Executive Summary In 2020, AES delivered on or exceeded all strategic and financial objectives. We completed construction of 2.3 GW of new projects and signed long-term PPAs for 3 GW of renewable capacity. Fluence, our joint venture with Siemens, maintained its leading global market share with 1 GW of projects delivered or awarded in 2020. Finally, following our efforts to reduce recourse debt, our Parent Company's credit rating was upgraded to investment grade by S&P. 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$0.39 , from$0.45 to$0.06 . This decrease reflects higher impairments and losses on sales in the current period, lower contributions from DP&L primarily driven by lower regulated rates as a result of the changes in the ESP, lower demand at IPL and DP&L due to milder weather, lower contributions from Colombia due to drier hydrology and lower generation due to a life extension project at Chivor, and prior year net insurance recoveries; partially offset by lower income tax expense, and higher contributions fromChile due to net gains from early contract terminations at Angamos and a positive impact due to incremental capitalized interest, fromBrazil due to a favorable revision to the GSF liability, fromPanama due to higher availability and improved hydrology, and in theU.S. due to commencement of operations of the Southland Energy CCGTs and a gain on sale of land. Adjusted EPS, a non-GAAP measure, increased$0.08 , from$1.36 to$1.44 , mainly due to higher availability and improved hydrology inPanama , commencement of operations of the Southland Energy CCGTs and a gain on sale of land in theU.S. , a favorable revision to the GSF liability inBrazil , a lower adjusted tax rate, and a positive impact inChile due to incremental capitalized interest; partially offset by lower contributions from our utilities in theU.S. primarily driven by lower regulated rates as a result of the changes in DP&L's ESP and lower demand due to milder weather, lower contributions from Colombia due to drier hydrology and lower generation due to a life extension project at Chivor, and prior year net insurance recoveries.
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Review of Consolidated Results of Operations
% Change 2020 % Change 2019 Years Ended December 31, 2020 2019 2018 vs. 2019 vs. 2018 (in millions, except per share amounts) Revenue: US and Utilities SBU$ 3,918 $ 4,058 $ 4,230 -3 % -4 % South America SBU 3,159 3,208 3,533 -2 % -9 % MCAC SBU 1,766 1,882 1,728 -6 % 9 % Eurasia SBU 828 1,047 1,255 -21 % -17 % Corporate and Other 231 46 41 NM 12 % Eliminations (242) (52) (51) NM 2 % Total Revenue 9,660 10,189 10,736 -5 % -5 % Operating Margin: US and Utilities SBU 638 754 733 -15 % 3 % South America SBU 1,243 873 1,017 42 % -14 % MCAC SBU 559 487 534 15 % -9 % Eurasia SBU 186 188 227 -1 % -17 % Corporate and Other 120 39 58 NM -33 % Eliminations (53) 8 4 NM 100 % Total Operating Margin 2,693 2,349 2,573 15 % -9 % General and administrative expenses (165) (196) (192) -16 % 2 % Interest expense (1,038) (1,050) (1,056) -1 % -1 % Interest income 268 318 310 -16 % 3 % Loss on extinguishment of debt (186) (169) (188) 10 % -10 % Other expense (53) (80) (58) -34 % 38 % Other income 75 145 72 -48 % NM Gain (loss) on disposal and sale of business interests (95) 28 984 NM -97 % Asset impairment expense (864) (185) (208) NM -11 % Foreign currency transaction gains (losses) 55 (67) (72) NM -7 % Other non-operating expense (202) (92) (147) NM -37 % Income tax expense (216) (352) (708) -39 % -50 % Net equity in earnings (losses) of affiliates (123) (172) 39 -28 % NM INCOME FROM CONTINUING OPERATIONS 149 477 1,349 -69 % -65 % Loss from operations of discontinued businesses, net of income tax expense of$0 ,$0 , and$2 , respectively - - (9) - % -100 % Gain from disposal of discontinued businesses, net of income tax expense of$0 ,$0 , and$44 , respectively 3 1 225 NM -100 % NET INCOME 152 478 1,565 -68 % -69 % Less: Income from continuing operations attributable to noncontrolling interests and redeemable stock of subsidiaries (106) (175) (364) -39 % -52 % Less: Loss from discontinued operations attributable to noncontrolling interests - - 2 - % -100 %
NET INCOME ATTRIBUTABLE TO THE
$ 1,203 -85 % -75 %
AMOUNTS ATTRIBUTABLE TO THE AES CORPORATION COMMON
STOCKHOLDERS:
Income from continuing operations, net of tax
$ 985 -86 % -69 % Income from discontinued operations, net of tax 3 1 218 NM -100 %
NET INCOME ATTRIBUTABLE TO THE
$ 1,203 -85 % -75 %
Net cash provided by operating activities
$ 2,343 12 % 5 % 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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Consolidated Revenue and Operating Margin Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Revenue (in millions) [[Image Removed: aes-20201231_g16.jpg]] Consolidated Revenue - Revenue decreased$529 million , or 5%, in 2020 compared to 2019. Excluding the unfavorable FX impact of$182 million , primarily inSouth America , this decrease was driven by: •$229 million in Eurasia driven by the sale of theNorthern Ireland businesses inJune 2019 and lower generation inVietnam ; •$140 million in US and Utilities mainly driven by a decrease in energy pass-through rates and lower demand due to the COVID-19 pandemic inEl Salvador , lower regulated rates as a result of the changes in DP&L's ESP, lower retail sales demand at IPL and DPL primarily due to milder weather and COVID-19 pandemic impacts, and decreased capacity sales, at Southland due to unit retirements, and at DPL due to the sale and closure of generation facilities. These decreases were partially offset by increased capacity sales at Southland Energy due to the commencement of the PPAs; and •$88 million in MCAC mainly driven by lower generation and volume pass-through fuel revenue inMexico , the disconnection of the Estrella del Mar I power barge from the grid inPanama , and lower market prices, spot sales and demand in both theDominican Republic and at the Colon combined cycle facility inPanama . These decreases were partially offset by higher LNG sales in theDominican Republic , driven by the Eastern Pipeline COD in 2020. These unfavorable impacts were partially offset by an increase of$115 million inSouth America driven by revenue recognized at Angamos for the early termination of contracts with Minera Escondida andMinera Spence and recovery of previously expensed payments from customers inChile , partially offset by drier hydrology and lower generation inColombia due to a life extension project being performed at the Chivor hydro plant, lower pass-through coal prices, spot prices, and lower generation inChile , and lower energy and capacity prices (Resolution 31/2020) inArgentina .
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81 | 2020 Annual Report Operating Margin (in millions) [[Image Removed: aes-20201231_g17.jpg]] Consolidated Operating Margin - Operating margin increased$344 million , or 15%, in 2020 compared to 2019. Excluding the unfavorable impact of FX of$50 million , primarily inSouth America , this increase was driven by: •$423 million inSouth America primarily due to the drivers discussed above, as well as a$184 million favorable revision to the GSF liability at Tietê related to the passage of a regulation providing concession extensions to hydro plants as compensation for prior period non-hydrological risk charges incorrectly assessed by the regulator; and •$72 million in MCAC mostly due to higher availability at Changuinola due to the tunnel lining upgrade in 2019, improved hydrology inPanama , and higher LNG sales in theDominican Republic , partially offset by prior year insurance recoveries associated with the lightning incident at the Andres facility in 2018, current year outage due to Andres steam turbine failure, and the disconnection of the Estrella del Mar I power barge from the grid inPanama . These favorable impacts were partially offset by a decrease of$116 million in US and Utilities mostly due to lower regulated rates as a result of the changes in DP&L's ESP, lower retail sales demand at DPL and IPL primarily due to milder weather and COVID-19 pandemic impacts, lower capacity sales due to the retirement of units at Southland, a favorable revision to the ARO at DPL, and cost recoveries from DPL's joint owners of Stuart and Killen in 2019, partially offset by increased capacity sales at Southland Energy due to the commencement of the PPAs, and lower depreciation expense at Southland due to the extension of the water board permits. Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 Revenue (in millions) [[Image Removed: aes-20201231_g18.jpg]] Consolidated Revenue - Revenue decreased$547 million , or 5%, in 2019 compared to 2018. Excluding the unfavorable FX impact of$133 million , primarily inSouth America , this decrease was driven by: •$229 million inSouth America primarily driven by lower generation and prices inArgentina and lower contract sales and generation inChile ;
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•$173 million in Eurasia primarily due to the sales of the Masinloc power plant inMarch 2018 and theNorthern Ireland businesses inJune 2019 ; and •$172 million in US and Utilities primarily driven by the closure of generation facilities at DPL in the first half of 2018 andShady Point inMay 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 inEl 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 inPanama inSeptember 2018 . Operating Margin (in millions) [[Image Removed: aes-20201231_g19.jpg]] Consolidated Operating Margin - Operating margin decreased$224 million , or 9%, in 2019 compared to 2018. Excluding the unfavorable impact of FX of$46 million , primarily inSouth America , this decrease was driven by: •$107 million inSouth America primarily due to the drivers discussed above; •$46 million in MCAC due to the outage at Changuinola as a result of upgrading the tunnel lining and lower hydrology inPanama as compared to the prior year, partially offset by the business interruption insurance recoveries at the Andres facility inDominican Republic , higher contract sales atPanama , and the commencement of operations at the Colon combined cycle facility inPanama ; and •$31 million in Eurasia primarily due to the drivers discussed above, partially offset by lower depreciation at theJordan 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 atShady Point and DPL, and increased rock ash disposal atPuerto Rico . 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 decreased$31 million , or 16%, to$165 million for 2020 compared to$196 million for 2019, primarily due to a higher reallocation of information technology costs to the SBUs and lower professional fees, partially offset by higher 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.
