewables
and the Colon combined cycle facility in Panama, 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 Ended December 31, 2019 Compared to Year Ended December 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 in South
America
, this decrease was driven by:
$229 million in South America primarily driven by lower generation and
prices in Argentina and lower contract sales and generation in Chile;



$173 million in Eurasia primarily due to the sales of the Masinloc power



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 Shady Point in



May 2019, and lower energy prices and sales due to higher temperatures 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 El Salvador.





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 in Panama in September 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 in South America, this decrease was driven by:
$107 million in South 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 in Panama 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 in Dominican Republic, higher contract sales
at Panama, and the commencement of operations at the Colon combined cycle
facility in Panama; and
$31 million in Eurasia primarily due to the drivers discussed above,


partially offset by lower depreciation at the Jordan plants due to their



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 at
Shady Point and DPL, and increased rock ash disposal at Puerto Rico.
Year Ended December 31, 2018 Compared to Year Ended December 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 in South
America
partially offset by Eurasia, this increase was driven by:
$357 million in South America primarily due to higher contract sales and


prices in Colombia and the commencement of new PPAs at Angamos and Cochrane



in Chile, as well as higher capacity prices in Argentina resulting from
market reforms enacted in 2017;



$215 million in MCAC primarily due to to the commencement of operations at



the Colon combined cycle facility as well as improved hydrology at Panama,



higher pass-through fuel prices in Mexico, higher contracted energy sales



due to commencement of operations at the Los Mina combined cycle facility



in June 2017, and higher spot prices in the Dominican Republic; and



$68 million in US and Utilities driven primarily by higher market energy



sales at Southland, higher regulated rates commencing in November 2017 at



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 El Salvador, partially offset by the sale and



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 in March 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;



$70 million in MCAC primarily due to drivers discussed above; and



$40 million in US and Utilities mostly due to the drivers discussed above



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 in Hawaii 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 in Hawaii 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 the Dominican
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 the Dominican 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 Report




Goodwill impairment expense
There were no goodwill impairments for the years ended December 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 at
Hawaii due to a decrease in the economic useful life of the coal-fired asset,
compared to prior year impairments of $157 million at Shady 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 in Kazakhstan due to the classification of the CHPs and
HPPs as held-for-sale and $296 million in the U.S. as a result of the decision
to sell the DPL peaker assets and a decline in forward pricing at Laurel
Mountain
, partially offset by a 2018 impairment of $157 million due to decreased
future cash flows and the decision to sell Shady 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 $31 million, gains of $23 million, and losses of $21



million on foreign currency derivative contracts for the years ended



December 31, 2019, 2018 and 2017, respectively.





The Company recognized net foreign currency transaction losses of $67 million
for the year ended December 31, 2019, primarily driven by unrealized losses on
foreign currency derivatives related to government receivables in Argentina 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 ended December 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 ended December 31, 2017 primarily driven by transactions associated
with VAT activity in Mexico, the amortization of frozen embedded derivatives in
the Philippines, and appreciation of the Euro in Bulgaria. These gains were
partially offset by foreign currency derivative losses in Colombia 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 in Chile 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
ended December 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 the United
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 in Argentina. 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 ended December 31, 2018 and 2017, respectively.
The net decrease in the 2018 effective tax rate was primarily due to greater
2017 impacts related to U.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 under SAB 118, which provides
SEC 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 under U.S. GILTI rules.
Our effective tax rate reflects the tax effect of significant operations outside
the U.S., which are generally taxed at rates different than the U.S. statutory
rate. Foreign earnings may be taxed at rates higher than the U.S. corporate rate
of 21% and are also subject to current U.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 ended December
31, 2019
. Net income from discontinued operations was $216 million for the year
ended December 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 in October
2018
.
Net loss from discontinued operations was $629 million for the year ended
December 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 in Chile;


• Lower earnings in Chile 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 Panama primarily due to lower hydrology and the outage



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 $22 million, or 6%, to $362 million in 2018, compared to
$384 million in 2017. This decrease was primarily due to:
• Other-than-temporary impairment of Guacolda;



• Favorable impact of a legal settlement at Uruguaiana in 2017; and



• Lower earnings due to deconsolidation of Eletropaulo in November 2017 and



the sale of Masinloc in March 2018.





These decreases were partially offset by:
• Gains on sales of Electrica Santiago and CTNG in Chile;


• Higher earnings in Colombia primarily due to higher contract sales and
prices; and


• Higher earnings in Vietnam due to the adoption of the new revenue
recognition standard.


