Executive Summary
In 2021, AES delivered on its strategic and financial objectives. We completed construction or the acquisition of 2.1 GW of renewables generation and signed long-term PPAs for an additional 5 GW of new renewables. Fluence completed its IPO and began trading inNovember 2021 . 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$0.68 , from$0.06 to a loss of$0.62 . This decrease reflects the loss on deconsolidation of Alto Maipo in the current period, higher current year impairments, and lower contributions fromBrazil due to the prior year revision of the GSF liability and drier hydrology; partially offset by higher margins at our US and Utilities SBU including new renewables, Southland Energy, and Southland, lower Parent Company interest expense due to realized gains on de-designated interest rate swaps and lower interest rates, gains on Fluence capital raisings, a gain on remeasurement of our interest in sPower's development platform, and lower income tax expense. Adjusted EPS, a non-GAAP measure, increased$0.08 , from$1.44 to$1.52 , mainly reflecting higher contributions from our US and Utilities SBU, including new renewables and Southland Energy, higher generation at Chivor due to the life extension project completed in the prior year and better hydrology, and lower Parent Company interest expense due to realized gains on de-designated interest rate swaps and lower interest rates; partially offset by a higher adjusted tax rate, lower contributions fromBrazil due to the prior year revision of the GSF liability and drier hydrology, the prior year impacts of a gain on sale of land in theU.S. , incremental capitalized interest inChile , and recovery of previously expensed payments from customers inChile ; and the impact of the inclusion of shares underlying the purchase contract component of ourMarch 2021 equity units issuance.
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Review of Consolidated Results of Operations
% Change 2021 % Change 2020 Years Ended December 31, 2021 2020 2019 vs. 2020 vs. 2019 (in millions, except per share amounts) Revenue: US and Utilities SBU$ 4,335 $ 3,918 $ 4,058 11 % -3 % South America SBU 3,541 3,159 3,208 12 % -2 % MCAC SBU 2,157 1,766 1,882 22 % -6 % Eurasia SBU 1,123 828 1,047 36 % -21 % Corporate and Other 116 231 46 -50 % NM Eliminations (131) (242) (52) -46 % NM Total Revenue 11,141 9,660 10,189 15 % -5 % Operating Margin: US and Utilities SBU 792 638 754 24 % -15 % South America SBU 1,069 1,243 873 -14 % 42 % MCAC SBU 521 559 487 -7 % 15 % Eurasia SBU 216 186 188 16 % -1 % Corporate and Other 158 120 39 32 % NM Eliminations (45) (53) 8 -15 % NM Total Operating Margin 2,711 2,693 2,349 1 % 15 % General and administrative expenses (166) (165) (196) 1 % -16 % Interest expense (911) (1,038) (1,050) -12 % -1 % Interest income 298 268 318 11 % -16 % Loss on extinguishment of debt (78) (186) (169) -58 % 10 % Other expense (60) (53) (80) 13 % -34 % Other income 410 75 145 NM -48 % Gain (loss) on disposal and sale of business interests (1,683) (95) 28 NM NM Asset impairment expense (1,575) (864) (185) 82 % NM Foreign currency transaction gains (losses) (10) 55 (67) NM NM Other non-operating expense - (202) (92) -100 % NM Income tax benefit (expense) 133 (216) (352) NM -39 % Net equity in losses of affiliates (24) (123) (172) -80 % -28 % INCOME (LOSS) FROM CONTINUING OPERATIONS (955) 149 477 NM -69 % Gain from disposal of discontinued businesses, net of income tax expense of$1 ,$0 , and$0 , respectively 4 3 1 33 % NM NET INCOME (LOSS) (951) 152 478 NM -68 % Less: Loss (income) from continuing operations attributable to noncontrolling interests and redeemable stock of subsidiaries 542 (106) (175) NM -39 % NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION$ (409) $ 46 $ 303 NM -85 % AMOUNTS ATTRIBUTABLE TO THEAES CORPORATION COMMON STOCKHOLDERS: Income (loss) from continuing operations, net of tax$ (413) $ 43 $ 302 NM -86 % Income from discontinued operations, net of tax 4 3 1 33 % NM NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION$ (409) $ 46 $ 303 NM -85 %
Net cash provided by operating activities
$ 2,466 -31 % 12 % 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 Ended
Revenue (in millions) [[Image Removed: aes-20211231_g16.jpg]]
Consolidated Revenue - Revenue increased
•$417 million in US and Utilities driven by higher sales at Southland Energy primarily due to the CCGT units operating under active PPAs during the full 2021 period; higher demand inEl Salvador due to the economic recovery from the COVID-19 impact; higher fuel revenues and higher demand from favorable weather atAES Indiana ; increases in capacity sales and in realized gains resulting from the commercial hedging strategy at Southland; and higher sales atAES Clean Energy due to the supply agreement withDominican Republic ; higher pass-through fuel prices inMexico ; and higher energy prices and contract sales due to increased demand inPanama ; partially offset by the impact from the sale of Itabo inApril 2021 ; •$382 million inSouth America primarily driven by the revenue recognized at Angamos for the early termination of contracts with Minera Escondida andMinera Spence ; higher generation and prices (Resolution 440/2021) inArgentina ; higher availability, from higher reservoir levels, inColombia ; and higher volume and generation at AES Brasil, partially due to the acquisition of the Ventus andCubico wind complexes; partially offset by unfavorable FX impact and by the prior period recovery of previously expensed payments from customers inChile ; and
•$295 million in Eurasia mainly driven by higher energy prices and generation in
Operating Margin (in millions) [[Image Removed: aes-20211231_g17.jpg]]
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Consolidated Operating Margin - Operating margin increased
•$154 million in US and Utilities primarily from higher sales at Southland Energy due to the CCGT units operating under active PPAs during the full 2021 period; increases in capacity sales and in realized gains resulting from the commercial hedging strategy at Southland; and higher demand inEl Salvador due to the economic recovery from the COVID-19 impact; partially offset by increased costs associated with growing and accelerating the development pipeline at AES Clean Energy and by higher maintenance expenses atAES Indiana ;
•$46 million at Corporate and Other, mainly eliminated at consolidated level, driven by increases in IT costs reallocated to the operating segments and premiums earned by the AES self-insurance company; and
•$30 million in Eurasia mainly driven by higher energy prices and generation in
These favorable impacts were partially offset by a decrease of:
•$174 million inSouth America primarily due to unfavorable FX impact; higher energy purchases due to drier hydrology and a prior period GSF settlement at Tietê; and higher spot prices on energy prices and prior period recovery of previously expensed payments from customers inChile ; partially offset by revenue recognized at Angamos for the early termination of contracts with Minera Escondida andMinera Spence ; higher generation and prices (Resolution 440/2021) inArgentina ; lower fixed costs inChile ; and higher availability, from higher reservoir levels, inColombia ; and •$38 million in MCAC mainly driven by the impact from the sale of Itabo inApril 2021 ; decreased capacity and higher fixed costs in theDominican Republic ; decreased availability and higher fixed costs inMexico ; and higher fuel costs, drier hydrology, and the disconnection of the Estrella del Mar I power barge in the prior year inPanama ; partially offset by higher LNG sales in theDominican Republic driven by the Eastern Pipeline COD in 2020 and higher demand and positive impact from new renewables businesses inPanama .
Year Ended
Revenue (in millions) [[Image Removed: aes-20211231_g18.jpg]]
Consolidated Revenue - Revenue decreased
•$219 million in Eurasia driven by the sale of the
•$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 AES Ohio's ESP, lower retail sales demand atAES Indiana 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; •$116 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,
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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; and •$49 million inSouth America driven by unfavorable FX impact, 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 , partially offset 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 . Operating Margin (in millions) [[Image Removed: aes-20211231_g19.jpg]]
Consolidated Operating Margin - Operating margin increased
•$370 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 in
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 AES Ohio's ESP, lower retail sales demand at DPL andAES Indiana 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.
See Item 7.- Management's Discussion and Analysis of Financial Condition and Results of Operations-SBU Performance Analysis of this Form 10-K for additional discussion and analysis of operating results for each SBU.
Consolidated Results of Operations - Other
General and administrative expenses
General and administrative expenses include expenses related to corporate staff functions and initiatives, executive management, finance, legal, human resources, and information systems, as well as global development costs.
General and administrative expenses increased
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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.