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83 | 2020 Annual Report Interest expense Interest expense decreased$12 million , or 1%, to$1,038 million for 2020, compared to$1,050 million for 2019 primarily due to incremental capitalized interest inChile and lower interest rates due to refinancing at the Parent Company, partially offset by lower capitalized interest due to the commencement of operations at theAlamitos and Huntington Beach facilities inFebruary 2020 . Interest expense decreased$6 million , or 1%, to$1,050 million for 2019, compared to$1,056 million for 2018 primarily due to the debt refinancing at the Parent Company and DPL, and favorable foreign currency translation at AESBrasil , partially offset by lower capitalized interest due to the commencement of operations at Colon inSeptember 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 income Interest income decreased$50 million , or 16%, to$268 million for 2020, compared to$318 million for 2019 primarily to the decrease of the LIBOR rate on receivables inArgentina , a lower loan receivable balance at Mong Duong, and a lower average interest rate at AES Brasil. Interest income increased$8 million , or 3%, to$318 million for 2019, compared to$310 million for 2018 primarily inSouth America driven by a higher average interest rate on CAMMESA receivables. Loss on extinguishment of debt Loss on extinguishment of debt increased$17 million , or 10%, to$186 million for 2020, compared to$169 million for 2019. This increase was primarily due to losses of$145 million and$34 million at the Parent Company and DPL, respectively, resulting from the redemption of senior notes and a$16 million loss resulting from thePanama refinancing in 2020. These increases were partially offset by 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 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 the 2019 losses discussed above. 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 decreased$70 million , or 48%, to$75 million for 2020, compared to$145 million for 2019 primarily due to the prior year gains on insurance recoveries associated with property damage at the Andres facility and upgrading the tunnel lining at Changuinola, partially offset by the current year gain on sale of Redondo Beach land at Southland. Other income increased$73 million to$145 million for 2019, compared to$72 million for 2018 primarily due to gains on insurance recoveries associated with property damage at the Andres facility and upgrading the tunnel lining at Changuinola. These increases were partially offset by a gain on remeasurement of contingent liabilities for projects inHawaii in 2018. Other expense Other expense decreased$27 million , or 34%, to$53 million for 2020, compared to$80 million for 2019 primarily due to prior year losses recognized at commencement of sales-type leases at Distributed Energy, the prior year loss on disposal of assets at Changuinola associated with upgrading the tunnel lining, and lower defined benefit plan costs at IPL in 2020, partially offset by a loss on sale ofStabilization Fund receivables inChile and compliance with an arbitration decision in 2020. 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
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the loss on disposal of assets resulting from damage associated with a lightning incident at the Andres facility in theDominican Republic in 2018. 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 Loss on disposal and sale of business interests was$95 million for 2020, primarily due to the loss on sale of Uruguaiana and the loss on the settlement of the arbitration related to the sale of Kazakhstan HPPs, partially offset by the gain on sale of OPGC; as compared to a gain of$28 million for 2019 primarily due to the gain on sale of a portion of our interest in sPower's operating assets, the gain on the merger of Simple Energy to form Uplight, and the gain on transfer of Stuart and Killen, partially offset by the loss on sale of Kilroot and Ballylumford. 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 . See Note 25- Held-For-Sale and Dispositions and 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. Asset impairment expense Asset impairment expense increased$679 million to$864 million for 2020, compared to$185 million for 2019. This increase was primarily driven by a$781 million impairment related to certain coal-fired plants atAES Gener and a$30 million impairment of the Estrella del Mar I power barge inPanama , compared to a$115 million prior year impairment at Kilroot and Ballylumford upon meeting the held-for-sale criteria in 2019. Asset impairment expense decreased$23 million , or 11%, to$185 million for 2019, compared to$208 million for 2018. This decrease was primarily driven by$115 million as a result of an impairment analysis performed at Kilroot and Ballylumford upon meeting the held-for-sale criteria in 2019 and$60 million atHawaii due to a decrease in the economic useful life of the coal-fired asset, compared to 2018 impairments of$157 million atShady Point due to an unfavorable economic outlook creating uncertainty around future cash flows and$37 million at Nejapa due to the landfill owner's failure to perform improvements necessary to continue extracting gas. See Note 22- Asset Impairment Expense included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for further information. Foreign currency transaction gains (losses) Foreign currency transaction gains (losses) in millions were as follows: Years Ended December 31, 2020 2019 2018 Argentina (1)$ 29 $ (73) $ (71) Corporate 21 (1) 11 Other 5 7 (12) Total (2)$ 55 $ (67) $ (72)
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(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 gains of$57 million , losses of$31 million , and gains of$23 million on foreign currency derivative contracts for the years endedDecember 31, 2020 , 2019 and 2018, respectively. The Company recognized net foreign currency transaction gains of$55 million for the year endedDecember 31, 2020 , primarily driven by realized and unrealized gains on foreign currency derivatives related to government receivables inArgentina and unrealized gains at the Parent Company resulting from the appreciation of intercompany receivables denominated in Euro. The Company recognized net foreign currency transaction losses of$67 million for the year endedDecember 31, 2019 , primarily driven by unrealized losses on foreign currency derivatives related to government receivables inArgentina and unrealized losses associated with the devaluation of long-term receivables denominated in the Argentine peso.
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The Company recognized net foreign currency transaction losses of$72 million for the year endedDecember 31, 2018 , primarily due to the devaluation of long-term receivables denominated in Argentine pesos, partially offset by gains at the Parent Company related to foreign currency derivatives. Other non-operating expense Other non-operating expense was$202 million and$92 million in 2020 and 2019, respectively, due to the other-than-temporary impairment of the OPGC equity method investment. InDecember 2019 , an other-than-temporary impairment of$92 million was identified at OPGC primarily due to the estimated market value of the Company's investment and other negative developments impacting future expected cash flows at the investee. InMarch 2020 , the Company recognized an additional$43 million other-than-temporary impairment due to the economic slowdown. InJune 2020 , the Company agreed to sell its entire stake in the OPGC investment, resulting in an other-than-temporary impairment of$158 million . Other non-operating expense was$147 million in 2018 primarily due to the$144 million other-than-temporary impairment of the Guacolda equity method investment as a result of increased renewable generation inChile lowering energy prices and impacting the ability of Guacolda to re-contract its existing PPAs after they expire. 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$136 million to$216 million in 2020 as compared to$352 million for 2019. The Company's effective tax rates were 44% and 35% for the years endedDecember 31, 2020 and 2019. The net increase in the 2020 effective tax rate was primarily due to the 2020 impacts of the other-than-temporary impairment of the OPGC equity method investment and the loss on sale of the Company's entire interest in AES Uruguaiana, partially offset by the recognition of a federal ITC for the Na Pua Makani wind facility inHawaii . Further, the 2019 rate was impacted by the items described below. See Note 25- Held-for-Sale and Dispositions included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for details of the sales. Income tax expense decreased$356 million to$352 million in 2019 as compared to$708 million for 2018. The Company's effective tax rate was 35% for both years endedDecember 31, 2019 and 2018. The 2019 effective tax rate was impacted by the nondeductible losses on the sale of the Company's entire 100% interest in the Kilroot coal and oil-fired plant and energy storage facility and the Ballylumford gas-fired plant in theUnited Kingdom and associated asset impairments. Further impacting the 2019 effective tax rate were the effects of the Argentine peso devaluation to tax expense, as well as to pretax income for nondeductible unrealized losses on foreign currency derivatives related to government receivables inArgentina . The 2018 effective tax rate was impacted by the increase in the Staff Accounting Bulletin No.118 ("SAB 118") adjustment with respect to the estimate of the one-time transition tax and deferred tax remeasurement under the TCJA. This impact was partially offset by the impact of the sale of the Company's entire 51% equity interest in Masinloc. See Note 25- Held-for-Sale and Dispositions included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for details of the sales. Our effective tax rate reflects the tax effect of significant operations outside theU.S. , which are generally taxed at rates different than theU.S. statutory rate. Foreign earnings may be taxed at rates higher than theU.S. corporate rate of 21% and are also subject to currentU.S. taxation under the GILTI rules introduced by the TCJA. A future proportionate change in the composition of income before income taxes from foreign and domestic tax jurisdictions could impact our periodic effective tax rate. The Company also benefits from reduced tax rates in certain countries as a result of satisfying specific commitments regarding employment and capital investment. See Note 23- Income Taxes included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for addition information regarding these reduced rates. Net equity in earnings (losses) of affiliates Net equity in losses of affiliates decreased$49 million , or 28%, to$123 million in 2020, compared to$172 million in 2019. This was primarily driven by a$31 million increase in earnings due to lower long-lived asset impairments at Guacolda, Gener's 50%-owned equity affiliate, during 2020 as compared to 2019. 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
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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. 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 from discontinued operations Net income from discontinued operations was$3 million and$1 million for the years endedDecember 31, 2020 and 2019, respectively, with no material drivers. Net income from discontinued operations was$216 million for the year endedDecember 31, 2018 primarily due to the after-tax gain on sale of Eletropaulo of$199 million recognized in the second quarter of 2018 and the recognition of a$26 million deferred gain upon liquidation of Borsod inOctober 2018 . 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$69 million , or 39%, to$106 million in 2020, compared to$175 million in 2019. This decrease was primarily due to: •Lower earnings inChile due to long-lived asset impairments at Gener, partially offset by net gains from early contract terminations at Angamos and lower interest expense due to incremental capitalized interest; •Lower earnings inColombia due to drier hydrology and a life extension project at the Chivor hydroelectric plant; •Prior year insurance recoveries net of outages at Andres; and •HLBV allocation of losses to noncontrolling interests at Distributed Energy. These increases were partially offset by: •Higher earnings inBrazil due to the favorable revision of the GSF liability; and •Prior year losses on extinguishment of debt at Mong Duong and Colon. 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: •Gains on sales of Electrica Santiago and CTNG inChile in 2018; •Lower earnings inChile in 2019 primarily due to 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 inPanama in 2019 primarily due to lower hydrology and the outage at Changuinola as a result of upgrading the tunnel lining. These decreases were partially offset by: •Other-than-temporary impairment of Guacolda in 2018. Net income attributable toThe AES Corporation Net income attributable toThe AES Corporation decreased$257 million , or 85%, to$46 million in 2020, compared to$303 million in 2019. This decrease was primarily due to: •Long-lived asset impairments at Gener andPanama ; •Net impact of current and prior year other-than-temporary impairments of OPGC; •Higher losses on extinguishment of debt in the current year, primarily due to major refinancings at the Parent Company; •Lower margins at our US and Utilities SBU;
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•Losses on sale of Uruguaiana and the Kazakhstan HPPs as a result of the final arbitration decision; and •Prior year net insurance recoveries at Andres. These decreases were partially offset by: •Prior year long-lived asset impairments at Kilroot and Ballylumford; •Net impact of current and prior year long-lived asset impairments at Guacolda; •Prior year unrealized losses on foreign currency derivatives related to government receivables inArgentina ; •Higher margins at ourSouth America and MCAC SBUs; •Lower income tax expense; •Lower interest expense due to incremental capitalized interest inChile ; and •Gain on sale of land held by AES Redondo Beach at Southland. Net income attributable toThe AES Corporation decreased$900 million , or 75% to$303 million in 2019, compared to$1,203 million in 2018. This decrease was primarily due to: •Gains on the sales of Masinloc, Eletropaulo (reflected within discontinued operations), CTNG and Electrica Santiago in 2018, net of tax; •Long-lived asset impairments at Guacolda,Hawaii , Kilroot and Ballylumford, and other-than-temporary impairment at OPGC in 2019; •Loss on sale at Kilroot and Ballylumford in 2019; •Losses on extinguishment of debt at DPL,AES Gener ,Mong Duong , and Colon in 2019; •Losses recognized at commencement of sales-type leases at Distributed Energy in 2019; •The impact of sold businesses in our Eurasia SBU; •Lower margins atArgentina andChile in 2019, primarily due to lower generation; and •Lower margins at Changuinola in 2019, driven by the outage as a result of upgrading the tunnel lining and lower hydrology inPanama . These decreases were partially offset by: •Income tax expense in 2018 to finalize the initial impact ofU.S. tax reform enacted inDecember 2017 ; •Loss on extinguishment of debt at the Parent Company in 2018; •Long-lived asset impairments atShady Point and Nejapa, and other-than-temporary impairment at Guacolda in 2018; •Gains on insurance proceeds in 2019, associated with the lightning incident at the Andres facility in 2018 and the Changuinola tunnel leak; •Gain on sale of a portion of our interest in sPower's operating assets and gain on disposal of Stuart and Killen at DPL in 2019; and •Higher earnings at our US and Utilities SBU in 2019, primarily as a result of renewable projects that came online. SBU Performance Analysis Segments We are organized into four market-oriented SBUs: US and Utilities (United States ,Puerto Rico andEl Salvador );South America (Chile , Colombia,Argentina andBrazil ); MCAC (Mexico ,Central America and theCaribbean ); and Eurasia (Europe andAsia ). Non-GAAP Measures Adjusted Operating Margin, Adjusted PTC and Adjusted EPS are non-GAAP supplemental measures that are used by management and external users of our Consolidated Financial Statements such as investors, industry analysts and lenders.
