Executive Summary
In 2022, AES delivered on its strategic and financial objectives. We completed construction or the acquisition of 1.9 GW of renewables and energy storage, and signed long-term PPAs for an additional 5.2 GW of new renewable energy. See Overview of our Strategy included in Item 1.- Business of this Form 10-K for further information. Compared with last year, diluted loss per share from continuing operations increased$0.20 , from$0.62 to$0.82 . This loss increase reflects the prior year gains on remeasurement of our interest in sPower's development platform and the Fluence capital raise, higher income tax expense, lower contributions from our US and Utilities SBU due to the recognition of previously deferred power purchase costs and impacts of outages, the prior year impact of realized gains on de-designated interest rate swaps at the Parent Company, higher interest expense, and lower capitalized interest at construction projects inChile ; partially offset by the prior year loss on deconsolidation of Alto Maipo, and higher margins from our MCAC SBU due to favorable LNG transactions. Adjusted EPS, a non-GAAP measure, increased$0.15 , from$1.52 to$1.67 , mainly driven by higher contributions from our MCAC SBU due to favorable LNG transactions and from our South America SBU due to higher margins and increased ownership inAES Andes , partially offset by lower contributions from our US and Utilities SBU due to the recognition of previously deferred power purchase costs and impacts of outages, the prior year impact of realized gains on de-designated interest rate swaps at the Parent Company, and higher interest expense.
--------------------------------------------------------------------------------
84 | 2022 Annual Report
Review of Consolidated Results of Operations
% Change 2022 % Change 2021 Years Ended December 31, 2022 2021 2020 vs. 2021 vs. 2020 (in millions, except per share amounts) Revenue: US and Utilities SBU$ 5,013 $ 4,335 $ 3,918 16 % 11 % South America SBU 3,539 3,541 3,159 - % 12 % MCAC SBU 2,868 2,157 1,766 33 % 22 % Eurasia SBU 1,217 1,123 828 8 % 36 % Corporate and Other 119 116 231 3 % -50 % Eliminations (139) (131) (242) 6 % -46 % Total Revenue 12,617 11,141 9,660 13 % 15 % Operating Margin: US and Utilities SBU 564 792 638 -29 % 24 % South America SBU 823 1,069 1,243 -23 % -14 % MCAC SBU 820 521 559 57 % -7 % Eurasia SBU 236 216 186 9 % 16 % Corporate and Other 175 158 120 11 % 32 % Eliminations (70) (45) (53) 56 % -15 % Total Operating Margin 2,548 2,711 2,693 -6 % 1 % General and administrative expenses (207) (166) (165) 25 % 1 % Interest expense (1,117) (911) (1,038) 23 % -12 % Interest income 389 298 268 31 % 11 % Loss on extinguishment of debt (15) (78) (186) -81 % -58 % Other expense (68) (60) (53) 13 % 13 % Other income 102 410 75 -75 % NM Loss on disposal and sale of business interests (9) (1,683) (95) -99 % NM Goodwill impairment expense (777) - - NM - % Asset impairment expense (763) (1,575) (864) -52 % 82 % Foreign currency transaction gains (losses) (77) (10) 55 NM NM Other non-operating expense (175) - (202) NM -100 % Income tax benefit (expense) (265) 133 (216) NM NM Net equity in losses of affiliates (71) (24) (123) NM -80 % INCOME (LOSS) FROM CONTINUING OPERATIONS (505) (955) 149 -47 % NM Gain from disposal of discontinued businesses, net of income tax expense of$0 ,$1 , and$0 , respectively - 4 3 -100 % 33 % NET INCOME (LOSS) (505) (951) 152 -47 % NM Less: Net loss (income) attributable to noncontrolling interests and redeemable stock of subsidiaries (41) 542 (106) NM NM NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION$ (546) $ (409) $ 46 33 % NM AMOUNTS ATTRIBUTABLE TO THEAES CORPORATION COMMON STOCKHOLDERS: Income (loss) from continuing operations, net of tax$ (546) $ (413) $ 43 32 % NM Income from discontinued operations, net of tax - 4 3 -100 % 33 % NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION$ (546) $ (409) $ 46 33 % NM
Net cash provided by operating activities
$ 2,755 43 % -31 % 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.