Interest expense
Interest expense decreased$127 million , or 12%, to$911 million for 2021, compared to$1,038 million for 2020 primarily due to realized gains on de-designated interest rate swaps, lower interest rates related to refinancing at the Parent Company and lower monetary correction due to the GSF settlement inMarch 2021 . 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 income
Interest income increased$30 million , or 11%, to$298 million for 2021, compared to$268 million for 2020 primarily due to the arbitration proceeding inChile , the commencement of a sales-type lease at the AES Energy Storage Alamitos project inJanuary 2021 , and higher CAMMESA interest rates on receivables inArgentina , partially offset by a lower loan receivable balance inVietnam . Interest income decreased$50 million , or 16%, to$268 million for 2020, compared to$318 million for 2019 primarily due 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.
Loss on extinguishment of debt
Loss on extinguishment of debt decreased$108 million , or 58%, to$78 million for 2021, compared to$186 million for 2020. This decrease was primarily due to prior year 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. These decreases were partially offset in 2021 by a loss of$27 million due to the prepayment at AES Brasil, losses atArgentina and AES Andes of$17 million and$14 million , respectively, due to repayments, and a refinancing resulting in a loss at Andres of$14 million . 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 the increases mentioned above partially offset by losses of$45 million at DPL,$31 million at Mong Duong,$29 million at AES Andes,$28 million at Colon, and$24 million at Cochrane in 2019 resulting from the redemption or refinancing of senior notes.
See Note 11- Debt included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for further information.
Other income
Other income increased$335 million to$410 million for 2021, compared to$75 million for 2020 primarily due to the current year gain on remeasurement of our equity interest in the sPower development platform to its acquisition-date fair value, recognized as part of the merger to formAES Clean Energy Development , legal arbitration at Alto Maipo, and the gain on remeasurement of contingent consideration of the Great Cove Solar acquisition at Clean Energy, partially offset by the prior year gain on sale of Redondo Beach land at Southland. Other income decreased$70 million , or 48% to$75 million for 2020, compared to$145 million for 2019 primarily due to 2019 gains on insurance recoveries associated with property damage at the Andres facility and upgrading the tunnel lining at Changuinola, partially offset by the 2020 gain on sale of Redondo Beach land at Southland.
Other expense
Other expense increased$7 million , or 13%, to$60 million for 2021, compared to$53 million for 2020 primarily due to a current year loss recognized at commencement of a sales-type lease atAES Renewable Holdings and an increase in loss on sale and disposal of assets, partially offset by lower losses on sales ofStabilization Fund receivables inChile and compliance with an arbitration decision in 2020.
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Other expense decreased$27 million , or 34% to$53 million for 2020, compared to$80 million for 2019 primarily due to 2019 losses recognized at commencement of sales-type leases atAES Renewable Holdings , the 2019 loss on disposal of assets at Changuinola associated with upgrading the tunnel lining, and lower defined benefit plan costs atAES Indiana in 2020, partially offset by a loss on sale ofStabilization Fund receivables inChile and compliance with an arbitration decision in 2020.
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 increased$1,588 million to$1,683 million for 2021, compared to$95 million for 2020, primarily due to the$2,074 million loss on the deconsolidation of Alto Maipo, partially offset by the issuance of new shares by Fluence, our equity method investment, to new investors, which AES has accounted for as a gain on the partial disposition of its investment in Fluence, and the gain on the sale of Guacolda. 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.
See Note 24- Held - f or-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$711 million to$1,575 million for 2021, compared to$864 million for 2020. This increase was primarily due to impairments of$649 million and$155 million related to AES Andes' commitment to accelerate the retirement of theVentanas 3 & 4 and Angamos coal-fired plants, respectively, a$475 million impairment atPuerto Rico associated with the economic costs and reputational risks of disposal of coal combustion residuals off island, impairments of$29 million ,$73 million , and$91 million at Buffalo Gap I, II, and III wind generation facilities, respectively, due to an expired PPA and volatile spot prices in theERCOT market, and a$67 million impairment at the Mountain View I & II wind facilities related to a repowering project that will result in decommissioning the majority of the existing wind turbines in advance of their depreciable lives. The increase was partially offset by the$564 million and$213 million impairments related to the Angamos andVentanas 1 & 2 coal-fired plants inChile in the prior year and the$38 million impairment of the generation facility inHawaii during 2020. 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 at AES Andes and a$30 million impairment of the Estrella del Mar I power barge inPanama , compared to a$115 million impairment at Kilroot and Ballylumford upon meeting the held-for-sale criteria in 2019.
See Note 22- Asset Impairment Expense included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for further information.
Foreign currency transaction gains (losses)
Foreign currency transaction gains (losses) in millions were as follows:
Years Ended December 31, 2021 2020 2019 Argentina (1)$ (21) $ 29 $ (73) Corporate (11) 21 (1) Dominican Republic (1) 9 2 Chile 20 (5) 2 Other 3 1 3 Total (2)$ (10) $ 55 $ (67)
_____________________________
(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$12 million and$57 million , and losses of$31 million on foreign currency derivative contracts for the years endedDecember 31, 2021 , 2020, and 2019, respectively.
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The Company recognized net foreign currency transaction losses of$10 million for the year endedDecember 31, 2021 , primarily driven by the depreciation of the Argentine peso, unrealized losses on foreign currency derivatives related to government receivables inArgentina , and unrealized losses at the Parent Company resulting from the depreciation of intercompany receivables denominated in Euro, partially offset by unrealized derivative gains on foreign currency derivatives due to the depreciating Colombian peso. 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.
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 . There were no other non-operating expenses during the year endedDecember 31, 2021 .
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 benefit (expense) Income tax benefit was$133 million for the twelve months endedDecember 31, 2021 , compared to income tax expense of$216 million for the twelve months endedDecember 31, 2020 . The Company's effective tax rates were 13% and 44% for the years endedDecember 31, 2021 and 2020, respectively. The net change in the 2021 effective tax rate was primarily due to the 2021 impacts of the deconsolidation of Alto Maipo and the asset impairment atPuerto Rico . These impacts were partially offset by the income tax benefit related to effective settlement resulting from the exam closure of the Company'sU.S. 2017 tax return. Additionally offsetting the aforementioned impacts was the benefit associated with the release of valuation allowance due to a change in expected realizability of net operating loss carryforwards at one of our Brazilian subsidiaries. The 2020 effective tax rate was impacted by 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 in Hawaii. See Note 22- As set Impairment Expense included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for details of the asset impairment. See Note 24- Held-for-Sale and Dispositions included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for details of the sale of the Company's entire interest of AES Uruguaiana and the deconsolidation of Alto Maipo. 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 drivers cited above. Further, the 2019 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 . See Note 24- 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
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proportionate change in the composition of income before income taxes from foreign and domestic tax jurisdictions could impact our periodic effective tax rate. The Company also benefits from reduced tax rates in certain countries as a result of satisfying specific commitments regarding employment and capital investment. See Note 23- Income Taxes included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for additional information regarding these reduced rates.
Net equity in losses of affiliates
Net equity in losses of affiliates decreased$99 million , or 80%, to$24 million in 2021, compared to$123 million in 2020. This was primarily driven by earnings at sPower in 2021 of$79 million , compared to losses in the prior year, driven by renewable projects that came online and prior year impairments of certain development projects, and$81 million of losses at AES Andes in 2020 mainly due to a long-lived asset impairment and the suspension of equity method accounting at Guacolda. This decrease in losses was partially offset by an increase in losses at Fluence of$45 million due to shipping issues, cost overruns and delays at projects under construction, and an increase in costs associated with the growing business, as well as an increase in losses at Uplight of$10 million due to higher costs associated with the growing business. 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, AES Andes' 50%-owned equity affiliate, during 2020 as compared to 2019.
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 attributable to noncontrolling interests and redeemable stock of subsidiaries
Net income attributable to noncontrolling interests and redeemable stock of
subsidiaries decreased
•Loss on deconsolidation of Alto Maipo due to loss of control after Chapter 11 filing;
•Asset impairments at Buffalo Gap;
•Increased costs associated with growing and accelerating the
•Lower earnings in
•Lower earnings in the
These decreases were partially offset by:
•Allocation of earnings at Southland Energy to noncontrolling interests;
•Higher earnings in
•Higher earnings in
Net income attributable to noncontrolling interests and redeemable stock of
subsidiaries decreased
•Lower earnings inChile due to long-lived asset impairments at AES Andes, partially offset by net gains from early contract terminations at Angamos and lower interest expense due to incremental capitalized interest;
•Lower earnings in
•Prior year insurance recoveries net of outages at Andres; and
•HLBV allocation of losses to noncontrolling interests at
These decreases were partially offset by:
•Higher earnings in
•Prior year losses on extinguishment of debt at Mong Duong and Colon.