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For the year endedDecember 31, 2020 , the Company changed the definitions of Adjusted Operating Margin, Adjusted PTC and Adjusted EPS to exclude net gains at Angamos, one of our businesses in the South America SBU, associated with the early contract terminations with Minera Escondida andMinera Spence . We believe the inclusion of the effects of this non-recurring transaction would result in a lack of comparability in our results of operations and would distort the metrics that our investors use to measure us. For the year endedDecember 31, 2019 , the Company changed the definitions of Adjusted PTC and Adjusted EPS to exclude gains and losses recognized at commencement of sales-type leases. We believe these transactions are economically similar to sales of business interests and excluding these gains or losses better reflects the underlying business performance of the Company. Adjusted Operating Margin We define Adjusted Operating Margin as Operating Margin, adjusted for the impact of NCI, excluding (a) unrealized gains or losses related to derivative transactions; (b) benefits and costs associated with dispositions and acquisitions of business interests, including early plant closures; (c) costs directly associated with a major restructuring program, including, but not limited to, workforce reduction efforts, relocations, and office consolidation; and (d) net gains at Angamos, one of our businesses in the South America SBU, associated with the early contract terminations with Minera Escondida andMinera Spence . The allocation of HLBV earnings to noncontrolling interests is not adjusted out of Adjusted Operating Margin. See Review of Consolidated Results of Operations for 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 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, 2020 2019 2018 Operating Margin$ 2,693 $ 2,349 $ 2,573 Noncontrolling interests adjustment (1) (831) (670) (686) Unrealized derivative losses 24 11 19 Disposition/acquisition losses 24 15 21 Net gains from early contract terminations at Angamos (182) - - Restructuring costs (2) - - 1 Total Adjusted Operating Margin$ 1,728 $ 1,705 $ 1,928
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(1)The allocation of HLBV earnings to noncontrolling interests is not adjusted out of Adjusted Operating Margin. (2)InFebruary 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: aes-20201231_g20.jpg]]
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89 | 2020 Annual Report Adjusted PTC We define Adjusted PTC as pre-tax income from continuing operations attributable toThe AES Corporation excluding gains or losses of the consolidated entity due to (a) unrealized gains or losses related to derivative transactions and equity securities; (b) unrealized foreign currency gains or losses; (c) gains, losses, benefits and costs associated with dispositions and acquisitions of business interests, including early plant closures, and gains and losses recognized at commencement of sales-type leases; (d) losses due to impairments; (e) gains, losses and costs due to the early retirement of debt; (f) costs directly associated with a major restructuring program, including, but not limited to, workforce reduction efforts, relocations, and office consolidation; and (g) net gains at Angamos, one of our businesses in the South America SBU, associated with the early contract terminations with Minera Escondida andMinera Spence . Adjusted PTC also includes net equity in earnings of affiliates on an after-tax basis adjusted for the same gains or losses excluded from consolidated entities. Adjusted PTC reflects the impact of NCI and excludes the items specified in the definition above. In addition to the revenue and cost of sales reflected in Operating Margin, Adjusted PTC includes the other components of our 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 toThe AES Corporation . We believe that Adjusted PTC better reflects the underlying business performance of the Company and is the most relevant measure considered in the Company's internal evaluation of the financial performance of its segments. Factors in this determination include the variability due to unrealized gains or losses related to derivative transactions or equity securities remeasurement, unrealized foreign currency gains or losses, losses due to impairments, strategic decisions to dispose of or acquire business interests, retire debt or implement restructuring initiatives, and the non-recurring nature of the impact of the early contract terminations at Angamos, which affect results in a given period or periods. In addition, 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 operates. Given its large number of businesses and complexity, the Company concluded that Adjusted PTC is a more transparent measure that better assists investors in determining which businesses have the greatest impact on the Company's results. Adjusted PTC should not be construed as an alternative to income from continuing operations attributable toThe AES Corporation , which is determined in accordance with GAAP. Reconciliation of Adjusted PTC (in millions)
Years Ended
2020 2019 2018
Income (loss) from continuing operations, net of tax, attributable
$ 302 $ 985 toThe AES Corporation Income tax expense attributable to The AES Corporation 130 250 563 Pre-tax contribution 173 552 1,548 Unrealized derivative and equity securities losses 3 113 33 Unrealized foreign currency losses (gains) (10) 36 51 Disposition/acquisition losses (gains) 112 12 (934) Impairment losses 928 406 307 Loss on extinguishment of debt 223 121 180 Net gains from early contract terminations at Angamos (182) - - Total Adjusted PTC$ 1,247 $ 1,240 $ 1,185
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90 | 2020 Annual Report
[[Image Removed: aes-20201231_g21.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; (g) net gains at Angamos, one of our businesses in the South America SBU, associated with the early contract terminations with Minera Escondida andMinera Spence ; and (h) 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 remeasurement, unrealized foreign currency gains or losses, losses due to impairments, strategic decisions to dispose of or acquire business interests, retire debt or implement restructuring initiatives, the one-time impact of the 2017 U.S. tax law reform and subsequent period adjustments related to enactment effects, and the non-recurring nature of the impact of the early contract terminations at Angamos, which affect results in a given period or periods. Adjusted EPS should not be construed as an alternative to diluted earnings per share from continuing operations, which is determined in accordance with GAAP.
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91 | 2020 Annual Report
Reconciliation of Adjusted EPS
Years Ended
2020 2019 2018
Diluted earnings (loss) per share from continuing operations
$ 0.45 $ 1.48 Unrealized derivative and equity securities losses 0.01 0.17 (1) 0.05 Unrealized foreign currency losses (gains) (0.01) 0.05 (2) 0.09 (3) Disposition/acquisition losses (gains) 0.17 (4) 0.02 (5) (1.41) (6) Impairment losses 1.39 (7) 0.61 (8) 0.46 (9) Loss on extinguishment of debt
0.33 (10) 0.18 (11) 0.27 (12) Net gains from early contract terminations at Angamos
(0.27) (13) - - U.S. Tax Law Reform Impact 0.02 (14) (0.01) 0.18 (15) Less: Net income tax expense (benefit) (0.26) (16) (0.11) (17) 0.12 (18) Adjusted EPS$ 1.44 $ 1.36 $ 1.24
_____________________________
(1)Amount primarily relates to unrealized derivative losses inArgentina 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 inArgentina 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 loss on sale of Uruguaiana of$85 million , or$0.13 per share, loss on sale of the Kazakhstan HPPs of$30 million , or$0.05 per share, as a result of the final arbitration decision, and advisor fees associated with the successful acquisition of additional ownership interest in AES Brasil of$9 million , or$0.01 per share; partially offset by gain on sale of OPGC of$23 million , or$0.03 per share. (5)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. (6)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. (7)Amount primarily relates to asset impairments at Gener of$527 million , or$0.79 per share, other-than-temporary impairment of OPGC of$201 million , or$0.30 per share, impairments at our Guacolda and sPower equity affiliates, impacting equity earnings by$85 million , or$0.13 per share, and$57 million , or$0.09 per share, respectively; impairment atHawaii of$38 million , or$0.06 per share, and impairment atPanama of$15 million , or$0.02 per share. (8)Amount primarily relates to asset impairments at Kilroot and Ballylumford of$115 million , or$0.17 per share, andHawaii 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. (9)Amount primarily relates to asset impairments atShady 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. (10)Amount primarily relates to losses on early retirement of debt at the Parent Company of$146 million , or$0.22 per share, DPL of$32 million , or$0.05 per share, Angamos of$17 million , or$0.02 per share, andPanama of$11 million , or$0.02 per share. (11)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. (12)Amount primarily relates to loss on early retirement of debt at the Parent Company of$171 million , or$0.26 per share. (13)Amount relates to net gains at Angamos associated with the early contract terminations with Minera Escondida andMinera Spence of$182 million , or$0.27 per share. (14)Amount represents adjustment to tax law reform remeasurement due to incremental deferred taxes related to DPL of$16 million , or$0.02 per share. (15)Amount relates to aSAB 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 aSAB 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. (16)Amount primarily relates to income tax benefits associated with the impairments at Gener and Guacolda of$164 million , or$0.25 per share, and income tax benefits associated with losses on early retirement of debt at the Parent Company of$31 million , or$0.05 per share; partially offset by income tax expense related to net gains at Angamos associated with the early contract terminations with Minera Escondida andMinera Spence of$49 million , or$0.07 per share. (17)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. (18)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 atShady Point of$33 million , or$0.05 per share.