--------------------------------------------------------------------------------
85 | 2022 Annual Report
Consolidated Revenue and Operating Margin
Year Ended
Revenue (in millions) [[Image Removed: aes-20221231_g16.jpg]]
Consolidated Revenue - Revenue increased
•$711 million at MCAC driven by favorable LNG transactions inPanama and theDominican Republic ; higher contract sales due to increased demand and higher prices in theDominican Republic ; higher spot sales due to better hydrology inPanama ; and higher pass-through fuel costs inMexico ; partially offset by the impact from the sale of Itabo inApril 2021 ; •$678 million at US and Utilities driven by higher prices atAES Indiana and AESOhio due to increases in riders to collect fuel and purchased power costs from customers, as well as increased demand and favorable weather; higher sales at AES Clean Energy due to the supply agreement withEl Salvador ; partially offset by an increase in unrealized derivative losses at Southland and Southland Energy and a decrease at AES Hawaii due to closure of the plant inAugust 2022 ; and •$94 million at Eurasia mainly driven by higher energy prices and generation inBulgaria , higher electricity prices at St. Nikola, and recognition of construction revenue at Mong Duong due to a reduction in expected completion costs for ash pond 2; partially offset by unfavorable FX impact. Operating Margin (in millions) [[Image Removed: aes-20221231_g17.jpg]]
Consolidated Operating Margin - Operating margin decreased
--------------------------------------------------------------------------------
86 | 2022 Annual Report
•$246 million atSouth America primarily driven by revenue recognized at Angamos in the prior year for the early termination of contracts with Minera Escondida andMinera Spence ; an increase in regulatory receivable credit loss allowances inArgentina ; higher energy purchases and higher fixed costs at AES Brasil; and unfavorable FX impact; partially offset by higher generation, lower depreciation of coal assets, and lower spot purchases inChile ; higher contract sales at AESBrasil due to better hydrology; higher energy prices inColombia ; and higher availability atTermoAndes ; and •$228 million at US and Utilities mainly driven by an increase in unrealized derivative losses at Southland Energy; recognition of previously deferred purchased power costs at AES Ohio and a charge resulting from a regulatory settlement atAES Indiana ; the impact from outages and closure of the plant at AES Hawaii; lower availability and higher maintenance costs atAES Puerto Rico due to forced outages and a higher heat rate; and an increase in costs associated with growing the business at AES Clean Energy; partially offset by higher retail margin atAES Indiana due to higher volumes from favorable weather; and higher sales at AES Clean Energy due to the supply agreement with
These unfavorable impacts were partially offset by increases of:
•$299 million at MCAC primarily driven by an increase inPanama and theDominican Republic due to favorable LNG transactions; higher contract sales due to higher prices and favorable hydrology inPanama and increased demand and higher prices in theDominican Republic ; partially offset by the impact from the sale of Itabo inApril 2021 ; and •$20 million at Eurasia mainly driven by recognition of construction revenue at Mong Duong due to a reduction in expected completion costs for ash pond 2; and by higher electricity prices at St. Nikola inBulgaria ; partially offset by unfavorable FX impact and higher maintenance costs.
Year Ended
Revenue (in millions) [[Image Removed: aes-20221231_g18.jpg]]
Consolidated Revenue - Revenue increased
•$417 million at 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 atSouth 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
--------------------------------------------------------------------------------
87 | 2022 Annual Report
volume and generation at AES Brasil, partially due to the acquisition of Ventus and Cubico I; partially offset by unfavorable FX impact and by the prior period recovery of previously expensed payments from customers inChile ; and
•$295 million at Eurasia mainly driven by higher energy prices and generation in
Operating Margin (in millions) [[Image Removed: aes-20221231_g19.jpg]]
Consolidated Operating Margin - Operating margin increased
•$154 million at 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 the 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 at Eurasia mainly driven by higher energy prices and generation in
These favorable impacts were partially offset by decreases of:
•$174 million atSouth 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 at 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 .
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.