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Net income attributable to
Net income attributable to
•Loss on deconsolidation of Alto Maipo due to loss of control after Chapter 11 filing;
•Higher asset impairments in the current year; and
•Lower margins at our South America SBU primarily due to the prior year revision
of the GSF liability at
These decreases were partially offset by:
•Gain due to the initial public offering of Fluence;
•Gain on remeasurement of our equity interest in the sPower development platform to acquisition-date fair value;
•Prior year other-than-temporary impairment of OPGC;
•Lower Parent interest expense due to realized gains on de-designated interest rate swaps and lower interest rates;
•Prior year losses on extinguishment of debt at the Parent and DPL;
•Higher margins at our US and Utilities SBU primarily due to favorable price variances under the commercial hedging strategy at Southland and at Southland Energy mainly due to the CCGT units operating under active PPAs during the full 2021 period; and
•Lower income tax expense.
Net income attributable to
•Long-lived asset impairments at AES Andes and
•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;
•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 in
•Higher margins at our
•Lower income tax expense;
•Lower interest expense due to incremental capitalized interest in
•Gain on sale of land held by AES Redondo Beach at Southland.
SBU Performance Analysis
Segments
We are organized into four market-oriented SBUs: US and Utilities (
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Adjusted Operating Margin, Adjusted PTC and Adjusted EPS are non-GAAP supplemental measures that are used by management and external users of our Consolidated Financial Statements such as investors, industry analysts and lenders.
For the year endedDecember 31, 2021 , the Company updated the definition of Adjusted EPS item (g) tax benefit or expense related to the enactment effects of 2017 U.S. tax law reform and related regulations and any subsequent period adjustments related to enactment effects to include the 2021 tax benefit on reversal of uncertain tax positions effectively settled upon the closure of the Company's 2017 U.S. tax return exam. EffectiveJanuary 1, 2021 , the Company changed the definitions of Adjusted Operating Margin, Adjusted PTC, and Adjusted EPS to remove the adjustment for costs directly associated with a major restructuring program, including, but not limited to, workforce reduction efforts, relocations, and office consolidation. As this adjustment was specific to the major restructuring program announced by the Company in 2018, we believe removing this adjustment from our non-GAAP definitions provides simplification and clarity for our investors. 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; and (c) net gains at Angamos, one of our businesses in the South America SBU, associated with the early contract terminations with Minera Escondida andMinera Spence . The allocation of HLBV earnings to noncontrolling interests is not adjusted out of Adjusted Operating Margin. See Review of Consolidated Results of Operations for 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, 2021 2020 2019 Operating Margin$ 2,711 $ 2,693 $ 2,349 Noncontrolling interests adjustment (1) (722) (831) (670) Unrealized derivative (gains) losses (28) 24 11 Disposition/acquisition losses 11 24 15 Net gains from early contract terminations at Angamos (251) (182) - Total Adjusted Operating Margin$ 1,721 $ 1,728 $ 1,705 _____________________________
(1)The allocation of HLBV earnings to noncontrolling interests is not adjusted out of Adjusted Operating Margin.
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[[Image Removed: aes-20211231_g20.jpg]] Adjusted PTC We define Adjusted PTC as pre-tax income from continuing operations attributable toThe AES Corporation excluding gains or losses of the consolidated entity due to (a) unrealized gains or losses related to derivative transactions and equity securities; (b) unrealized foreign currency gains or losses; (c) gains, losses, benefits and costs associated with dispositions and acquisitions of business interests, including early plant closures, and gains and losses recognized at commencement of sales-type leases; (d) losses due to impairments; (e) gains, losses and costs due to the early retirement of debt; and (f) net gains at Angamos, one of our businesses in the South America SBU, associated with the early contract terminations with Minera Escondida andMinera Spence . Adjusted PTC also includes net equity in earnings of affiliates on an after-tax basis adjusted for the same gains or losses excluded from consolidated entities. Adjusted PTC reflects the impact of NCI and excludes the items specified in the definition above. In addition to the revenue and cost of sales reflected in Operating Margin, Adjusted PTC includes the other components of our 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 or retire debt, and the non-recurring nature of the impact of the early contract terminations at Angamos, which affect results in a given period or periods. In addition, 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 to
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93 | 2021 Annual Report
Reconciliation of Adjusted PTC (in millions)
Years Ended
2021 2020 2019
Income (loss) from continuing operations, net of tax, attributable
$ 43 $ 302
to The AES Corporation
Income tax expense (benefit) attributable to
130 250 Pre-tax contribution (444) 173 552 Unrealized derivative and equity securities losses (gains) (1) 3 113 Unrealized foreign currency losses (gains) 14 (10) 36 Disposition/acquisition losses 861 112 12 Impairment losses 1,153 928 406 Loss on extinguishment of debt 91 223 121 Net gains from early contract terminations at Angamos (256) (182) - Total Adjusted PTC$ 1,418 $ 1,247 $ 1,240 [[Image Removed: aes-20211231_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) net gains at Angamos, one of our businesses in the South America SBU, associated with the early contract terminations with Minera Escondida andMinera Spence ; and (g) tax benefit or expense related to the enactment effects of 2017U.S. tax law reform and related regulations and any subsequent period adjustments related to enactment effects, including the 2021 tax benefit on reversal of uncertain tax positions effectively settled upon the closure of the Company'sU.S. tax return exam. The GAAP measure most comparable to Adjusted EPS is diluted earnings per share from continuing operations. We believe that Adjusted EPS better reflects the underlying business performance of the Company and is considered in the Company's internal evaluation of financial performance. Factors in this determination include the variability due to unrealized gains or losses related to derivative transactions or equity securities remeasurement, unrealized foreign currency gains or losses, losses due to impairments, strategic decisions to dispose of or acquire business interests or retire debt, the one-time impact of the 2017 U.S. tax law reform and subsequent period adjustments related to enactment effects, and the non-recurring nature of the impact of the early contract terminations at Angamos, which affect results in a given period or periods. Adjusted EPS should not be construed as an alternative to diluted earnings per share from continuing operations, which is determined in accordance with GAAP.
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94 | 2021 Annual Report
The Company reported a loss from continuing operations of$0.62 for the year endedDecember 31, 2021 . For purposes of measuring diluted loss per share under GAAP, common stock equivalents were excluded from weighted average shares as their inclusion would be anti-dilutive. However, for purposes of computing Adjusted EPS, the Company has included the impact of dilutive common stock equivalents. The table below reconciles the weighted average shares used in GAAP diluted loss per share to the weighted average shares used in calculating the non-GAAP measure of Adjusted EPS. Reconciliation of Denominator Used for Adjusted EPS Year Ended December 31, 2021 (in millions, except per share data) Loss Shares $ per Share
GAAP DILUTED LOSS PER SHARE
Loss from continuing operations attributable to
$ (413) 666$ (0.62) EFFECT OF DILUTIVE SECURITIES Stock options - 1 - Restricted stock units - 3 - Equity units 2 33 0.03 NON-GAAP DILUTED LOSS PER SHARE $ (411) 703$ (0.59) Reconciliation of Adjusted EPS
Years Ended
2021 2020 2019
Diluted earnings (loss) per share from continuing operations
$ 0.06 $ 0.45 Unrealized derivative and equity securities losses - 0.01 0.17 (1) Unrealized foreign currency losses (gains) 0.02 (0.01) 0.05 (2) Disposition/acquisition losses
1.22 (3) 0.17 (4) 0.02 (5) Impairment losses
1.65 (6) 1.39 (7) 0.61 (8) Loss on extinguishment of debt
0.13 (9) 0.33 (10) 0.18 (11) Net gains from early contract terminations at Angamos
(0.37) (12) (0.27) (12) -
U.S. Tax Law Reform Impact (0.25) (13) 0.02 (14) (0.01) Less: Net income tax expense (benefit) (0.29) (15) (0.26) (16) (0.11) (17) Adjusted EPS$ 1.52 $ 1.44 $ 1.36
_____________________________
(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 in
(3)Amount primarily relates to loss on deconsolidation of Alto Maipo of$1.5 billion , or$2.09 per share, loss on Uplight transaction with shareholders of$25 million , or$0.04 per share, and a day-one loss recognized at commencement of a sales-type lease atAES Renewable Holdings of$13 million , or$0.02 per share, partially offset by gain on initial public offering of Fluence of$325 million , or$0.46 per share, gain on remeasurement of our equity interest in sPower to acquisition-date fair value of$249 million , or$0.35 per share, gain on Fluence issuance of shares of$60 million , or$0.09 per share, and gain on sale of Guacolda of$22 million , or$0.03 per share. (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 atAES Renewable Holdings 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 asset impairments at AES Andes of$540 million , or$0.77 per share, atPuerto Rico of$475 million , or$0.68 per share, atMountain View of$67 million , or$0.10 per share, at our sPower equity affiliate, impacting equity earnings by$24 million , or$0.03 per share, at Buffalo Gap of$22 million , or$0.03 per share, at Clean Energy of$14 million , or$0.02 per share, and atLaurel Mountain of$7 million , or$0.01 per share. (7)Amount primarily relates to asset impairments at AES Andes 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 at AES Hawaii 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, and at AES Hawaii of$60 million , or$0.09 per share; impairments at our Guacolda and sPower equity affiliates, impacting equity earnings by$105 million , or$0.16 per share, and$21 million , or$0.03 per share, respectively; and other-than-temporary impairment of OPGC of$92 million , or$0.14 per share. (9)Amount primarily relates to losses on early retirement of debt at AES Brasil of$27 million , or$0.04 per share, atArgentina of$17 million , or$0.02 per share, at AES Andes of$15 million , or$0.02 per share, and at Andres andLos Mina of$15 million , or$0.02 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 Andes 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)Amounts relate to net gains at Angamos associated with the early contract terminations with Minera Escondida andMinera Spence of$256 million , or$0.37 per share, and$182 million , or$0.27 per share, for the periods endedDecember 31, 2021 and 2020, respectively. (13)Amount relates to the tax benefit on reversal of uncertain tax positions effectively settled upon the closure of the Company's 2017 U.S. tax return exam of$176 million , or$0.25 per share.