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92 | 2020 Annual Report US and Utilities SBU The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated: $ Change For the Years Ended 2020 vs. % Change 2020 $ Change 2019 % Change 2019 December 31, 2020 2019 2018 2019 vs. 2019 vs. 2018 vs. 2018 Operating Margin$ 638 $ 754 $ 733 $ (116) -15 %$ 21 3 % Adjusted Operating Margin (1) 577 659 678 (82) -12 % (19) -3 % Adjusted PTC (1) 505 569 511 (64) -11 % 58 11 %
_____________________________
(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 2020 versus 2019 Operating Margin decreased$116 million , or 15%, which was driven primarily by the following (in millions): Decrease at DPL due to lower regulated retail margin primarily due to changes to$ (63) DP&L's ESP and lower volumes mainly from milder weather Decrease due to the sale and closure of generation facilities at DPL, including a credit to depreciation expense in 2019 as a result of a reduction to an ARO
(50)
liability and cost recoveries from DPL's joint owners of Stuart and Killen in the prior year Decrease at Southland driven by higher losses from commodity derivatives and lower capacity sales due to unit retirements, partially offset by lower
(47)
depreciation expense Decrease at IPL primarily due to lower retail margin driven by lower volumes from milder weather and lower demand from the impact of COVID-19, partially offset by (36) lower maintenance expense from scheduled plant outages Decrease atHawaii primarily driven by lower availability due to increasing forced outages and higher expenses related to the shortened useful life of the (20) coal plant
Increase at Southland Energy due to the CCGT units beginning commercial
113
operations during Q1 2020 Other
(13)
Total US and Utilities SBU Operating Margin Decrease
Adjusted Operating Margin decreased$82 million primarily due to the drivers above, adjusted for NCI and excluding unrealized gains and losses on derivatives and costs associated with dispositions of business interests. Adjusted PTC decreased$64 million , primarily driven by the decrease in Adjusted Operating Margin described above and increased interest expense primarily at Southland Energy due to lower capitalized interest following completion of the CCGT units and new debt issuances, partially offset by a gain on sale of land held by AES Redondo Beach at Southland, lower pension expense at IPL, and an increase in allocation of earnings from equity affiliates driven by renewable projects that came online in 2020 at sPower. Fiscal year 2019 versus 2018 Operating Margin increased$21 million , or 3%, which was driven primarily by the following (in millions): Increase at IPL primarily driven by higher retail rates following the 2018 rate order, partially offset by lower volumes due to unfavorable weather and higher$ 59 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 and demand, partially 22 offset by changes to DPL's ESP Decrease due to the sale and closure of generation facilities at Shady Point and (47) DPL, including cost recoveries from DPL's joint owners of Stuart and Killen Decrease in Puerto Rico mainly driven by an increase of rock ash disposal (23) Other 10 Total US and Utilities SBU Operating Margin Increase
Adjusted Operating Margin decreased$19 million primarily due to the drivers above, adjusted for NCI and excluding unrealized gains and losses on derivatives and costs and benefits associated with early plant closures. Adjusted PTC increased$58 million , primarily driven by an increase in earnings attributable to AES as a result of contributions from new renewable projects and lower interest expense at DPL, partially offset by the decrease in Adjusted Operating Margin described above and a decrease in AFUDC for theEagle Valley CCGT project at IPL.
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93 | 2020 Annual Report South America SBU The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated: $ Change For the Years Ended $ Change 2020 % Change 2020 2019 vs. % Change 2019 December 31, 2020 2019 2018 vs. 2019 vs. 2019 2018 vs. 2018 Operating Margin$ 1,243 $ 873 $ 1,017 $ 370 42 %$ (144) -14 % Adjusted Operating Margin (1) 550 499 612 51 10 % (113) -18 % Adjusted PTC (1) 534 504 519 30 6 % (15) -3 %
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(1) A non-GAAP financial measure, adjusted for the impact of NCI. See SBU Performance Analysis-Non-GAAP Measures for definition and Item 1.- Business for the respective ownership interest for key businesses. In addition, AES owned 24.35% of AES Brasil untilAugust 2020 when ownership increased to 42.85%, and increased again to 44.13% inDecember 2020 due to acquisition of additional shares in the company. Fiscal year 2020 versus 2019 Operating Margin increased$370 million , or 42%, which was driven primarily by the following (in millions): Increase inChile primarily related to early contract terminations at Angamos$ 302 Increase inBrazil mainly due to a reduction in cost of sales as a result of a revision to the GSF liability, partially offset by depreciation of the Brazilian 140 real against the USD Recovery of previously expensed payments from customers inChile
57
Lower reservoir levels as a result of the life extension project at Chivor during (108) Q1 2020 and drier hydrology inColombia Lower capacity prices (Resolution 31/2020) inArgentina partially offset by the (21) impact of new wind projects beginning commercial operations in 2020 Total South America SBU Operating Margin Increase
Adjusted Operating Margin increased$51 million primarily due to the drivers above, adjusted for NCI and the net gains on early contract terminations at Angamos. Adjusted PTC increased$30 million , mainly driven by the increase in Adjusted Operating Margin described above, as well as lower interest expense due to incremental capitalized interest at Alto Maipo. These positive impacts were partially offset by realized FX losses and lower interest income primarily driven by lower interest rates on CAMMESA receivables inArgentina , and higher interest expense inBrazil due to higher inflation rates. Fiscal year 2019 versus 2018 Operating Margin decreased$144 million , or 14%, which was driven primarily by the following (in millions): Decrease inArgentina primarily driven by lower generation and lower energy and capacity prices as defined by resolution 1/2019, which modified generators'$ (59) 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 depreciation of the (38) Argentine peso Decrease inChile primarily due to lower contracted energy sales and lower efficient plant availability, partially offset by lower spot prices on energy (30) purchases Decrease due to the sale of Electrica Santiago and the transmission lines in 2018 (21) Decrease inChile primarily due to higher fixed costs associated with IT initiatives and realized FX losses related to forward instruments, partially (11) offset by savings on employee expenses Decrease inBrazil primarily driven by lower spot sales and prices, partially (10) offset by higher contracted energy sales Increase inColombia due to higher spot prices primarily driven by drier system 30 hydrology Increase inBrazil due to new solar plants in operation 10 Other
(15)
Total South America SBU Operating Margin Decrease
Adjusted Operating Margin decreased$113 million primarily due to the drivers above, adjusted for NCI. Adjusted PTC decreased$15 million , mainly driven by the decrease in Adjusted Operating Margin described above, partially offset by realized FX gains inArgentina andChile in 2019 as compared to losses in 2018, and higher equity earnings in 2019 related to better operating results at Guacolda.
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94 | 2020 Annual Report MCAC SBU The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated: For the Years Ended $ Change 2020 % Change 2020 $ Change 2019 % Change 2019 December 31, 2020 2019 2018 vs. 2019 vs. 2019 vs. 2018 vs. 2018 Operating Margin$ 559 $ 487 $ 534 $ 72 15 %$ (47) -9 % Adjusted Operating Margin (1) 394 352 391 42 12 % (39) -10 % Adjusted PTC (1) 287 367 300 (80) -22 % 67 22 %
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(1) A non-GAAP financial measure, adjusted for the impact of NCI. See SBU Performance Analysis-Non-GAAP Measures for definition and Item 1.- Business for the respective ownership interest for key businesses. Fiscal year 2020 versus 2019 Operating Margin increased$72 million , or 15%, which was driven primarily by the following (in millions): Higher availability inPanama mainly due to the outage of Changuinola in 2019 for$ 63 the tunnel lining upgrade Increase inPanama driven by improved hydrology resulting in higher net spot 43 market sales Increase inDominican Republic due to higher LNG sales margin driven by the 27 Eastern Pipeline COD in 2020 Increase inPanama mainly driven by higher availability and capacity tank revenue and lower fixed costs, partially offset by lower energy sales margin at theColon 9 combined cycle plant Decrease inDominican Republic related to Andres facility due to steam turbine (49) failure in 2020 and business interruption insurance recovered in 2019 Decrease inPanama driven by lower margin at the Estrella de Mar I power barge (26) mainly due to disconnection from the grid inAugust 2020 Other 5 Total MCAC SBU Operating Margin Increase
Adjusted Operating Margin increased$42 million primarily due to the drivers above, adjusted for NCI. Adjusted PTC decreased$80 million , mainly driven by insurance recoveries associated with property damage at Andres and Changuinola in 2019, partially offset by the increase in Adjusted Operating Margin described above. Fiscal year 2019 versus 2018 Operating Margin decreased$47 million , or 9%, which was driven primarily by the following (in millions): Lower availability due to the outage of Changuinola for the tunnel lining upgrade$ (123) Lower availability driven by lower hydrology inPanama
(40)
Decrease inDominican Republic due to lower energy prices
(18)
Lower energy costs and business interruption insurance recovered due to the
45
lightning incident at the Andres facility in 2018 Higher contract sales atPanama mainly driven by contract renewals at higher 41 prices Higher sales atPanama driven by the commencement of operations at the Colon 40 combined cycle facility inSeptember 2018 Increase inMexico due to pension plan pass-through adjustment
12
Other
(4)
Total MCAC SBU Operating Margin Decrease
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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95 | 2020 Annual Report Eurasia SBU The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated: For the Years Ended $ Change 2020 % Change 2020 $ Change 2019 % Change 2019 December 31, 2020 2019 2018 vs. 2019 vs. 2019 vs. 2018 vs. 2018 Operating Margin$ 186 $ 188 $ 227 $ (2) -1 %$ (39) -17 % Adjusted Operating Margin (1) 142 148 194 (6) -4 % (46) -24 % Adjusted PTC (1) 177 159 222 18 11 % (63) -28 %
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(1) A non-GAAP financial measure, adjusted for the impact of NCI. See SBU Performance Analysis-Non-GAAP Measures for definition and Item 1.- Business for the respective ownership interest for key businesses. Fiscal year 2020 versus 2019 Operating Margin decreased$2 million , or 1%, which was driven primarily by the following (in millions):
Impact of the sale of Kilroot and Ballylumford businesses in
(6)
Other
4
Total Eurasia SBU Operating Margin Decrease
Adjusted Operating Margin decreased$6 million due to the drivers above, adjusted for NCI. Adjusted PTC increased$18 million , mainly driven by lower interest expense due to regular debt repayments inBulgaria and a positive variance in OPGC equity earnings, partially offset by the decrease in Adjusted Operating Margin described above. Fiscal year 2019 versus 2018 Operating Margin decreased$39 million , or 17%, which was driven primarily by the following (in millions): Impact of the sale of Kilroot and Ballylumford businesses inJune 2019 $ (46) Impact of the sale of the Masinloc power plant inMarch 2018
(24)
Lower depreciation at theJordan plants due to their classification as held-for-sale 20 Other 11 Total Eurasia SBU Operating Margin Decrease
Adjusted Operating Margin decreased$46 million , primarily due to the drivers above, adjusted for NCI. Adjusted PTC decreased$63 million , primarily driven by the decrease in Adjusted Operating Margin discussed above, as well as a decrease in earnings at OPGC and the sale of Elsta, our equity affiliate inthe Netherlands . Key Trends and Uncertainties During 2021 and beyond, we expect to face the following challenges at certain of our businesses. Management expects that improved operating performance at certain businesses, growth from new businesses, and global cost reduction initiatives may lessen or offset their impact. If these favorable effects do not occur, or if the challenges described below and elsewhere in this section impact us more significantly than we currently anticipate, or if volatile foreign currencies and commodities move more unfavorably, then these adverse factors (or other adverse factors unknown to us) may have a material impact on our operating margin, net income attributable toThe AES Corporation and cash flows. We continue to monitor our operations and address challenges as they arise. For the risk factors related to our business, see Item 1.- Business and Item 1A.- Risk Factors of this Form 10-K. COVID-19 Pandemic The COVID-19 pandemic has impacted global economic activity, including electricity and energy consumption, and caused significant volatility in financial markets. The following discussion highlights our assessment of the impacts of the pandemic on our current financial and operating status, and our financial and operational outlook based on information known as of this filing. Also see Item 1A.- Risk Factors of this Form 10-K. Throughout the COVID-19 pandemic we have conducted our essential operations without significant disruption. We derive approximately 85% of our total revenues from our regulated utilities and long-term sales and
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96 | 2020 Annual Report