--------------------------------------------------------------------------------
88 | 2022 Annual Report
General and administrative expenses increased
General and administrative expenses increased
Interest expense
Interest expense increased$206 million , or 23%, to$1.1 billion in 2022, compared to$911 million in 2021, primarily due to the prior year impact of realized gains on de-designated interest rate swaps, lower capitalized interest at construction projects inChile , and increased borrowings inSouth America and at the Parent Company. Interest expense decreased$127 million , or 12%, to$911 million in 2021, compared to$1 billion in 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 income
Interest income increased$91 million , or 31%, to$389 million in 2022, compared to$298 million in 2021 primarily due to an increase in short-term investments at AES Brasil andArgentina , higher CAMMESA interest rates on receivables inArgentina , and increase in sales-type lease receivables at the Alamitos Energy Center. Interest income increased$30 million , or 11%, to$298 million in 2021, compared to$268 million in 2020 primarily due to the arbitration proceeding inChile , the commencement of a sales-type lease at the Alamitos Energy Center inJanuary 2021 , and higher CAMMESA interest rates on receivables inArgentina , partially offset by a lower loan receivable balance inVietnam .
Loss on extinguishment of debt
Loss on extinguishment of debt decreased$63 million , or 81%, to$15 million in 2022, compared to$78 million in 2021. This decrease was primarily due to the prior year losses of$27 million due to the prepayment at AES Brasil, at AESArgentina andAES Andes of$17 million and$14 million , respectively, due to repayments, and a refinancing resulting in a$14 million loss at Andres, partially offset in 2022 by a refinancing resulting in a loss of$12 million atAES Renewable Holdings . Loss on extinguishment of debt decreased$108 million , or 58% to$78 million in 2021, compared to$186 million in 2020. This decrease was primarily due to losses in 2020 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 the losses mentioned above. See Note 11- Debt included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for further information. Other income Other income decreased$308 million to$102 million in 2022, compared to$410 million in 2021 primarily due to the prior 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 , prior year legal arbitration at Alto Maipo, and the prior year gain on remeasurement of contingent consideration at AES Clean Energy; partially offset by the current year gain on remeasurement of our existing investment in 5B, which is accounted for using the measurement alternative, and insurance proceeds primarily associated with property damage atTermoAndes . Other income increased$335 million to$410 million in 2021, compared to$75 million in 2020 primarily due to the 2021 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 AES Clean Energy, partially offset by the 2020 gain on sale of Redondo Beach land at Southland.
Other expense
Other expense increased$8 million , or 13%, to$68 million in 2022, compared to$60 million in 2021, primarily due to current year costs related to the disposition of AES Gilbert, including the recognition of an allowance on the sales-type lease receivable; partially offset by lower losses recognized at commencement of sales-type leases due to the prior year loss atAES Renewable Holdings .
--------------------------------------------------------------------------------
89 | 2022 Annual Report
Other expense increased$7 million , or 13% to$60 million in 2021, compared to$53 million in 2020 primarily due to the 2021 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.
See Note 21- Other Income and Expense included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for further information.
Loss on disposal and sale of business interests
Loss on disposal and sale of business interests decreased$1.7 billion to$9 million in 2022, compared to$1.7 billion in 2021, primarily due to the prior year$2.1 billion 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 accounted for as a gain on the partial disposition of its investment in Fluence in 2021. Loss on disposal and sale of business interests increased$1.6 billion to$1.7 billion in 2021, compared to$95 million in 2020, primarily due to the changes at Alto Maipo and Fluence referenced in the paragraph above.
See Note 24- Held-for-Sale and Dispositions and Note 8 - Investments in and Advances to Affiliates included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for further information.
Goodwill impairment expense was$777 million in 2022, due to a$644 million impairment atAES Andes and a$133 million impairment at AES El Salvador. This was due to the Company seeing increases in inputs utilized to derive the discount rate applied in our goodwill impairment analysis, such as higher interest rates and country risk premiums in certain markets. These changes to the inputs of our discount rate have negatively impacted our annual goodwill impairment test as ofOctober 1, 2022 . There was no goodwill impairment expense in 2021 or 2020.