(14)Amount represents adjustment to tax law reform remeasurement due to
incremental deferred taxes related to DPL of
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95 | 2021 Annual Report
(15)Amount primarily relates to income tax benefits associated with the loss on deconsolidation of Alto Maipo of$209 million , or$0.30 per share, income tax benefits associated with the impairments at AES Andes of$146 million , or$0.21 per share, atPuerto Rico of$20 million , or$0.03 per share, and atMountain View of$15 million , or$0.02 per share, partially offset by income tax expense associated with the gain on initial public offering of Fluence of$73 million , or$0.10 per share, income tax expense related to net gains at Angamos associated with the early contract terminations with Minera Escondida andMinera Spence of$69 million , or$0.10 per share, and income tax expense associated with the gain on remeasurement of our equity interest in sPower of$55 million , or$0.08 per share. (16)Amount primarily relates to income tax benefits associated with the impairments at AES Andes 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, AES 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. 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 $ Change 2021 % Change 2021 2020 vs. % Change 2020 December 31, 2021 2020 2019 vs. 2020 vs. 2020 2019 vs. 2019 Operating Margin$ 792 $ 638 $ 754 $ 154 24 %$ (116) -15 % Adjusted Operating Margin (1) 617 577 659 40 7 % (82) -12 % Adjusted PTC (1) 660 505 569 155 31 % (64) -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 2021 versus 2020
Operating Margin increased
Increase at Southland Energy primarily due to the CCGT units operating under active$ 100 PPAs during the full 2021 period Increase at Southland primarily driven by increase in capacity sales and favorable price variances under the commercial hedging strategy, partially offset by 83
unfavorable energy price adjustments due to market re-settlements
Increase in
18 COVID-19 in 2020 Decrease at Clean Energy driven by increased costs associated with growing and accelerating the development pipeline, partially offset by higher revenue due to (37) the Company's agreement to supplyAES Indiana primarily due to higher maintenance and other fixed costs, (16) partially offset by higher volumes from favorable weather Other 6 Total US and Utilities SBU Operating Margin Increase
Adjusted Operating Margin increased$40 million primarily due to the drivers above, adjusted for NCI, primarily related to the sale of ownership interest in Southland Energy, and unrealized gains and losses on derivatives. Adjusted PTC increased$155 million , primarily driven by the increase in Adjusted Operating Margin described above, an increase at ourU.S. renewables businesses due to contributions from newly operational projects, lower interest expenses at Southland Energy attributable to NCI allocation in 2021, non-service pension income atAES Indiana , and lower interest expense at DPL. These increases were partially offset by a gain in 2020 on sale of land held by AESRedondo Beach at Southland.
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96 | 2021 Annual Report Fiscal year 2020 versus 2019
Operating Margin decreased
Decrease at DPL due to lower regulated retail margin primarily due to changes to$ (63) AES Ohio'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 atAES Indiana primarily due to lower retail margin driven by lower volumes from milder weather and lower demand from the impact of COVID-19,
(36)
partially offset by lower maintenance expense from scheduled plant outages Decrease at AES Hawaii 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 atAES Indiana , and an increase in allocation of earnings from equity affiliates driven by renewable projects that came online in 2020 at sPower.
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 2021 vs. % Change 2021 $ Change 2020 % Change 2020 December 31, 2021 2020 2019 2020 vs. 2020 vs. 2019 vs. 2019 Operating Margin$ 1,069 $ 1,243 $ 873 $ (174) -14 %$ 370 42 % Adjusted Operating Margin (1) 432 550 499 (118) -21 % 51 10 % Adjusted PTC (1) 423 534 504 (111) -21 % 30 6 %
_____________________________
(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. AES' indirect beneficial interest in AES Brasil increased from 24.35% to 44.13% in 2020 and to 46.7% in 2021. See Item 1.- Business - South America SBU - Brazil .
Fiscal year 2021 versus 2020
Operating Margin decreased
Lower margin inBrazil primarily due to the prior year GSF settlement gain and$ (251) higher energy purchases led by drier hydrology Recovery of previously expensed payments from customers inChile
(47)
Decrease in energy and capacity tariffs inArgentina , lower availability ofTermoAndes , and higher fixed costs, partially offset by higher dispatch of San (19) Nicolás and the commencement of operations of wind facilities Higher margin inColombia related to higher reservoir levels and better hydrology 80 Increase inChile primarily related to early contract terminations at Angamos and lower depreciation, partially offset by lower contract margin mainly related to 63 higher spot prices on energy purchases coupled with lower availability Total South America SBU Operating Margin Decrease
Adjusted Operating Margin decreased
Adjusted PTC decreased$111 million , mainly driven by the decrease in Adjusted Operating Margin described above, incremental capitalized interest at Alto Maipo in the prior period, lower equity earnings at Guacolda due to the suspension of equity method accounting, and higher interest expense inBrazil . These negative variances were partially offset by a favorable award in an arbitration proceeding inChile and higher interest income inArgentina due to increase in rates and higher sales.
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97 | 2021 Annual Report Fiscal year 2020 versus 2019
Operating Margin increased
Increase inChile primarily related to early contract terminations at Angamos$ 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
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.
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 2021 % Change 2021 $ Change 2020 % Change 2020 December 31, 2021 2020 2019 vs. 2020 vs. 2020 vs. 2019 vs. 2019 Operating Margin$ 521 $ 559 $ 487 $ (38) -7 %$ 72 15 % Adjusted Operating Margin (1) 398 394 352 4 1 % 42 12 % Adjusted PTC (1) 314 287 367 27 9 % (80) -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 2021 versus 2020
Operating Margin decreased
Decrease in theDominican Republic mainly driven by the sale of Itabo onApril 8 ,$ (64) 2021 Decrease inMexico driven by lower availability and higher fixed costs
(29)
Increase in theDominican Republic driven by higher LNG sales mainly due to Eastern Pipeline COD in 2020 and positive LNG buyback from BP forDecember 2021 48 cargo, partially offset by lower capacity due to the incorporation of new plants into the system and higher fixed costs Increase inPanama mainly driven byPanama's demand recovery, new wind and solar projects, higher capacity prices, and lower fixed costs, partially offset by the 11Estrella del Mar I power barge disconnection inJuly 2020 , higher cost of gas, and drier hydrology in 2021, mainly during Q4 Other (4) Total MCAC SBU Operating Margin Decrease
Adjusted Operating Margin increased
Adjusted PTC increased$27 million , mainly driven by the increase in Adjusted Operating Margin described above, as well as a legal settlement inPanama in 2020 and a current year gain on pension plan buyout inMexico .