supply contracts or PPAs at our generation businesses, which contributes to a relatively stable revenue and cost structure at most of our businesses. The impact of the COVID-19 pandemic on the energy market materialized in our operational locations in the second quarter and was generally better than our revised expectations for the second half of 2020. Across our global portfolio, our utilities businesses experienced a low single digit percentage decline in the fourth quarter. Our business model outside of utilities is primarily based on take-or-pay contracts or tolling agreements, with limited exposure to demand. Any uncontracted portion of our generation business is exposed to increased price risk resulting from lower demand associated with the pandemic. We are also experiencing a decline in electricity spot prices in some of our markets due to lower system demand. While we cannot predict the length and magnitude of the pandemic or how it could impact global economic conditions, a delayed recovery with respect to demand may adversely impact our financial results for 2021. We continue to monitor and manage our credit exposures in a prudent manner. Our credit exposures have continued in-line with historical levels and within the customary 45-60 day grace period. These impacts are expected to be partially offset by recoveries throughU.S. regulatory rate-making mechanisms and a combination of the securitization of customer payment moratorium receivables and agreements with the generating companies inEl Salvador . We have not experienced material credit-related impacts from our PPA offtakers due to the COVID-19 pandemic. Our supply chain management has remained robust during this challenging time and we continue to closely manage and monitor developments. We continue to experience certain minor delays in some of our development projects, primarily in permitting processes and the implementation of interconnections, due to governments and other authorities having limited capacity to perform their functions. The Coronavirus Aid, Relief, and Economic Security ("CARES") Act was passed by theU.S. Congress and signed into law onMarch 27, 2020 . While we currently expect a limited impact from this legislation on our business, certain elements such as changes in the deductibility of interest may provide some cash benefits in the near term. Additionally, the Company continues to monitor the potential impact of the COVID-19 pandemic on our financial results and operations, which may result in the need to record a valuation allowance against deferred tax assets in the jurisdictions where we operate. Macroeconomic and Political The macroeconomic and political environments in some countries where our subsidiaries conduct business have changed during 2020. This could result in significant impacts to tax laws and environmental and energy policies. Additionally, we operate in multiple countries and as such are subject to volatility in exchange rates at the subsidiary level. See Item 7A.- Quantitative and Qualitative Disclosures About Market Risk for further information.Argentina - In the run up to the 2019 Presidential elections, the Argentine peso devalued significantly and the government ofArgentina imposed capital controls and announced a restructuring ofArgentina's debt payments. Restrictions on the flow of capital have limited the availability of international credit, and economic conditions inArgentina have further deteriorated, triggering additional devaluation of the Argentine peso and a deterioration of the country's risk profile. Following the election ofAlberto Fernández inOctober 2019 , the administration has been evaluating solutions to the Argentine economic crisis. OnFebruary 27, 2020 , the Secretariat of Energy passed Resolution No. 31/2020 that includes the denomination of tariffs in local currency indexed by local inflation (currently delayed due to the COVID-19 pandemic), and reductions in capacity payments received by generators. These regulatory changes have negatively impacted our financial results. In addition,Argentina restructured its public debt in 2020 through an agreement with its international creditors. Although the situation inArgentina remains challenging, 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 in Item 8.- Financial Statements and Supplementary Data of this Form 10-K.Chile - InOctober 2019 ,Chile saw significant protests associated with economic conditions resulting in the declaration of a state of emergency in several major cities. In response to the social unrest, the Chilean government held a referendum inOctober 2020 , which determined that a new constitution will be drafted by a constitutional convention. A second vote will be held alongside municipal and gubernatorial elections inApril 2021 to elect the members of the constitutional convention. A third vote, which is expected to occur in 2022, would accept or reject the new constitution after it is drafted. Other initiatives to address the concerns of the protesters are under consideration byCongress and could result in regulatory or policy changes that may affect our results of operations inChile .
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97 | 2020 Annual Report
InNovember 2019 , the Chilean government enacted Law 21,185 that establishes aStabilization Fund for regulated energy prices. Historically, the government updated the prices for regulated energy contracts every six months to reflect the indexation the contracts have to exchange rates and commodities prices. The new law freezes regulated prices and does not allow the pass-through of these contractual indexation updates to customers beyond the pricing in effect atJuly 1, 2019 , until new lower-cost renewable contracts are incorporated into pricing in 2023. Consequently, costs incurred in excess of theJuly 1, 2019 price will be accumulated and borne by generators. The receivables will be paid by distribution companies and the face value will be recognized by a Tariff Decree issued by the regulator every six months. OnDecember 31, 2020 ,AES Gener executed an agreement for the sale of$105 million of receivables generated pursuant the Tariff Stabilization Law at a discount of$20 million . Of the$85 million of net receivables outstanding pursuant the Tariff Stabilization Law,$23 million were collected byAES Gener inFebruary 2021 .Puerto Rico - Our subsidiaries inPuerto Rico have long-term PPAs with state-owned PREPA, which has been facing economic challenges that could result in a material adverse effect on our business inPuerto Rico . The Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA") was enacted to create a structure for exercising federal oversight over the fiscal affairs ofU.S. territories and created procedures for adjusting debt accumulated by thePuerto Rico government and, potentially, other territories ("Title III"). PROMESA also expedites the approval of key energy projects and other critical projects inPuerto Rico . PROMESA allowed for the establishment of an Oversight Board with broad powers of budgetary and financial control overPuerto Rico . The Oversight Board filed for bankruptcy on behalf of PREPA under Title III inJuly 2017 . As a result of the bankruptcy filing,AES Puerto Rico and AES Ilumina's non-recourse debt of$238 million and$31 million , respectively, continue to be in technical default and are classified as current as ofDecember 31, 2020 . The Company is in compliance with its debt payment obligations as ofDecember 31, 2020 . The Company's receivable balances inPuerto Rico as ofDecember 31, 2020 totaled$55 million , of which$1 million was overdue. Despite the Title III protection, PREPA has been making substantially all of its payments to the generators in line with historical payment patterns. OnJanuary 2, 2020 , the Governor ofPuerto Rico signed a bill that prohibits the disposal and unencapsulated beneficial use of coal combustion residuals inPuerto Rico . Prior to this bill's approval, the Company had put in place arrangements to dispose or beneficially use its coal ash and combustion residual outside ofPuerto Rico . Considering the information available as of the filing date, management believes the carrying amount of our long-lived assets inPuerto Rico of$534 million is recoverable as ofDecember 31, 2020 . Reference Rate Reform - InJuly 2017 , theUK Financial Conduct Authority announced that it intends to phase out LIBOR by the end of 2021. In theU.S. , the Alternative Reference Rate Committee at theFederal Reserve identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative rate for LIBOR; alternative reference rates in other key markets are under development. OnNovember 30, 2020 , theICE Benchmark Association ("IBA") announced it had begun consultation on its intention to cease publication of two specific LIBOR rates byDecember 31, 2021 , while extending the timeline for the overnight, one-month, three-month, six-month, and 12-month USD LIBOR rates throughJune 30, 2023 . The IBA expects to make separate announcements in this regard following the outcome of the consultation. AES holds a substantial amount of debt and derivative contracts referencing LIBOR as an interest rate benchmark. Although the full impact of the reform remains unknown, we have begun to engage with AES counterparties to discuss specific action items to be undertaken in order to prepare for amendments when they become due. United States Tax Law Reform Federal Taxes - InDecember 2017 ,the United States enacted the TCJA. The legislation significantly revised theU.S. corporate income tax system by, among other things, lowering the corporate income tax rate, introducing new limitations on interest expense deductions, subjecting foreign earnings in excess of an allowable return to currentU.S. taxation, and adopting a semi-territorial corporate tax system. These changes impacted our 2018 and 2019 effective tax rates and may materially impact our effective tax rate in future periods. Furthermore, we anticipate that growth in ourU.S. businesses and higherU.S. tax expense may fully utilize our remaining net operating loss carryforwards in the near term, which could lead to material cash tax payments inthe United States . Our interpretation of the TCJA may change in the event theU.S. Treasury and the Internal Revenue Service issue additional guidance. The Company's effective tax rate in 2020 reflects the application of the GILTI high-tax exclusion under the final regulations published onJuly 23, 2020 . This election reduced our provision for GILTI income from,
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among others, certain subsidiaries inChile and theDominican Republic . Should these subsidiaries fail to qualify for the exclusion under the regulations, the Company'sU.S. taxable income and consolidated income tax expense for 2020 may be materially impacted. These regulations may materially impact our future year effective tax rates and future cash tax obligations. 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.U.S. Renewable Tax Credits - The Consolidated Appropriations Act, 2021 ("CAA, 2021") became law onDecember 27, 2020 . Included in the CAA, 2021 is the Taxpayer Certainty and Disaster Tax Relief Act of 2020 ("TCDTRA"), which extends the sunset or phase-down periods of federal tax credits related to the development and operation of certain renewable energy electric generating facilities, and provides new tax credit extension rules specifically applying to offshore wind power electric generating facilities. Specifically, the TCDTRA extends the 26% Investment Tax Credit for qualified solar projects beginning construction in 2021 and 2022 that are placed in service beforeJanuary 1, 2026 and permits a 22% Investment Tax Credit for qualified projects beginning construction in 2023 that are placed in service beforeJanuary 1, 2026 . It also extends the 60% Production Tax Credit for onshore wind by one year, allowing qualified wind projects beginning construction in 2021 to be eligible. In addition to the tax credit extenders, the TCDTRA provides for a five-year extension of the controlled foreign corporation look-through rule through 2025. Under this rule, dividends and interest paid by one controlled foreign subsidiary to another are exempt fromU.S. tax. AES currently relies on the controlled foreign corporation look-through rule to exempt dividends and interest paid between foreign subsidiaries from currentU.S. tax. 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 . Chilean Decarbonization Plan - The Chilean government has announced an initiative to phase out coal power plants by 2040 and achieve carbon neutrality by 2050. OnJune 4, 2019 ,AES Gener signed an agreement with the Chilean government to cease the operation of two coal units for a total of 322 MW as part of the phase-out. Under the agreement,Ventanas 1 (114 MW) will cease operation inNovember 2022 andVentanas 2 (208 MW) inMay 2024 ; howeverAES Gener has announced its intention to accelerate the disconnection of these units. OnDecember 26, 2020 , the Chilean government issued Supreme Decree Number 42, which allows coal plants to remain connected to the grid in "strategic reserve status" for five years after ceasing operations, receive a reduced capacity payment, and dispatch, if necessary, to ensure the electric system's reliability. OnDecember 29, 2020 ,Ventanas 1 ceased operation and entered "strategic reserve status."Ventanas 2 is also expected to enter "strategic reserve status" in August 2021. See Item 1- Business - South America SBU - Chile for further discussion. Considering the information available as of the filing date, management believes the carrying amount of our coal-fired long-lived assets inChile of$1.9 billion is recoverable as ofDecember 31, 2020 . Puerto Rico Energy Public Policy Act - OnApril 11, 2019 , the Governor ofPuerto Rico signed the Puerto Rico Energy Public Policy Act ("the Act") establishing guidelines for grid efficiency and eliminating coal as a source for electricity generation byJanuary 1, 2028 . The Act supports the accelerated deployment of renewables through the Renewable Portfolio Standard and the conversion of coal generating facilities to other fuel sources, with compliance targets of 40% by 2025, 60% by 2040, and 100% by 2050.AES Puerto Rico's long-term PPA with PREPA expiresNovember 30, 2027 . PREPA andAES Puerto Rico have discussed different strategic alternatives, but have yet to reach any agreement. Any agreement that may be reached would be subject to lender and