Net income attributable to The AES Corporation
Net income attributable to The 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, Hawaii, Kilroot and



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 Argentina and Chile, primarily due to lower generation; and





• 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 U.S. tax



reform enacted in December 2017;



• Prior year loss on extinguishment of debt at the Parent Company;





• Prior year long-lived asset impairments at Shady 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 The AES Corporation increased $2,364 million to
$1,203 million in 2018, compared to a loss of $1,161 million in 2017. This
increase was primarily due to:
• Gains on the sales of Masinloc, Eletropaulo (reflected within discontinued



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 U.S. tax reform enacted in December 2017;



• Asset impairments at DPL, Laurel Mountain and in Kazakhstan in 2017;



• Lower interest expense at the Parent Company and Gener; and



• Higher margins at our South America, MCAC and US and Utilities SBUs.





These increases were partially offset by:
• Higher tax expense in 2018 due to the new GILTI rules in the U.S.;



• Asset impairment at Shady Point and other-than-temporary impairment of



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 and El Salvador); South America (Chile, Colombia, Argentina
and Brazil); MCAC (Mexico, Central America and the Caribbean); and Eurasia
(Europe and Asia).
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 ended December 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 $ 1,815



_____________________________



(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 its



ongoing 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 to The AES Corporation, which is determined in
accordance with GAAP.
Reconciliation of Adjusted PTC (in millions) Years Ended


December 31,



2019


2018 2017
Income (loss) from continuing operations, net of tax,
attributable to The AES Corporation


$ 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 February 2018, the Company announced a reorganization as a part of its



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 ended December 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 ended December 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 $ (0.76 )





Reconciliation of Adjusted EPS Years Ended


December 31,



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 Argentina of $89



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 $12 million, or $0.02 per share, mainly



associated with intercompany receivables denominated in Euro.



(3) Amount primarily relates to unrealized FX losses of $22 million, or $0.03



per share, associated with the devaluation of long-term receivables



denominated in Argentine pesos, and unrealized FX losses of $14 million, or



$0.02 per share, on intercompany receivables denominated in Euro and British



pounds at the Parent Company.



(4) Amount primarily relates to losses recognized at commencement of sales-type



leases at Distributed Energy of $36 million, or $0.05 per share, and loss on



sale of Kilroot and Ballylumford of $31 million, or $0.05 per share;



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 on



sale 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



$1.16 per share, gain on sale of CTNG of $86 million, or $0.13 per share,



gain on sale of Electrica Santiago of $36 million, or $0.05 per share, gain



on remeasurement of contingent consideration at AES Oahu of $32 million, or



$0.05 per share, gain on sale related to the Company's contribution of AES



Advancion energy storage to the Fluence joint venture of $23 million, or



$0.03 per share, and realized derivative gains associated with the sale of



Eletropaulo of $21 million, or $0.03 per share; partially offset by loss on



disposal of the Beckjord facility and additional shutdown costs related to



Stuart and Killen at DPL of $21 million, or $0.03 per share.



(6) Amount primarily relates to loss on sale of Kazakhstan CHPs of $49 million,



or $0.07 per share, realized derivative losses associated with the sale of



Sul of $38 million, or $0.06 per share, loss on sale of Kazakhstan HPPs of



$33 million, or $0.05 per share, and costs associated with early plant



closures at DPL of $24 million, or $0.04 per share; partially offset by gain



on Masinloc contingent consideration of $23 million, or $0.03 per share, and



gain on sale of Miami Fort and Zimmer of $13 million, or $0.02 per share.



(7) Amount primarily relates to asset impairments at Kilroot and Ballylumford of



$115 million, or $0.17 per share, and Hawaii of $60 million, or $0.09 per



share; impairments at our Guacolda and sPower equity affiliates, impacting



equity earnings by $105 million, or $0.16 per share, and $21 million, or



$0.03 per share, respectively; and other-than-temporary impairment of OPGC



of $92 million, or $0.14 per share.



(8) Amount primarily relates to asset impairments at Shady Point of $157



million, or $0.24 per share, and Nejapa of $37 million, or $0.06 per share,



and other-than-temporary impairment of Guacolda of $96 million, or $0.14 per



share.



(9) Amount primarily relates to asset impairments at Kazakhstan CHPs of $94



million, or $0.14 per share, Kazakhstan HPPs of $92 million, or $0.14 per



share, Laurel Mountain of $121 million, or $0.18 per share, DPL of $175



million, or $0.27 per share, and Kilroot of $37 million, or $0.05 per share.





(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.





--------------------------------------------------------------------------------



91 | 2019 Annual Report





(12) Amount primarily relates to losses on early retirement of debt at the



Parent Company of $92 million, or $0.14 per share, AES Gener of $20



million, or $0.02 per share, and IPALCO of $9 million, or $0.01 per share;



partially offset by a gain on early retirement of debt at AES Argentina of



$65 million, or $0.10 per share.