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98 | 2021 Annual Report Fiscal year 2020 versus 2019
Operating Margin increased
Higher availability inPanama mainly due to the outage of Changuinola in 2019 for$ 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
Adjusted PTC decreased
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 2021 % Change 2021 $ Change 2020 % Change 2020 December 31, 2021 2020 2019 vs. 2020 vs. 2020 vs. 2019 vs. 2019 Operating Margin$ 216 $ 186 $ 188 $ 30 16 %$ (2) -1 % Adjusted Operating Margin (1) 162 142 148 20 14 % (6) -4 % Adjusted PTC (1) 196 177 159 19 11 % 18 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 2021 versus 2020
Operating Margin increased
Increase at Kavarna and Maritza primarily driven by higher electricity prices in
$ 19 Improved operational performance at Mong Duong 4 Other 7 Total Eurasia SBU Operating Margin Increase
Adjusted Operating Margin increased
Adjusted PTC increased
Fiscal year 2020 versus 2019
Operating Margin decreased
Impact of the sale of Kilroot and Ballylumford businesses in
Other
4
Total Eurasia SBU Operating Margin Decrease
Adjusted Operating Margin decreased
Adjusted PTC increased$18 million , primarily 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 discussed above.
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99 | 2021 Annual Report Key Trends and Uncertainties During 2022 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.
Operational
COVID-19 Pandemic - The COVID-19 pandemic has impacted global economic activity, including electricity and energy consumption, and caused significant volatility in financial markets intermittently in the last two years. Throughout the COVID-19 pandemic we have conducted our essential operations without significant disruption. We derive approximately 85% of our total revenues from our regulated utilities and long-term sales and supply contracts or PPAs at our generation businesses, which contributes to a relatively stable revenue and cost structure at most of our businesses. In 2021, our operational locations continued to experience the impact of, and recovery from, the COVID-19 pandemic. Across our global portfolio, our utilities businesses have generally performed in line with our expectations consistent with a recovery from the COVID-19 pandemic. While we cannot predict the length and magnitude of the pandemic, including the impact of current or future variants, or how it could impact global economic conditions, a delayed recovery with respect to demand may adversely impact our financial results for 2022. Also see Item 1A.- Risk Factors of this Form 10-K. 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. 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. Operational Sensitivity to Dry Hydrological Conditions - Our hydroelectric generation facilities are sensitive to changes in the weather, particularly the level of water inflows into generation facilities. While our operations inPanama , Colombia,Brazil , andChile have experienced challenges arising from dry hydrology from time to time, the current dry hydrological conditions inBrazil have exceeded historical levels. If these hydrological conditions continue to persist, we may need to purchase energy at higher prices to fulfill our contractual arrangements. Trade Restrictions and Supply Chain - In recent years, increased tensions between theU.S. andChina have resulted in policies that restrict or increase costs on trade, such as tariffs and import restrictions, that have impacted the renewable energy industry. While we have been able to largely mitigate any material impacts so far,China is the largest supplier of raw materials and components used in solar panels. Imports of solar panels into theU.S. fromChina andSoutheast Asia have been delayed or challenged in certain instances. In addition, substantial shortages in shipping services and disruptions in global supply chain, recent disruptions specific to solar panel imports including the uncertainty around the application of additional tariffs on solar panel imports fromSoutheast Asia , and the potential detainment of panels byU.S. Customs and Border Protection has further challenged the supply chain related to renewable energy. While we have contracted and substantially secured our expected requirements forU.S. solar panels for 2022, these disruptions may persist and impact our suppliers' ability or willingness to meet their contractual agreements. AES will continue to monitor developments and take prudent steps towards maintaining a robust supply chain for our renewables projects.
Macroeconomic and Political
The macroeconomic and political environments in some countries where our subsidiaries conduct business have changed during 2021. 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
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100 | 2021 Annual Report
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, 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 - OnDecember 19, 2021 , Gabriel Boric was elected president ofChile with 56 percent of the vote in the second round. Boric will take office onMarch 11, 2022 , after two years of political and social turmoil inChile driven by massive protests over inequality, leading the country through the process of writing a new constitution. Boric has declared his goal of introducing significant reforms in key areas such as pensions, education, labor, and health services. To mitigate the fiscal impact of these initiatives, Boric also declared his intention to introduce a tax reform to increase mining royalties and increase income, emissions, and wealth taxes among other changes. These and other initiatives could result in regulatory or policy changes that may affect our results of operations inChile . The Chilean government held a referendum inOctober 2020 , which determined that a new constitution will be drafted by a constitutional convention. A second vote was 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. 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. InDecember 2020 , AES Andes executed an agreement for the sale of the receivables generated pursuant the Tariff Stabilization Law at a discount. See Note 7 - Financin g Receivables included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for further information.
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$201 million and$29 million , respectively, continue to be in technical default and are classified as current as ofDecember 31, 2021 . The Company is in compliance with its debt payment obligations as ofDecember 31, 2021 . 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 .
New factors arose in the first quarter of 2021 associated with the economic
costs and operational and reputational risks of disposal of coal combustion
residuals off island. In addition, new legislative initiatives surrounding the
prohibition of coal generation assets in
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101 | 2021 Annual Report
along with management's decision on how to best achieve our decarbonization goals resulted in an indicator of impairment at its asset group inPuerto Rico . The Company performed an impairment analysis and determined that the carrying amount of its coal-fired long-lived assets was not recoverable. As a result, the Company recognized asset impairment expense of$475 million . Considering the information available as of the filing date, management believes the carrying amount of our long-lived assets inPuerto Rico of$79 million is recoverable as ofDecember 31, 2021 . Reference Rate Reform - InJuly 2017 , theUnited Kingdom Financial Conduct Authority announced that it intends to phase out LIBOR. 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. OnMarch 5, 2021 , theFinancial Conduct Authority ("FCA") announced the future cessation or non-representativeness of the LIBOR benchmark settings, to cease publication of one-week and two-month USD LIBOR rates byDecember 31, 2021 , and extending the cessation dates for the overnight, one-month, three-month, six-month, and 12-month USD LIBOR rates throughJune 30, 2023 . AES holds a substantial amount of debt and derivative contracts referencing LIBOR as an interest rate benchmark. In order to facilitate an organized transition from LIBOR to alternative benchmark rate(s), AES has established a process to measure and mitigate risks associated with the cessation of LIBOR. As part of this initiative, alternative benchmark rates have been, and continue to be, assessed, and implemented for newly executed agreements. Many of AES' existing agreements include provisions designed to facilitate an orderly transition from LIBOR, and interest rate derivatives address the LIBOR transition through the adoption of the ISDA 2020 IBOR Fallbacks Protocol and subsequent amendments. To the extent that the terms of the credit agreements and derivative instruments do not align following the cessation of LIBOR rates, AES will seek to negotiate contract amendments with counterparties or additional derivatives contracts. Global Tax - The macroeconomic and political environments in theU.S. and some countries where our subsidiaries conduct business have changed during 2020 and 2021. This could result in significant impacts to tax law. For example, the "American Rescue Plan Act of 2021" was signed into law onMarch 11, 2021 . The$1.9 trillion act includes COVID-19 relief as well as broader stimulus, but also includes several revenue-raising and business tax provisions. Two corporate income tax increases partially offset the cost of the bill: the elimination of a beneficial foreign tax credit rule, and the expansion of executive compensation deduction limits effective in 2027. In the third quarter of 2021, both theUnited States Senate and theUnited States House of Representatives passed$3.5 trillion budget resolutions as a first step to the budget reconciliation process that could includeU.S. corporate and international tax reforms. As part of the reconciliation process, theHouse Ways and Means Committee marked up a version of the "Build Back Better Act". The Build Back Better Act includedU.S. corporate and international tax reform proposals that would increase theU.S. corporate income tax rate, modify the GILTI rules, create additional interest deduction limitations and provide clean energy incentives, among others. The Company believes it would benefit from the clean energy initiatives, though the tax implications may be unfavorable in the short term. As of the filing date, this legislation has not been voted on in theUnited States Senate . With respect to international tax reform, in the third quarter of 2021,132 member countries of theOECD "Inclusive Framework" group released a statement announcing a coordinated framework that would reallocate taxing rights over the profits of multinational corporations and establish a global minimum tax at a 15% rate. OnDecember 20, 2021 theOECD released a set of Model Rules related to the so-called Pillar 2 global minimum tax known as the Global Anti-Base Erosion (GloBE). OnDecember 22, 2021 , theEuropean Commission proposed a draft Directive establishing a global minimum level of taxation. The proposal, if approved by all 27 EU Member States, would require each Member State to transpose the Directive into their respective national laws byDecember 31, 2022 for the Income Inclusion Rule to come into effect as ofJanuary 1, 2023 and the Under Taxed Payments Rule to come into effectJanuary 1, 2024 . The Subject to Tax Rule was excluded from the draft Directive. These Rules, collectively, comprise the main facets of the GloBE. The potential impact to the Company is not known, but may be material. Implementation of the framework would require multilateral agreement and/or country specific legislative action, including in theU.S. Inflation - In the markets in which we operate, there have been higher rates of inflation in recent months. While most of our contracts in our international businesses are indexed to inflation, in general, ourU.S. -based generation contracts are not indexed to inflation. If inflation continues to increase in our markets, it may increase our expenses that we may not be able to pass through to customers. It may also increase the costs of some of our
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development projects that could negatively impact their competitiveness. Our utility businesses do allow for recovering of operations and maintenance costs through the regulatory process, which may have timing impacts on recovery.