See Note 9-
Asset impairment expense
Asset impairment expense decreased$812 million to$763 million in 2022, compared to$1.6 billion in 2021. This decrease was primarily due to 2021 impairments atAES Andes totaling$804 million associated with a commitment to accelerate the retirement of theVentanas 3 & 4 and Angamos coal-fired plants, a$475 million impairment atPuerto Rico associated with the economic costs and reputational risks of disposal of coal combustion residuals off island, impairments at the Buffalo Gap wind generation facilities totaling$193 million due to an expired PPA and volatile spot prices in theERCOT market, and a$67 million impairment at the Mountain View I & II facilities related to a repowering project that will result in decommissioning the majority of the existing wind turbines in advance of their depreciable lives. This was partially offset by the$468 million impairment of Maritza's coal-fired plant due toBulgaria's commitment to cease electricity generation using coal as a fuel source beyond 2038, the$193 million impairment at TEG TEP inMexico , and a$76 million impairment ofAmman East and IPP4 inJordan . Asset impairment expense increased$711 million to$1.6 billion in 2021, compared to$864 million in 2020. This increase was primarily due to 2021 impairments atAES Andes totaling$804 million , a$475 million impairment atPuerto Rico , impairments at the Buffalo Gap wind generation facilities totaling$193 million , and a$67 million impairment at the Mountain View I & II wind facilities. This was partially offset by the$564 million and$213 million impairments related to the Angamos andVentanas 1 & 2 coal-fired plants inChile and the$38 million impairment of the generation facility inHawaii during 2020.
See Note 22- Asset Impairment Expense included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for further information.
--------------------------------------------------------------------------------
90 | 2022 Annual Report
Foreign currency transaction gains (losses)
Foreign currency transaction gains (losses) in millions were as follows:
Years Ended December 31, 2022 2021 2020 Argentina (1)$ (88) $ (21) $ 29 Chile 13 20 (5) Corporate - (11) 21 Dominican Republic - (1) 9 Other (2) 3 1 Total (2)$ (77) $ (10) $ 55
_____________________________
(1) Includes peso-denominated energy receivable indexed to the USD through the FONINVEMEM agreement which is considered a foreign currency derivative. See Note 7- Financing Receivables included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for further information. (2) Includes losses of$20 million and gains of$12 million and$57 million on foreign currency derivative contracts for the years endedDecember 31, 2022 , 2021, and 2020, respectively. The Company recognized net foreign currency transaction losses of$77 million in 2022, primarily driven by the depreciation of the Argentine peso, partially offset by realized foreign currency derivative gains inSouth America due to the depreciating Colombian peso. The Company recognized net foreign currency transaction losses of$10 million in 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 in 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.
Other non-operating expense
Other non-operating expense was$175 million in 2022 due to the other-than-temporary impairment of the sPower equity method investment. The impairment analysis was triggered by the signing of a purchase and sale agreement which, at the time, implied an expected loss upon sale of the Company's indirect interest in a portfolio of sPower's operating assets ("OpCo B"). The transaction closed onFebruary 28, 2023 . sPower primarily holds operating assets where the tax credits associated with underlying projects have already been allocated to tax equity partners. The application of HLBV accounting increases the carrying value of these investments, as earnings are initially disproportionately allocated to the sponsor entity. Since sPower does not have any ongoing development or other value creation activities following the transfer of these activities toAES Clean Energy Development , the impairment adjusts the carrying value to the fair market value of the operating assets. See Note 25-Acquisitions included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for further information regarding the formation ofAES Clean Energy Development .
There was no other non-operating expense in 2021.
Other non-operating expense was$202 million in 2020 due to the other-than-temporary impairment of the OPGC equity method investment. InDecember 2019 , an other-than-temporary impairment was recorded for 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 .
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 expense was$265 million in 2022, compared to income tax benefit of$133 million in 2021. The Company's effective tax rates were (157)% and 13% for the years endedDecember 31, 2022 and 2021, respectively.