(13) Amount relates to a SAB 118 charge to finalize the provisional estimate of



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 $1.02 per share, and the remeasurement of deferred tax assets



and liabilities to the lower corporate tax rate of $39 million, or $0.06



per share.



(15) Amount primarily relates to the income tax benefits associated with the



impairments at OPGC of $23 million, or $0.03 per share, Guacolda of $13



million, or $0.02 per share, Hawaii of $13 million, or $0.02 per share, and



Kilroot and Ballylumford of $11 million, or $0.02 per share, and income tax



benefits associated with losses on early retirement of debt of $24 million,



or $0.04 per share; partially offset by an adjustment to income tax expense



related to 2018 gains on sales of business interests, primarily Masinloc,



of $25 million, or $0.04 per share.



(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 $97 million, or $0.15 per share, and income tax



expense associated with gains on sale of CTNG of $36 million, or $0.05 per



share, and Electrica Santiago of $13 million, or $0.02 per share; partially



offset by income tax benefits associated with the loss on early retirement



of debt at the Parent Company of $36 million, or $0.05 per share, and



income tax benefits associated with the impairment at Shady Point of $33



million, or $0.05 per share.



(17) Amount primarily relates to the income tax benefits associated with asset



impairments of $148 million, or $0.22 per share.





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 $ 754 $ 733 $ 693 $


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 Shady
Point
and DPL, including cost recoveries from DPL's joint owners of


(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 the Eagle 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 by Eagle 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 at Hawaii 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 in Hawaii,
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 at IPALCO.
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 in Argentina 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 in Chile 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 in Chile 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 Colombia due to higher spot prices primarily driven by drier



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 in
Argentina and Chile 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 in Argentina 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 in Colombia mainly related to higher contract pricing in 2018


64



and higher generation
Margin on new PPAs in Chile 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 in Chile, 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 in Chile, 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 in Brazil, lower equity earnings in Chile and higher realized foreign
currency losses in Argentina.
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 in Panama (40 )
Decrease in Dominican 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 Panama mainly driven by contract renewals at



41



higher prices
Higher sales at Panama driven by the commencement of operations at the


40



Colon combined cycle facility in September 2018
Increase in Mexico 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 in Dominican Republic due to higher spot prices $


32



Higher contracted energy sales in Panama mainly driven by the
commencement of operations at the Colon combined cycle facility in



21



September 2018
Higher availability driven by improved hydrology in Panama


17



Higher contracted energy sales in Dominican Republic mainly driven by the
commencement of operations at the Los Mina combined cycle facility in



12



June 2017 and lower forced maintenance outages
Decrease in Mexico 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 in Panama and Dominican Republic and lower
foreign currency gains in Mexico.
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 in March 2018


(24 )
Lower depreciation at the Jordan plants due to their classification as
held-for-sale



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 in the 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 in March 2018 $


(122 )
Impact of the sale of the Kazakhstan CHPs and the expiration of HPP
concession in 2017



(36 )
Decrease in Vietnam due to adoption of the new revenue recognition
standard in 2018 and higher maintenance costs