Alto Maipo
The Company's subsidiary, Alto Maipo, is currently constructing a hydroelectric facility nearSantiago, Chile which is approximately 99% complete and started generating energy in the fourth quarter of 2021 as part of the commissioning process. The Alto Maipo project (the "Project") has experienced significant construction difficulties, which resulted in a substantial increase in project costs over the original budget and led to a series of negotiations that resulted in securing additional funding from creditors and additional equity injections from AES Andes. OnMarch 17, 2017 , Alto Maipo completed the first financial and legal restructuring of the Project. Following this restructuring, Alto Maipo terminated a construction contract withConstructora Nuevo Maipo S.A. ("CNM") as a result of CNM's failure to perform. OnJuly 3, 2017 , CNM filed a claim against Alto Maipo before theInternational Chamber of Commerce ("ICC") for cost overruns and contract termination. Prior to this claim, Alto Maipo issued an arbitration request before the ICC for multiple contract breaches by CNM. See Item 3.- Legal Proceedings in this Form 10-K for further information and status of the proceedings. InFebruary 2018 , Alto Maipo signed an amended EPC contract with Strabag, which increased the scope of the original contract to incorporate CNM's work and was approved by the creditors inMay 2018 as part of the second restructuring of the Project. OnAugust 27, 2021 , Alto Maipo updated its creditors with respect to the construction budget and long-term business plan for the Project, which considers different scenarios for spot prices, decarbonization initiatives, and hydrological conditions, among other significant variables. Under some of these scenarios, Alto Maipo may experience reduced future cash flows, which would limit its ability to repay debt. Alto Maipo's management initiated negotiations with its creditors to restructure its obligations and achieve a sustainable long-term capital structure for Alto Maipo. OnNovember 17, 2021 , Alto Maipo SpA commenced a reorganization proceeding in accordance with Chapter 11 of theU.S. Bankruptcy Code, through a voluntary petition. Consequently, after Chapter 11 filing,The AES Corporation is no longer considered to have control over Alto Maipo and, therefore, derecognized Alto Maipo from its Consolidated Balance Sheets and recognized an after-tax loss of approximately$1.2 billion , net of noncontrolling interests, in the Consolidated Statement of Operations in the fourth quarter of 2021, associated with the loss of control attributable to the former controlling interest. Alto Maipo is party to a restructuring support agreement to which holders of more than 78% of the outstanding senior indebtedness are party, and which contemplates a plan of reorganization in which AES Andes will own all of the equity of the reorganized company. If Alto Maipo is unable to renegotiate the terms of its financial arrangements with its creditors and is unable to meet its obligations under those arrangements as they come due, the creditors may enforce their rights under the credit agreements. These finance agreements are non-recourse with respect toThe AES Corporation .
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. InFebruary 2022 , the Company announced its intent to exit coal generation by year-end 2025 versus our prior expectation of a reduction to below 10% by year-end 2025, subject to necessary approvals. 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. On
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with the Chilean government to cease the operation of two coal units for a total of 322 MW as part of the phase-out. Under the agreement,Ventanas 1 (114 MW) will cease operation inNovember 2022 andVentanas 2 (208 MW) inMay 2024 ; however AES Andes 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" inSeptember 2022 . OnJuly 6, 2021 , AES Andes and the Chilean government signed an amendment to the decarbonization agreement to include theVentanas 3 (267 MW),Ventanas 4 (270 MW), Angamos 1 (277 MW), and Angamos 2 (281 MW) plants. The plants will be available for disconnection afterJanuary 2025 , subject to system reliability and sufficiency. The Company performed an impairment analysis atJune 30, 2021 and determined the carrying amounts of these asset groups were not recoverable. As a result, AES Andes recognized asset impairment expense of$804 million ($540 million net of NCI). 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$1.1 billion is recoverable as ofDecember 31, 2021 . Puerto Rico Energy Public Policy Act - OnApril 11, 2019 , the Governor ofPuerto Rico signed the Puerto Rico Energy Public Policy Act ("the Act") establishing guidelines for grid efficiency and eliminating coal as a source for electricity generation byJanuary 1, 2028 . The Act supports the accelerated deployment of renewables through the Renewable Portfolio Standard and the conversion of coal generating facilities to other fuel sources, with compliance targets of 40% by 2025, 60% by 2040, and 100% by 2050.AES Puerto Rico's long-term PPA with PREPA expiresNovember 30, 2027 . PREPA andAES Puerto Rico have discussed different strategic alternatives, but have yet to reach any agreement. Any agreement that may be reached would be subject to lender and regulatory approval, including that of the Oversight Board that filed for bankruptcy on behalf of PREPA. As described under Macroeconomic and Political above, additional factors arose in the first quarter of 2021 with respect to the disposal of coal combustion residuals, which contributed to the Company recognizing an asset impairment expense of$475 million . Considering the information available as of the filing date, management believes the carrying amount of our long-lived assets inPuerto Rico of$79 million is recoverable as ofDecember 31, 2021 .Hawaii - InJuly 2020 , theHawaii State Legislature passed a bill that will prohibit AES Hawaii from generating electricity from coal afterDecember 31, 2022 . This bill will restrict the Company from contracting the asset beyond the expiration of its existing PPA, and as a result, AES plans to retire the AESHawaii coal facility in 2022. Considering the information available as of the filing date, management believes the carrying amount of our coal-fired long-lived assets inHawaii of$14 million is recoverable as ofDecember 31, 2021 . For further information about the risks associated with decarbonization initiatives, see Item 1A.- Risk Factors -Concerns about GHG emissions and the potential risks associated with climate change have led to increased regulation and other actions that could impact our businesses included in 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. No formal investigation has been launched by DG Comp to date. However, AES Maritza has been engaging in discussions with the DG Comp case team and the Government ofBulgaria ("GoB") to attempt to reach a negotiated resolution of the DG Comp's review ("PPA Discussions"). The PPA Discussions are ongoing and the PPA continues to remain in place. However, there can be no assurance that, in the context of the PPA Discussions, the other parties will not seek a prompt termination of the PPA. We do not believe termination of the PPA is justified. Nevertheless, the PPA Discussions involve a range of potential outcomes, including but not limited to the termination of the PPA and payment of some level of compensation to AES Maritza. Any negotiated resolution would be subject to mutually acceptable terms, lender consent, and DG Comp approval. At this time, we cannot predict the outcome of the PPA Discussions or when those discussions will conclude. Nor can we predict how DG Comp might resolve its review if the PPA Discussions fail to result in an agreement concerning the agency's review. AES Maritza believes that its PPA is legal and in compliance with all applicable laws, and it will take all actions necessary to protect its interests, whether through negotiated
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agreement or otherwise. However, there can be no assurance that this matter will be resolved favorably; if it is not, there could be a material adverse effect on the Company's financial condition, results of operation, and cash flows. Considering the information available as of the filing date, management believes the carrying value of our long-lived assets at Maritza of approximately$959 million is recoverable as ofDecember 31, 2021 .