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regulatory approval, including that of the Oversight Board that filed for bankruptcy on behalf of PREPA. The Company is evaluating certain developments occurring during the first quarter of 2021 to determine if a reassessment of the recoverability and useful life of the plant is necessary. Considering the information available as of the filing date, management believes the carrying amount of our long-lived assets inPuerto Rico of$534 million is recoverable as ofDecember 31, 2020 .Hawaii - InJuly 2020 , theHawaii State Legislature passed a bill that will prohibit AES Hawaii from generating electricity from coal afterDecember 31, 2022 . As this will restrict the Company from contracting the asset beyond the expiration of its existing PPA, management reassessed the economic useful life of the generation facility. A decrease in the useful life was identified as an impairment indicator. The Company performed an impairment analysis and determined that the carrying amount of the asset group was not recoverable. As a result, the Company recognized asset impairment expense of$38 million . AESHawaii is reported in the US and Utilities SBU reportable segment. 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 AES Maritza PPA Review - DG Comp is conducting a preliminary review of whether AES Maritza's PPA with NEK is compliant with theEuropean Union's State Aid rules. Although no formal investigation has been launched by DG Comp to date, AES Maritza has engaged in discussions with the DG Comp case team to discuss the agency's review. In the near term, Maritza expects to engage in discussions withBulgaria (with the involvement of DG Comp) to attempt to reach a negotiated resolution concerning DG Comp's review. Separately,Bulgaria recently submitted its proposed plan for the reform of its electricity market to theEuropean Commission (the "Market Reform Plan"). The proposed Market Reform Plan is part ofBulgaria's plan to introduce a market-wide capacity remuneration mechanism, which would require approval by DG Comp. The Market Reform Plan proposes a deadline ofJune 30, 2021 for the termination of AES Maritza's PPA, and anticipates discussions with AES Maritza about that issue. We do not believe termination of the PPA is justified, nor do we believe that the unilaterally proposed deadline for the termination of the PPA is realistic, given that the discussions withBulgaria have not yet begun. We expect that the anticipated discussions withBulgaria could involve a range of potential outcomes, including but not limited to the termination of the PPA and payment of some level of compensation to AES Maritza. Any negotiated resolution would be subject to mutually acceptable terms, lender consent, and DG Comp approval. At this time, we cannot predict the outcome of the anticipated discussions between AES Maritza andBulgaria , nor can we predict how DG Comp might resolve its review if the discussions fail to result in an agreement concerning the review. AES Maritza believes that its PPA is legal and in compliance with all applicable laws, and it will take all actions necessary to protect its interests, whether through negotiated agreement or otherwise. However, there can be no assurances that this matter will be resolved favorably; if it is not, there could be a material adverse effect on the Company's financial condition, results of operation, and cash flows. Considering the information available as of the filing date, management believes the carrying value of our long-lived assets at Maritza of approximately$1.1 billion is recoverable as ofDecember 31, 2020 . Tietê GSF Settlement - InSeptember 2020 , Law 14.052/2020 published by ANEEL was approved by the President ofBrazil , establishing terms for compensation to MRE hydro generators for the incorrect application of the GSF mechanism from 2013 to 2018, which resulted in higher charges assessed to MRE hydro generators by the regulator. Under this law, compensation will be in the form of an offer for a concession extension for each hydro generator, in exchange for full payment of billed GSF trade payables. InDecember 2020 , ANEEL published a regulation establishing the terms and conditions for potential compensation to Tietê in the form of a concession extension period of approximately 2.6 years. As a result, the previously recognized contingent liabilities related to GSF payments were updated to reflect the Company's best estimate for the fair value of compensation to be received from the concession extension offered in conjunction with the regulation. This compensation was estimated to have a fair value of$184 million , and was recorded as a reversal of Non-Regulated Cost of Sales on the Consolidated Statements of Operations. The concession extension also met the criteria for recognition as a definite-lived intangible asset that will be amortized from the date of the agreement, which is expected in the first quarter of 2021, until the end of the new concession period. The value of the concession extension is based on a preliminary time-value equivalent calculation made by the CCEE and subsequent adjustments requested by Tietê. Both the concession extension period and its equivalent asset value are subject to agreement between ANEEL and AES.
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Management does not expect the agreement to result in a materially different concession extension period or equivalent asset value, however the final compensation value and extension period could differ from the original estimates as ofDecember 31, 2020 , which could require adjustments. Foreign Exchange Rates We operate in multiple countries and as such are subject to volatility in exchange rates at varying degrees at the subsidiary level and between our functional currency, the USD, and currencies of the countries in which we operate. 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 have an impact on our future results. The Argentine economy continues to be considered highly inflationary underU.S. GAAP; as such, all of our Argentine businesses are reported using the USD as the functional currency. For additional information, refer to Item 7A.- Quantitative and Qualitative Disclosures About Market Risk . Impairments Long-lived Assets and Equity Affiliates - InAugust 2020 ,AES Gener reached an agreement with Minera Escondida andMinera Spence to early terminate two PPAs of the Angamos coal-fired plant inChile .AES Gener also announced its intention to accelerate the retirement of theVentanas 1 andVentanas 2 coal-fired plants. Management will no longer be pursuing a contracting strategy for these assets and the plants will primarily be utilized as peaker plants and for grid stability. Due to these developments, the Company performed an impairment analysis and determined that the carrying amounts of these asset groups were not recoverable. As a result, the Company recognized asset impairment expense of$781 million . During the year endedDecember 31, 2020 , the Company recognized asset and other-than-temporary impairment expenses of$1.1 billion , inclusive of the asset impairment noted above. 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 2020 totaled$2.1 billion atDecember 31, 2020 . 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 10%. In 2019, during the annual goodwill impairment test performed as ofOctober 1 , 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" largely due to the Chilean government's announcement to phase out coal generation by 2040, and a decline in long-term energy prices. As a result of the long-lived asset impairments at Gener during the third quarter of 2020, the Company determined there was a triggering event requiring a reassessment of goodwill impairment atSeptember 1, 2020 . The Company determined the fair value of its Gener reporting unit exceeded its carrying value by 13%. Although the fair value exceeds its carrying value by more than 10%, the Company continues to monitor the Gener reporting unit for potential interim goodwill impairment triggering events. Through 2028, Gener's plants remain largely contracted, with 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. While the duration and severity of the impacts of the COVID-19 pandemic remain unknown, further disruptions in the global market could result in changes to assumptions utilized in the goodwill assessment. Impairments would
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negatively impact our consolidated results of operations and net worth. See Item 1A.- Risk Factors of this Form 10-K for further information. The Company monitors its reporting units at risk of impairment for interim impairment indicators, and believes that the estimates and assumptions used in the calculations are reasonable as ofDecember 31, 2020 . Should the fair value of any of the Company's reporting units fall below its carrying amount because of reduced operating performance, market declines, changes in the discount rate, regulatory changes, or other adverse conditions, goodwill impairment charges may be necessary in future periods. Capital Resources and Liquidity Overview As ofDecember 31, 2020 , the Company had unrestricted cash and cash equivalents of$1.1 billion , of which$71 million was held at the Parent Company and qualified holding companies. The Company had$335 million in short-term investments, held primarily at subsidiaries, and restricted cash and debt service reserves of$738 million . The Company also had non-recourse and recourse aggregate principal amounts of debt outstanding of$16.4 billion and$3.4 billion , respectively. Of the$1.4 billion of our current non-recourse debt,$1.2 billion was presented as such because it is due in the next twelve months and$276 million relates to debt considered in default due to covenant violations. None of the defaults are payment defaults but are instead technical defaults triggered by failure to comply with covenants or other requirements contained in the non-recourse debt documents, of which$269 million is due to the bankruptcy of the offtaker. We expect current maturities of non-recourse debt to be repaid from net cash provided by operating activities of the subsidiary to which the debt relates, through opportunistic refinancing activity, or some combination thereof. We have$1 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$70 million under its revolving credit facility. On a consolidated basis, of the Company's$20.2 billion of total gross debt outstanding as ofDecember 31, 2020 , approximately$2.7 billion bore interest at variable rates that were not subject to a derivative instrument which fixed the interest rate.Brazil holds$800 million of our floating rate non-recourse exposure as we have no ability to fix local debt interest rates efficiently. In addition to utilizing non-recourse debt at a subsidiary level when available, the Parent Company provides a portion, or in certain instances all, of the remaining long-term financing or credit required to fund development, construction or acquisition of a particular project. These investments have generally taken the form of equity investments or intercompany loans, which are subordinated to the project's non-recourse loans. We generally obtain the funds for these investments from our cash flows from operations, proceeds from the sales of assets and/or the proceeds from our issuances of debt, common stock and other securities. Similarly, in certain of our businesses, the Parent Company may provide financial guarantees or other credit support for the benefit of counterparties who have entered into contracts for the purchase or sale of electricity, equipment, or other services with our subsidiaries or
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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. As ofDecember 31, 2020 , the Parent Company had provided outstanding financial and performance-related guarantees or other credit support commitments to or for the benefit of our businesses, which were limited by the terms of the agreements, of approximately$1.4 billion in aggregate (excluding those collateralized by letters of credit and other obligations discussed below). As a result of the Parent Company's split rating, some counterparties may be unwilling to accept our general unsecured commitments to provide credit support. Accordingly, with respect to both new and existing commitments, the Parent Company may be required to provide some other form of assurance, such as a letter of credit, to backstop or replace our credit support.The Parent Company may not be able to provide adequate assurances to such counterparties. To the extent we are required and able to provide letters of credit or other collateral to such counterparties, this will reduce the amount of credit available to us to meet our other liquidity needs. As ofDecember 31, 2020 , we had$110 million in letters of credit outstanding provided under our unsecured credit facilities, and$77 million in letters of credit outstanding provided under our revolving credit facility. These letters of credit operate to guarantee performance relating to certain project development and construction activities and business operations. During the year endedDecember 31, 2020 , the Company paid letter of credit fees ranging from 1% to 3% per annum on the outstanding amounts. We expect to continue to seek, where possible, non-recourse debt financing in connection with the assets or businesses that we or our affiliates may develop, construct or acquire. However, depending on local and global market conditions and the unique characteristics of individual businesses, non-recourse debt may not be available on economically attractive terms or at all. If we decide not to provide any additional funding or credit support to a subsidiary project that is under construction or has near-term debt payment obligations and that subsidiary is unable to obtain additional non-recourse debt, such subsidiary may become insolvent, and we may lose our investment in that subsidiary. Additionally, if any of our subsidiaries lose a significant customer, the subsidiary may need to withdraw from a project or restructure the non-recourse debt financing. If we or the subsidiary choose not to proceed with a project or are unable to successfully complete a restructuring of the non-recourse debt, we may lose our investment in that subsidiary. Many of our subsidiaries depend on timely and continued access to capital markets to manage their liquidity needs. The inability to raise capital on favorable terms, to refinance existing indebtedness or to fund operations and other commitments during times of political or economic uncertainty may have material adverse effects on the financial condition and results of operations of those subsidiaries. In addition, changes in the timing of tariff increases or delays in the regulatory determinations under the relevant concessions could affect the cash flows and results of operations of our businesses. Long-Term Receivables As ofDecember 31, 2020 , the Company had approximately$110 million of gross accounts receivable classified as Other noncurrent assets. These noncurrent receivables mostly consist of accounts receivable inArgentina andChile that, pursuant to amended agreements or government resolutions, have collection periods that extend beyondDecember 31, 2021 , or one year from the latest balance sheet date. The majority of Argentine receivables have been converted into long-term financing for the construction of power plants. Noncurrent receivables inChile pertain primarily to revenues recognized on regulated energy contracts that were impacted by theStabilization Fund created by the Chilean government. A portion relates to the extension of existing PPAs with the addition of renewable energy. See Note 7- Financing Receivables included in Item 8.- Financial Statements and Supplementary Data , Item 1.- Business-South America SBU-Argentina-Regulatory Framework and Market Structure , and Item 7.- Management's Discussion and Analysis of Financial Condition and Results of Operation-Key Trends and Uncertainties-Macroeconomic and Political-Chile of this Form 10-K for further information. As ofDecember 31, 2020 , the Company had approximately$1.3 billion of loans receivable primarily related to a facility constructed under a BOT contract inVietnam . This loan receivable represents contract consideration related to the construction of the facility, which was substantially completed in 2015, and will be collected over the 25-year term of the plant's PPA. As ofDecember 31, 2020 ,Mong Duong met the held-for-sale criteria and the loan receivable balance of$1.3 billion , net of CECL reserve of$32 million , was reclassified to held-for-sale assets. Of the loan receivable balance,$80 million was classified as Current held-for-sale assets and$1.2 billion was classified as Noncurrent held-for-sale assets on the Consolidated Balance Sheet. See Note 20- Revenue included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for further information.