(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 in
Vietnam 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 to The 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 of Argentina imposed capital controls
and announced a restructuring of Argentina's debt payments. Restrictions on the
flow of capital have limited the availability of international credit, and
economic conditions in Argentina have further deteriorated, triggering
additional devaluation of the Argentine peso and a deterioration of the
country's risk profile.
On October 27, 2019, Alberto Fernández was elected president. The entering
administration has started evaluating measures to respond to the Argentine
economic crisis. On February 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 - In October 2019, Chile saw significant protests associated with economic
conditions resulting in the declaration of a state of emergency in several major
cities.
In November 2019, the Chilean government enacted Law 21,185 that establishes a
Stabilization 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 at July
1, 2019
, until new lower-cost renewable contracts are incorporated into pricing
in 2023. Consequently, costs incurred in excess of the July 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 to December 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 by Congress and could result
in regulatory changes that may affect our results of operations in Chile.
Puerto Rico - Our subsidiaries in Puerto 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 in Puerto 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 of U.S. territories and created procedures for adjusting debt
accumulated by the Puerto Rico government and, potentially, other territories
("Title III"). PROMESA also expedites the approval of key energy projects and
other critical projects in Puerto 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 over Puerto Rico. The Oversight Board filed for
bankruptcy on behalf of PREPA under Title III in July 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 of December 31, 2019. The Company is in compliance with
its debt payment obligations as of December 31, 2019.
The Company's receivable balances in Puerto Rico as of December 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.
On January 2, 2020, the Governor of Puerto Rico signed a bill that prohibits the
disposal and unencapsulated beneficial use of coal combustion residuals in
Puerto 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 of Puerto Rico.
Significant earthquakes and subsequent aftershocks hit Puerto Rico in late
December 2019 and January 2020. These events did not result in damage to our
assets in Puerto Rico. We expect that AES 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 in Puerto Rico of $538 million is
recoverable as of December 31, 2019.
Reference Rate Reform - In July 2017, the UK Financial Conduct Authority
announced that it intends to phase out LIBOR by the end of 2021. In the U.S.,
the Alternative Reference Rate Committee at the Federal 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 - In December 2017, the United States enacted the TCJA. The
legislation significantly revised the U.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 current U.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 our U.S. businesses and
higher U.S. tax expense may fully utilize our remaining net operating loss
carryforwards in the near term, which could lead to material cash tax payments
in the United States. Our interpretation of the TCJA may change as the U.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. On June 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 in November 2022 and Ventanas 2 (208 MW) in May 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 in Chile of $2.8 billion is
recoverable as of December 31, 2019.
Puerto Rico Energy Public Policy Act - On April 11, 2019, the Governor of Puerto
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 by January 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
expires November 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 and AES 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 at AES 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 the European 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 of Bulgaria to
discuss the agency's review. In the near term, Maritza expects that it will
engage in discussions with Bulgaria 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 and Bulgaria, 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 of December 31, 2019.
DP&L Rate Case - On November 21, 2019, the PUCO issued an order modifying DP&L's
ESP by removing the DMR. Effective December 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 under U.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
in Panama. 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 in January 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 ended December 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 at December 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 of October 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 of December 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 of December 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 of December 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 of December 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. At
December 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. At December 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 ended December 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 of December 31, 2019, the Company had approximately $109 million of accounts
receivable classified as Other noncurrent assets. These noncurrent receivables
mostly consist of accounts receivable in Argentina and Chile that, pursuant to
amended agreements or government resolutions, have collection periods that
extend beyond December 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 in Chile
pertain to revenues recognized on regulated energy contracts that were impacted
by the Stabilization 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 of December 31, 2019, the Company had approximately $1.4 billion of loans
receivable primarily related to a facility constructed under a BOT contract in
Vietnam. 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 ended December 31, 2019
were debt financings, cash flows from operating activities, and sales of
short-term investments. The primary uses of cash in the year ended December 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 ended December 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 ended December 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 ended December 31, 2017
were debt financings, sales of short-term investments, and cash flows from
operating activities. The primary uses of cash in the year ended December 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
ended December 31, 2019, compared to December 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 the



Consolidated 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 total



changes 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 $24 million primarily due to lower margins at



our South America and MCAC SBUs. These impacts were partially offset by the



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 at



Andres, 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 the



Consolidated 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 total



changes 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 $40 million primarily due to lower margins at



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 to



higher 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 Vietnam,



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 $179 million,



primarily due to project funding requirements at sPower.



• Capital expenditures increased $284 million, discussed further below.



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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 higher



investments 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 $173 million, primarily at Andres as a



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 $19 million, primarily at IPALCO due



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 ended
December 31, 2018 compared to December 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 $543



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 $56 million, discussed further below.





Capital Expenditures
(in millions)
[[Image Removed: chart-b1378f7d0dee51a2b67.jpg]]
• Growth expenditures increased $114 million, primarily due to higher



spending 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 $41 million, primarily at IPALCO due



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 ended
December 31, 2019 compared to December 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 $483 million impact from recourse debt activity is primarily due to



higher net repayments of Parent Company debt in the prior year.


• The $387 million impact from Parent Company revolver transactions is



primarily 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 $480 million impact from non-recourse debt transactions is primarily



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 is



primarily due to higher net borrowings at DPL and prior year net repayments



at IPALCO.





Fiscal Year 2018 versus 2017
Net cash used in financing activities decreased $1.7 billion for the year ended
December 31, 2018 compared to December 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 $605 million impact from recourse debt activity is primarily due to



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 $269 million impact from non-recourse debt transactions is primarily



due to lower net issuances at AES Argentina, Tietê, Colon, Alto Maipo, U.S.



Generation and Los Mina, which were partially offset by 2017 net repayments



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 the U.S. Such subsidiaries have no contractual restrictions on their ability
to send cash to the Parent Company. Parent Company Liquidity is reconciled to
its most directly comparable U.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
at December 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 at December 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 of December 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 of December 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
of December 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 December 31, 2019 and do not reflect anticipated



future refinancing, early redemptions or new debt issuances. Variable rate



interest obligations are estimated based on rates as of December 31, 2019.



(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 December 31, 2019:



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


$12



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 with
U.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 the U.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 with SAB 118, the Company made reasonable estimates of the impacts
of U.S. tax reform on its 2017 financial results, and recorded adjustments to
those estimates in 2018 as analysis was completed. As of December 31, 2018, our
analysis of the one-time impacts of the TCJA was complete under SAB 118.
However, in the first quarter of 2019, the U.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. Effective January 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 to January 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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