Foreign Exchange Rates
We operate in multiple countries and as such are subject to volatility in exchange rates at varying degrees at the subsidiary level and between our functional currency, the USD, and currencies of the countries in which we operate. In 2019 there was a significant devaluation in the Argentine peso against the USD, which had an impact on our 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 - During the year ended
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 currently has no reporting units considered to be "at risk". A reporting unit is considered "at risk" when its fair value does not exceed its carrying amount by 10%. 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, 2021 . 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, 2021 , the Company had unrestricted cash and cash equivalents of$943 million , of which$41 million was held at the Parent Company and qualified holding companies. The Company had$232 million in short-term investments, held primarily at subsidiaries, and restricted cash and debt service reserves of$541 million . The Company also had non-recourse and recourse aggregate principal amounts of debt outstanding of$14.8 billion and$3.8 billion , respectively. Of the$1.4 billion of our current non-recourse debt,$1.1 billion was presented as such because it is due in the next twelve months and$237 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$230 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$25 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.
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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$365 million under its revolving credit facility. On a consolidated basis, of the Company's$18.8 billion of total gross debt outstanding as ofDecember 31, 2021 , approximately$2.4 billion bore interest at variable rates that were not subject to a derivative instrument which fixed the interest rate.Brazil holds$1.1 billion of our floating rate non-recourse exposure as variable rate instruments act as a natural hedge against inflation inBrazil . In addition to utilizing non-recourse debt at a subsidiary level when available, the Parent Company provides a portion, or in certain instances all, of the remaining long-term financing or credit required to fund development, construction or acquisition of a particular project. These investments have generally taken the form of equity investments or intercompany loans, which are subordinated to the project's non-recourse loans. We generally obtain the funds for these investments from our cash flows from operations, proceeds from the sales of assets and/or the proceeds from our issuances of debt, common stock and other securities. Similarly, in certain of our businesses, the Parent Company may provide financial guarantees or other credit support for the benefit of counterparties who have entered into contracts for the purchase or sale of electricity, equipment, or other services with our subsidiaries or lenders. In such circumstances, if a business defaults on its payment or supply obligation, the Parent Company will be responsible for the business' obligations up to the amount provided for in the relevant guarantee or other credit support. As ofDecember 31, 2021 , the Parent Company had provided outstanding financial and performance-related guarantees or other credit support commitments to or for the benefit of our businesses, which were limited by the terms of the agreements, of approximately$2.2 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, 2021 , we had$119 million in letters of credit outstanding provided under our unsecured credit facilities, and$48 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, 2021 , the Company paid letter of credit fees ranging from 1% to 3% per annum on the outstanding amounts. We expect to continue to seek, where possible, non-recourse debt financing in connection with the assets or businesses that we or our affiliates may develop, construct or acquire. However, depending on local and global market conditions and the unique characteristics of individual businesses, non-recourse debt may not be available on economically attractive terms or at all. If we decide not to provide any additional funding or credit support to a subsidiary project that is under construction or has near-term debt payment obligations and that subsidiary is unable 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.
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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, 2021 , the Company had approximately$58 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, 2022 , or one year from the latest balance sheet date. The majority of Argentine receivables have been converted into long-term financing for the construction of power plants. Noncurrent receivables inChile pertain primarily to revenues recognized on regulated energy contracts that were impacted by theStabilization Fund created by the Chilean government. A portion relates to the extension of existing PPAs with the addition of renewable energy. See Note 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, 2021 , the Company had approximately$1.2 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. InDecember 2020 ,Mong Duong met the held-for-sale criteria and the loan receivable balance, net of CECL reserve, was reclassified to held-for-sale assets. As ofDecember 31, 2021 ,$91 million of the loan receivable balance was classified as Current held-for-sale assets and$1.1 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. Cash Sources and Uses The primary sources of cash for the Company in the year endedDecember 31, 2021 were debt financings, cash flows from operating activities, proceeds from the issuance of Equity Units, and sales of short-term investments. The primary uses of cash in the year endedDecember 31, 2021 were repayments of debt, capital expenditures, acquisitions of business interests, and purchases of short-term investments. 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.
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A summary of cash-based activities are as follows (in millions):
Year Ended December 31, Cash Sources: 2021 2020 2019
Borrowings under the revolving credit facilities
1,902 2,755 2,466 Issuance of non-recourse debt 1,644 4,680 5,828 Issuance of preferred stock 1,014 - - Sale of short-term investments 616 627 666 Contributions from noncontrolling interests 365 1 17 Affiliate repayments and returns of capital 320 158 131 Sales to noncontrolling interests 173 553 128 Issuance of preferred shares in subsidiaries 153 112 -
Proceeds from the sale of business interests, net of cash and restricted cash sold
95 169 178 Issuance of recourse debt 7 3,419 - Other 55 - 132 Total Cash Sources$ 9,146
Cash Uses: Repayments under the revolving credit facilities$ (2,420) $ (2,479) $ (1,735) Capital expenditures (2,116) (1,900) (2,405) Repayments of non-recourse debt (2,012) (4,136) (4,831)
Acquisitions of business interests, net of cash and (658)
(136) (192) restricted cash acquired Purchase of short-term investments (519) (653) (770) Contributions and loans to equity affiliates (427) (332) (324) Dividends paid on AES common stock (401) (381) (362) Distributions to noncontrolling interests (284) (422) (427) Purchase of emissions allowances (265) (188) (137) Acquisitions of noncontrolling interests (117) (259) - Payments for financing fees (32) (107) (126) Repayments of recourse debt (26) (3,366) (450) Payments for financed capital expenditures (24) (60) (146) Other (188) (220) (98) Total Cash Uses$ (9,489) $ (14,639) $ (12,003) Net increase (decrease) in Cash, Cash Equivalents, and$ (343) $ 255 $ (431) 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): 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Operating activities$ 1,902 $ 2,755 $ 2,466 $ (853) $ 289 Investing activities (3,051) (2,295) (2,721) (756) 426 Financing activities 797 (78) (86) 875 8
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108 | 2021 Annual Report Operating Activities Fiscal Year 2021 versus 2020
Net cash provided by operating activities decreased
Operating Cash Flows (1) (in millions) [[Image Removed: aes-20211231_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 increased$799 million , primarily due to higher margins at our US and Utilities SBU, a decrease in current income tax expense at Angamos due to a timing difference in recognition of the early contract terminations with Minera Escondida andMinera Spence , and a decrease in interest expense, partially offset by lower margins at our South America SBU.
•Working capital requirements increased
Fiscal Year 2020 versus 2019
Net cash provided by operating activities increased
Operating Cash Flows (1) (in millions) [[Image Removed: aes-20211231_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$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
Investing Activities
Fiscal Year 2021 versus 2020
Net cash used in investing activities increased
Investing Cash Flows (in millions) [[Image Removed: aes-20211231_g24.jpg]] •Acquisitions of business interests increased$522 million , primarily due to the AES Clean Energy acquisitions of New York Wind and Community Energy and the acquisitions of wind complexes at AES Brasil, partially offset by the prior year AES Panama acquisition of Penonome I. •Contributions and loans to equity affiliates increased$95 million , primarily due to higher contributions to Fluence and Uplight, our equity method investments, partially offset by higher prior year contributions to sPower and to Gas Natural Atlántico II, which was previously recorded as an equity investment inPanama in the prior year and is now consolidated by AES.
•Repayments from equity affiliates increased
•Cash from short-term investing activities increased
•Capital expenditures increased
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110 | 2021 Annual Report Capital Expenditures (in millions) [[Image Removed: aes-20211231_g25.jpg]] •Growth expenditures increased$190 million , primarily driven by higher TDSIC investments at AES Ohio andAES Indiana , and renewable projects atAES Clean Energy, AES Brasil, and AES Andes. This impact was partially offset by the completion of renewable energy projects inArgentina and the completion of the Southland repowering project. •Maintenance expenditures increased$33 million , primarily due to increased expenditures at AES Andes, DPL,El Salvador , andMexico , partially offset by prior year expenditures at Andres as a result of the steam turbine lightning damage, and by decreased expenditures atAES Indiana and Itabo, due to its sale in the current year.
•Environmental expenditures decreased
Fiscal Year 2020 versus 2019
Net cash used in investing activities decreased
Investing Cash Flows (in millions) [[Image Removed: aes-20211231_g26.jpg]]
(1)Insurance proceeds are included within "Other investing" within the Consolidated Statements of Cash Flows in Item 8.- Financial Statements and Supplementary Data of this Form 10-K.