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103 | 2020 Annual Report Cash Sources and Uses The primary sources of cash for the Company in the year endedDecember 31, 2020 were debt financings, cash flows from operating activities, sales of short-term investments, and sales to noncontrolling interests. The primary uses of cash in the year endedDecember 31, 2020 were repayments of debt, capital expenditures, and purchases of short-term investments. The primary sources of cash for the Company in the year endedDecember 31, 2019 were debt financings, cash flows from operating activities, and sales of short-term investments. The primary uses of cash in the year endedDecember 31, 2019 were repayments of debt, capital expenditures, and purchases of short-term investments. The primary sources of cash for the Company in the year endedDecember 31, 2018 were debt financings, cash flows from operating activities, proceeds from the sales of business interests, and sales of short-term investments. The primary uses of cash in the year endedDecember 31, 2018 were repayments of debt, capital expenditures, and purchases of short-term investments. A summary of cash-based activities are as follows (in millions): Year Ended December 31, Cash Sources: 2020 2019 2018 Issuance of non-recourse debt$ 4,680 $ 5,828 $ 1,928 Issuance of recourse debt 3,419 - 1,000 Net cash provided by operating activities 2,755 2,466 2,343 Borrowings under the revolving credit facilities 2,420 2,026 1,865 Sale of short-term investments 627 666 1,302 Sales to noncontrolling interests 553 128 95
Proceeds from the sale of business interests, net of cash and restricted cash sold
169 178 2,020 Issuance of preferred shares in subsidiaries 112 - - Insurance proceeds 9 150 17 Other - 9 123 Total Cash Sources$ 14,744 $ 11,451 $ 10,693 Cash Uses: Repayments of non-recourse debt$ (4,136) $ (4,831) $ (1,411) Repayments of recourse debt (3,366) (450) (1,933) Repayments under the revolving credit facilities (2,479) (1,735) (2,238) Capital expenditures (1,900) (2,405) (2,121) Purchase of short-term investments (653) (770) (1,411) Distributions to noncontrolling interests (422) (427) (340) Dividends paid on AES common stock (381) (362) (344) Contributions and loans to equity affiliates (332) (324) (145) Acquisitions of noncontrolling interests (259) - - Acquisitions of business interests, net of cash and (136) (192) (66) restricted cash acquired Payments for financing fees (107) (126) (39) Payments for financed capital expenditures (60) (146) (275) Other (258) (114) (155) Total Cash Uses$ (14,489) $ (11,882) $ (10,478) Net increase (decrease) in Cash, Cash Equivalents, and$ 255 $ (431) $ 215 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): 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Operating activities$ 2,755 $ 2,466 $ 2,343 $ 289 $ 123 Investing activities (2,295) (2,721) (505) 426 (2,216) Financing activities (78) (86) (1,643) 8 1,557
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104 | 2020 Annual Report Operating Activities Fiscal Year 2020 versus 2019 Net cash provided by operating activities increased$289 million for the year endedDecember 31, 2020 , compared toDecember 31, 2019 . Operating Cash Flows (1) (in millions) [[Image Removed: aes-20201231_g22.jpg]] (1)Amounts included in the chart above include the results of discontinued operations, where applicable. (2)The change in adjusted net income is defined as the variance in net income, net of the total adjustments to net income as shown on the Consolidated Statements of Cash Flows in Item 8.- Financial Statements and Supplementary Data of this Form 10-K. (3)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. •Adjusted net income decreased$40 million , primarily due to lower margins at our US and Utilities SBU and prior year gains on insurance proceeds associated with the lightning incident at the Andres facility in 2018 and the Changuinola tunnel leak, partially offset by higher margins at ourSouth America and MCAC SBUs. •Working capital requirements decreased$329 million , primarily due to an increase in deferred income at Angamos as a result of the early contract terminations with Minera Escondida andMinera Spence . Fiscal Year 2019 versus 2018 Net cash provided by operating activities increased$123 million for the year endedDecember 31, 2019 , compared toDecember 31, 2018 . Operating Cash Flows (1) (in millions) [[Image Removed: aes-20201231_g23.jpg]] (1)Amounts included in the chart above include the results of discontinued operations, where applicable. (2)The change in adjusted net income is defined as the variance in net income, net of the total adjustments to net income as shown on the Consolidated Statements of Cash Flows in Item 8.- Financial Statements and Supplementary Data of this Form 10-K. (3)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.
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•Adjusted net income decreased$24 million , primarily due to lower margins at ourSouth America and MCAC SBUs. These impacts were partially offset by the gains on insurance recoveries in 2019 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 theDominican 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 atArgentina as a result of lower operating margin and income tax rates, and higher supplier payments and collections atPuerto Rico in 2018. Investing Activities Fiscal Year 2020 versus 2019 Net cash used in investing activities decreased$426 million for the year endedDecember 31, 2020 compared toDecember 31, 2019 . Investing Cash Flows (in millions) [[Image Removed: aes-20201231_g24.jpg]] •Cash from short-term investing activities increased$78 million , primarily at Tietê as a result of lower net short-term investment purchases in 2020. •Insurance proceeds decreased$141 million , largely due to prior year insurance proceeds associated with the lightning incident at the Andres facility in 2018 and the Changuinola tunnel leak. •Capital expenditures decreased$505 million , discussed further below.
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106 | 2020 Annual Report Capital Expenditures (in millions) [[Image Removed: aes-20201231_g25.jpg]] •Growth expenditures decreased$356 million , primarily driven by the timing of payments for the Southland repowering project, renewable energy projects inArgentina , and a pipeline project at Andres, as well as the completion of solar projects at AES Brasil, a wind project inHawaii , and the Colon LNG facility inPanama . This impact was partially offset by higher investments atIPALCO and in renewable projects at Gener. •Maintenance expenditures decreased$143 million , primarily due to prior year expenditures at Andres as a result of the steam turbine lightning damage and inPanama as a result of the Changuinola tunnel lining upgrade, as well as due to the timing of payments in the prior year atIPALCO . •Environmental expenditures decreased$6 million , primarily due to the timing of payments in the prior year related to projects at Gener. Fiscal Year 2019 versus 2018 Net cash used in investing activities increased$2.2 billion for the year endedDecember 31, 2019 compared toDecember 31, 2018 . Investing Cash Flows (in millions) [[Image Removed: aes-20201231_g26.jpg]] •Proceeds from dispositions decreased$1.8 billion , primarily due to 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 theUnited Kingdom in 2019. •Contributions and loans to equity affiliates increased by$179 million , primarily due to project funding requirements at sPower. •Capital expenditures increased$284 million , discussed further below.
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107 | 2020 Annual Report Capital Expenditures (in millions) [[Image Removed: aes-20201231_g27.jpg]] •Growth expenditures increased$130 million , primarily due to higher investments in solar projects at Distributed Energy and renewable energy projects inArgentina , partially offset by a decrease in payments for the Southland repowering 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 atIPALCO due to lower spending for NAAQS, NPDES, and CCR rule compliance. Financing Activities Fiscal Year 2020 versus 2019 Net cash used in financing activities decreased$8 million for the year endedDecember 31, 2020 compared toDecember 31, 2019 . Financing Cash Flows (in millions) [[Image Removed: aes-20201231_g28.jpg]] See Notes 11- Debt and 17- Equity in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for more information regarding significant debt and equity transactions, respectively. •The$503 million impact from recourse debt transactions is primarily due to higher net borrowings at the Parent Company. •The$425 million impact from sales to noncontrolling interests is primarily due to the proceeds received from the sale of a 35% ownership interest in Southland Energy. •The$112 million impact from issuance of preferred shares in subsidiaries is due to proceeds from the issuance of preferred shares to minority interests of Cochrane.
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•The$453 million impact from non-recourse debt transactions is primarily due to lower net borrowings at Southland and Gener, partially offset by a decrease in net repayments at AES Brasil and DPL and higher net borrowings at Distributed Energy,Panama , andVietnam . •The$290 million impact from Parent Company revolver transactions is primarily due to higher net repayments in the current year. •The$259 million impact from acquisitions of noncontrolling interests is primarily due to the acquisition of an additional 19.8% ownership interest in AES Brasil. Fiscal Year 2019 versus 2018 Net cash used in financing activities decreased$1.6 billion for the year endedDecember 31, 2019 compared toDecember 31, 2018 . Financing Cash Flows (in millions) [[Image Removed: aes-20201231_g29.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 2018. •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 AES Brasil, and lower net issuances in 2018 atIPALCO . •The$387 million impact from Parent Company revolver transactions is primarily from higher repayments in 2018, and higher borrowings in 2019 for general corporate cash management activities. •The$278 million impact from non-recourse revolver transactions is primarily due to higher net borrowings at DPL and net repayments atIPALCO in 2018. Parent Company Liquidity The following discussion is included as a useful measure of the liquidity available toThe AES Corporation , or the Parent Company, given the non-recourse nature of most of our indebtedness. Parent Company Liquidity as outlined below is a non-GAAP measure and should not be construed as an alternative to Cash and cash equivalents, which is determined in accordance with GAAP. Parent Company Liquidity may differ from similarly titled measures used by other companies. The principal sources of liquidity at the Parent Company level are dividends and other distributions from our subsidiaries, including refinancing proceeds, proceeds from debt and equity financings at the Parent Company level, including availability under our revolving credit facility, and proceeds from asset sales. Cash requirements at the Parent Company level are primarily to fund interest and principal repayments of debt, construction commitments, other equity commitments, common stock repurchases, acquisitions, taxes, Parent Company overhead and development costs, and dividends on common stock.
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The Company defines Parent Company Liquidity as cash available to the Parent Company, including cash at qualified holding companies, plus available borrowings under our existing credit facility. The cash held at qualified holding companies represents cash sent to subsidiaries of the Company domiciled outside of theU.S. Such subsidiaries have no contractual restrictions on their ability to send cash to the Parent Company. Parent Company Liquidity is reconciled to its most directly comparable GAAP financial measure, Cash and cash equivalents, at the periods indicated as follows (in millions): December
31,
2020 2019 Consolidated cash and cash equivalents$ 1,089 $ 1,029 Less: Cash and cash equivalents at subsidiaries (1,018) (1,016) Parent Company and qualified holding companies' cash and cash 71 13
equivalents
Commitments under the Parent Company credit facility 1,000 1,000 Less: Letters of credit under the credit facility (77) (19) Less: Borrowings under the credit facility (70) (180) Borrowings available under the Parent Company credit facility 853 801 Total Parent Company Liquidity $
924
The Parent Company paid dividends of$0.57 per outstanding share to its common stockholders during the year endedDecember 31, 2020 . While we intend to continue payment of dividends and believe we will have sufficient liquidity to do so, we can provide no assurance that we will continue to pay dividends, or if continued, the amount of such dividends. Recourse Debt Our total recourse debt was$3.4 billion atDecember 31, 2020 and 2019. See Note 11- Debt in Item 8.- F inancial 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 revolving credit facility. See Item 1A.- Risk Factors -The AES Corporation's ability to make payments on its outstanding indebtedness is dependent upon the receipt of funds from our subsidiaries, of this Form 10-K. Various debt instruments at the Parent Company level, including our revolving credit facility, contain certain restrictive covenants. The covenants provide for, among other items, limitations on other indebtedness; liens, investments and guarantees; limitations on dividends, stock repurchases and other equity transactions; restrictions and limitations on mergers and acquisitions, sales of assets, leases, transactions with affiliates and off-balance sheet and derivative arrangements; maintenance of certain financial ratios; and financial and other reporting requirements. As ofDecember 31, 2020 , we were in compliance with these covenants at the Parent Company level. Non-Recourse Debt While the lenders under our non-recourse debt financings generally do not have direct recourse to the Parent Company, defaults thereunder can still have important consequences for our results of operations and liquidity, including, without limitation: •reducing our cash flows as the subsidiary will typically be prohibited from distributing cash to the Parent Company during the time period of any default; •triggering our obligation to make payments under any financial guarantee, letter of credit or other credit support we have provided to or on behalf of such subsidiary; •causing us to record a loss in the event the lender forecloses on the assets; and •triggering defaults in our outstanding debt at the Parent Company. For example, our revolving credit facility and outstanding debt securities at the Parent Company include events of default for certain bankruptcy-related events involving material subsidiaries. In addition, our revolving credit agreement at the Parent Company includes events of default related to payment defaults and accelerations of outstanding debt of material subsidiaries.
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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$1.4 billion . The portion of current debt related to such defaults was$276 million atDecember 31, 2020 , all of which was non-recourse debt related to three subsidiaries -AES Puerto Rico , AES Ilumina, and AES Jordan Solar. None of the defaults are payment defaults, but are instead technical defaults triggered by failure to comply with other covenants or other conditions contained in the non-recourse debt documents, of which$269 million is due to the bankruptcy of the offtaker. See Note 11- Debt in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for additional detail. None of the subsidiaries that are currently in default are subsidiaries that met the applicable definition of materiality under the Parent Company's debt agreements as ofDecember 31, 2020 , in order for such defaults to trigger an event of default or permit acceleration under the Parent Company's indebtedness. However, as a result of additional dispositions of assets, other significant reductions in asset carrying values or other matters in the future that may impact our financial position and results of operations or the financial position of the individual subsidiary, it is possible that one or more of these subsidiaries could fall within the definition of a "material subsidiary" and thereby trigger an event of default and possible acceleration of the indebtedness under the Parent Company's outstanding debt securities. A material subsidiary is defined in the Parent Company's revolving credit facility as any business that contributed 20% or more of the Parent Company's total cash distributions from businesses for the four most recently completed fiscal quarters. As ofDecember 31, 2020 , none of the defaults listed above, individually or in the aggregate, results in or is at risk of triggering a cross-default under the recourse debt of the Parent Company. Contractual Obligations and Parent Company Contingent Contractual Obligations A summary of our contractual obligations, commitments and other liabilities as ofDecember 31, 2020 is presented below (in millions): Less than 1 More than 5 Contractual Obligations Total year 1-3 years 3-5 years years Other Footnote Reference(5) Debt obligations (1) (2)$ 20,163 $
1,440
11 Interest payments on long-term debt (3) 6,422 721 1,340 1,065 3,296 - n/a Finance lease obligations (2) 157 5 10 8 134 - 14 Operating lease obligations (2) 645 29 57 52 507 - 14 Electricity obligations 7,552 700 947 868 5,037 - 12 Fuel obligations 5,191 1,370 1,424 952 1,445 - 12 Other purchase obligations 6,057 1,904 1,241 1,096 1,816 - 12 Other long-term liabilities reflected on AES' consolidated balance sheet under GAAP (2) (4) 595 - 332 11 243 9 n/a Total$ 46,782 $ 6,169 $ 6,890 $ 7,332 $ 26,382 $ 9 _____________________________ (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)Excludes any businesses classified as held-for-sale. See Note 25- Held-for- Sale and Dispositions in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for additional information related to held-for-sale businesses. (3)Interest payments are estimated based on final maturity dates of debt securities outstanding atDecember 31, 2020 and do not reflect anticipated future refinancing, early redemptions or new debt issuances. Variable rate interest obligations are estimated based on rates as ofDecember 31, 2020 . (4)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. (5)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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The following table presents our Parent Company's contingent contractual
obligations as of
Amount (in Maximum Exposure Range for Each Contingent contractual obligations millions) Number of Agreements Agreement (in millions) Guarantees and commitments$ 1,358 69$0 - 157 Letters of credit under the unsecured credit facilities 110 25$0 - 56 Letters of credit under the revolving credit facility 77 17$0 - 62 Surety bond 1 1$1 Total$ 1,546 112 _____________________________ (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. While we do not expect that we will be required to fund any material amounts under these contingent contractual obligations beyond 2020, many of the events which would give rise to such obligations are beyond our control. We can provide no assurance that we will be able to fund our obligations under these contingent contractual obligations if we are required to make substantial payments thereunder. Critical Accounting Policies and Estimates The Consolidated Financial Statements of AES are prepared in conformity withU.S. GAAP, which requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. AES' significant accounting policies are described in Note 1- General and Summary of Significant Accounting Policies to the Consolidated Financial Statements included in Item 8 of this Form 10-K. An accounting estimate is considered critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made, different estimates reasonably could have been used, or the impact of the estimates and assumptions on financial condition or operating performance is material. Management believes that the accounting estimates employed are appropriate and the resulting balances are reasonable; however, actual results could materially differ from the original estimates, requiring adjustments to these balances in future periods. Management has discussed these critical accounting policies with the Audit Committee, as appropriate. Listed below are the Company's most significant critical accounting estimates and assumptions used in the preparation of the Consolidated Financial Statements. Income Taxes - We are subject to income taxes in both theU.S. and numerous foreign jurisdictions. Our worldwide income tax provision requires significant judgment and is based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other taxing authorities. Certain of the Company's subsidiaries are under examination by relevant taxing authorities for various tax years. The Company regularly assesses the potential outcome of these examinations in each tax jurisdiction when determining the adequacy of the provision for income taxes. Accounting guidance for uncertainty in income taxes prescribes a more likely than not recognition threshold. Tax reserves have been established, which the Company believes to be adequate in relation to the potential for additional assessments. Once established, reserves are adjusted only when there is more information available or when an event occurs necessitating a change to the reserves. While the Company believes that the amounts of the tax estimates are reasonable, it is possible that the ultimate outcome of current or future examinations may be materially different than the reserve amounts. Because we have a wide range of statutory tax rates in the multiple jurisdictions in which we operate, any changes in our geographical earnings mix could materially impact our effective tax rate. Furthermore, our tax position could be adversely impacted by changes in tax laws, tax treaties or tax regulations, or the interpretation or enforcement thereof and such changes may be more likely or become more likely in view of recent economic trends in certain of the jurisdictions in which we operate.
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In accordance withSAB 118, the Company made reasonable estimates of the impacts ofU.S. tax reform on its 2017 financial results, and recorded adjustments to those estimates in 2018 as analysis was completed. As ofDecember 31, 2018 , our analysis of the one-time impacts of the TCJA was complete underSAB 118. However, in the first quarter of 2019, theU.S. Treasury Department issued final regulations on the one-time transition tax which included changes from the proposed regulations issued in 2018. In addition, no taxes have been recorded on undistributed earnings for certain of our non-U.S. subsidiaries to the extent such earnings are considered to be indefinitely reinvested in the operations of those subsidiaries. Should the earnings be remitted as dividends, the Company may be subject to additional foreign withholding and state income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of the existing assets and liabilities, and their respective income tax bases. The Company establishes a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company has elected to treat GILTI as an expense in the period in which the tax is accrued. Accordingly, no deferred tax assets or liabilities are recorded related to GILTI. 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 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-taker 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
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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 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). Credit risk for AES is evaluated at the level of the entity that is party to the contract. Nonperformance risk on the Company's derivative instruments is an adjustment to the fair value position that is derived from internally developed valuation models that utilize market inputs that may or may not be observable. 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, and future foreign 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
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assumptions to determine a financial instrument's fair value. In certain instances, published pricing 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. 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 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
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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. Credit Losses - The Company uses a forward-looking "expected loss" model to recognize allowances for credit losses on trade and other receivables, held-to-maturity debt securities, loans, and other instruments. For available-for-sale debt securities with unrealized losses, the Company continues to measure credit losses as it was done under previous GAAP, except that unrealized losses due to credit-related factors are now recognized as an allowance on the Consolidated Balance Sheet with a corresponding adjustment to earnings in the Consolidated Statements of Operations. For further information regarding credit losses, 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 a nd Summary of Significant Accounting Policies included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for further information about new accounting pronouncements adopted during 2020 and accounting pronouncements issued, but not yet effective.
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