•Cash from short-term investing activities increased
•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
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111 | 2021 Annual Report Capital Expenditures (in millions) [[Image Removed: aes-20211231_g27.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 at AES Hawaii, and the Colon LNG facility inPanama . This impact was partially offset by higher investments atIPALCO and in renewable projects inChile . •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
Financing Activities
Fiscal Year 2021 versus 2020
Net cash provided by financing activities increased
Financing Cash Flows (in millions) [[Image Removed: aes-20211231_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
•The
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•The
•The$142 million impact from acquisitions of noncontrolling interests is due to the prior year acquisition of an additional 19.8% ownership interest in AESBrasil , partially offset by the first installment for the acquisition of the remaining 49.9% minority ownership interest in Colon. •The$912 million impact from non-recourse debt transactions is primarily due to lower net borrowings atPanama , Southland Energy,Vietnam , andArgentina , and higher net repayments at AES Brasil, partially offset by higher net borrowings at AES Clean Energy and lower net repayments inChile . •The$380 million impact from sales to noncontrolling interests is primarily due to prior year proceeds received from the sale of a 35% ownership interest in Southland Energy. •The$242 million impact from other financing activities is primarily driven by a decrease in distributions to noncontrolling interests, due to lower distributions to minority interests at AES Andes, AES Brasil, and Itabo, due to its sale inApril 2021 . Fiscal Year 2020 versus 2019
Net cash used in financing activities decreased
Financing Cash Flows (in millions) [[Image Removed: aes-20211231_g29.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
•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. •The$453 million impact from non-recourse debt transactions is primarily due to lower net borrowings at Southland andChile , partially offset by a decrease in net repayments at AES Brasil and DPL and higher net borrowings atAES Renewable Holdings ,Panama , andVietnam .
•The
•The
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113 | 2021 Annual Report Parent Company Liquidity The following discussion is included as a useful measure of the liquidity available toThe AES Corporation , or the Parent Company, given the non-recourse nature of most of our indebtedness. Parent Company Liquidity as outlined below is a non-GAAP measure and should not be construed as an alternative to Cash and cash equivalents, which is determined in accordance with GAAP. Parent Company Liquidity may differ from similarly titled measures used by other companies. The principal sources of liquidity at the Parent Company level are dividends and other distributions from our subsidiaries, including refinancing proceeds, proceeds from debt and equity financings at the Parent Company level, including availability under our revolving credit facility, and proceeds from asset sales. Cash requirements at the Parent Company level are primarily to fund interest and principal repayments of debt, construction commitments, other equity commitments, common stock repurchases, acquisitions, taxes, Parent Company overhead and development costs, and dividends on common stock. The Company defines Parent Company Liquidity as cash available to the Parent Company, including cash at qualified holding companies, plus available borrowings under our existing credit facility. The cash held at qualified holding companies represents cash sent to subsidiaries of the Company domiciled outside of theU.S. Such subsidiaries have no contractual restrictions on their ability to send cash to the Parent Company. Parent Company Liquidity is reconciled to its most directly comparable GAAP financial measure, Cash and cash equivalents, at the periods indicated as follows (in millions): December 31, December 31, 2021 2020 Consolidated cash and cash equivalents $ 943$ 1,089 Less: Cash and cash equivalents at subsidiaries (902) (1,018) Parent Company and qualified holding companies' cash and cash 41 71
equivalents
Commitments under the Parent Company credit facility 1,250 1,000 Less: Letters of credit under the credit facility (48) (77) Less: Borrowings under the credit facility (365) (70) Borrowings available under the Parent Company credit facility 837 853 Total Parent Company Liquidity $
878
The Parent Company paid dividends of$0.60 per outstanding share to its common stockholders during the year endedDecember 31, 2021 . 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$3.8 billion and$3.4 billion atDecember 31, 2021 and 2020, respectively. See Note 11- Debt in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for additional detail. We believe that our sources of liquidity will be adequate to meet our needs for the foreseeable future. This belief is based on a number of material assumptions, including, without limitation, assumptions about our ability to access the capital markets, the operating and financial performance of our subsidiaries, currency exchange rates, power market pool prices, and the ability of our subsidiaries to pay dividends. In addition, our subsidiaries' ability to declare and pay cash dividends to us (at the Parent Company level) is subject to certain limitations contained in loans, governmental provisions and other agreements. We can provide no assurance that these sources will be available when needed or that the actual cash requirements will not be greater than anticipated. We have met our interim needs for shorter-term and working capital financing at the Parent Company level with our 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 liens; restrictions and limitations on mergers and acquisitions and the disposition of assets; maintenance of certain financial ratios; and financial and other reporting requirements. As ofDecember 31, 2021 , we were in compliance with these covenants at the Parent Company level.
Non-Recourse Debt
While the lenders under our non-recourse debt financings generally do not have direct recourse to the Parent Company, defaults thereunder can still have important consequences for our results of operations and liquidity, including, without limitation:
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•reducing our cash flows as the subsidiary will typically be prohibited from distributing cash to the Parent Company during the time period of any default;
•triggering our obligation to make payments under any financial guarantee, letter of credit or other credit support we have provided to or on behalf of such subsidiary;
•causing us to record a loss in the event the lender forecloses on the assets; and
•triggering defaults in our outstanding debt at the Parent Company.
For example, our revolving credit facility and outstanding debt securities at the Parent Company include events of default for certain bankruptcy-related events involving material subsidiaries. In addition, our revolving credit agreement at the Parent Company includes events of default related to payment defaults and accelerations of outstanding debt of material subsidiaries. Some of our subsidiaries are currently in default with respect to all or a portion of their outstanding indebtedness. The total non-recourse debt classified as current in the accompanying Consolidated Balance Sheets amounts to$1.4 billion . The portion of current debt related to such defaults was$237 million atDecember 31, 2021 , 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$230 million is due to the bankruptcy of the offtaker. See Note 11- Debt in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for additional detail. None of the subsidiaries that are currently in default are subsidiaries that met the applicable definition of materiality under the Parent Company's debt agreements as ofDecember 31, 2021 , in order for such defaults to trigger an event of default or permit acceleration under the Parent Company's indebtedness. However, as a result of additional dispositions of assets, other significant reductions in asset carrying values or other matters in the future that may impact our financial position and results of operations or the financial position of the individual subsidiary, it is possible that one or more of these subsidiaries could fall within the definition of a "material subsidiary" and thereby trigger an event of default and possible acceleration of the indebtedness under the Parent Company's outstanding debt securities. A material subsidiary is defined in the Parent Company's revolving credit facility as any business that contributed 20% or more of the Parent Company's total cash distributions from businesses for the four most recently completed fiscal quarters. As ofDecember 31, 2021 , none of the defaults listed above, individually or in the aggregate, results in or is at risk of triggering a cross-default under the recourse debt of the Parent Company.
Contractual Obligations and Parent Company Contingent Contractual Obligations
A summary of our contractual obligations, commitments and other liabilities as
of
Less than 1 More than 5 Contractual Obligations Total year 1-3 years 3-5 years years Other Footnote Reference(5) Debt obligations (1) (2)$ 18,815 $
1,395
11 Interest payments on long-term debt (3) 6,180 832 1,292 1,013 3,043 - n/a Finance lease obligations (2) 277 8 16 13 240 - 14 Operating lease obligations (2) 632 32 59 53 488 - 14 Electricity obligations 8,804 714 1,121 1,075 5,894 - 12 Fuel obligations 5,509 1,882 2,038 1,476 113 - 12 Other purchase obligations 8,831 5,896 939 411 1,585 - 12 Other long-term liabilities reflected on AES' consolidated balance sheet under GAAP (2) (4) 823 - 556 17 241 9 n/a Total$ 49,871 $ 10,759 $ 8,273 $ 8,331 $ 22,499 $ 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 24- 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, 2021 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, 2021 . (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.- Financial Statements and Supplementary Data of this Form 10-K for additional information on the items excluded.
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(5)For further information see the note referenced below in Item 8.- Financial Statements and Supplementary Data of this Form 10-K.
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$ 2,162 90$0 - 400 Letters of credit under the unsecured credit facilities 119 31$0 - 42 Letters of credit under the revolving credit facility 48 26$0 - 16 Surety bond 2 2$1 Total$ 2,331 149 _____________________________ (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 2021, 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.- Financial Statements and Supplementary Data 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
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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.
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 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
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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 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.
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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 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
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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 and 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 2021 and accounting pronouncements issued, but not yet effective.
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