--------------------------------------------------------------------------------
91 | 2022 Annual Report
The 2022 effective tax rate was impacted by the current year nondeductible goodwill impairments atAES Andes and AES El Salvador, as well as the current year asset impairment of the Maritza coal-fired plant. These impacts were partially offset by favorable LNG transactions at certain MCAC businesses and inflationary and foreign currency impacts at certain Argentine businesses recognized in 2022. The 2021 effective tax rate was impacted by 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 2021 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. See Note 9-Goodwill and Other Intangible Assets included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K for details of the goodwill impairments. See Note 22-Asset Impairment Expense included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K for details of the asset impairments. 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 deconsolidation of Alto Maipo. Income tax benefit was$133 million in 2021, compared to income tax expense of$216 million in 2020. The Company's effective tax rates were 13% and 44% for the years endedDecember 31, 2021 , and 2020, respectively. The net decrease in the effective tax rate was primarily due to the 2021 impacts of the drivers cited above. Further, 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 inHawaii . 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. 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 rule. A future proportionate change in the composition of income before income taxes from foreign and domestic tax jurisdictions could impact our periodic effective tax rate. The Company also benefits from reduced tax rates in certain countries as a result of satisfying specific commitments regarding employment and capital investment. See Note 23- Income Taxes included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for additional information regarding these reduced rates.
Net equity in losses of affiliates
Net equity in losses of affiliates increased$47 million to$71 million in 2022, compared to$24 million in 2021. This was primarily driven by lower earnings of$31 million from sPower, mainly due to lower earnings from renewable projects that came online and higher losses on extinguishment of debt, partially offset by lower impairment expense; and by an increase in losses of$22 million from Fluence mainly due to an increase in costs, including share-based compensation, associated with the growing business. 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 from sPower in 2021 of$79 million , compared to losses in 2020, driven by renewable projects that came online and impairments of certain development projects in 2020, and$81 million of losses fromAES 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 higher losses of$45 million from Fluence 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 higher losses of$10 million from Uplight due to higher costs associated with the growing business.
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.
--------------------------------------------------------------------------------
92 | 2022 Annual Report
Net income (loss) attributable to noncontrolling interests and redeemable stock of subsidiaries
Net income attributable to noncontrolling interests and redeemable stock of
subsidiaries increased
•Prior year loss on deconsolidation of Alto Maipo due to loss of control after Chapter 11 filing;
•Prior year asset impairments at Buffalo Gap; and
•Lower allocation of losses to tax equity partners at
These increases were partially offset by:
•Higher allocation of losses to tax equity partners and increased costs
associated with growing the business at
•Lower earnings from
•Prior year deferred tax benefits recorded at AES Brasil; and
•Asset impairments at Amman East and IPP4 in
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 the business at
•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 (loss) attributable to
Net loss attributable to
•Higher goodwill impairments in the current year;
•Prior year gain due to the initial public offering of Fluence;
•Higher income tax expense;
•Prior year gain on remeasurement of our equity interest in the sPower development platform to acquisition date fair value;
•Higher Parent interest expense due to prior year realized gains on de-designated interest rate swaps, higher interest rates, and higher outstanding debt;
•Lower margins at our US and Utilities SBU due to the recognition of previously deferred power purchase costs, impacts of outages, and unrealized derivative losses;
•Lower capitalized interest at construction projects in
•Other-than-temporary impairment of sPower.
--------------------------------------------------------------------------------
93 | 2022 Annual Report
These increases were partially offset by:
•Prior year loss on deconsolidation of Alto Maipo due to loss of control after Chapter 11 filing;
•Lower long-lived asset impairments in the current year; and
•Higher margins at our MCAC SBU due to favorable LNG transactions.
Net income attributable to
•Loss on deconsolidation of Alto Maipo due to loss of control after Chapter 11 filing;
•Higher asset impairments in 2021; and
•Lower margins at our South America SBU primarily due to the 2020 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;
•Other-than-temporary impairment of OPGC in 2020;
•Lower Parent interest expense due to realized gains on de-designated interest rate swaps and lower interest rates;
•Losses on extinguishment of debt at the Parent Company and DPL in 2020;
•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.
SBU Performance Analysis
Segments
We are organized into four market-oriented SBUs: US and Utilities (
Non-GAAP Measures
Adjusted Operating Margin, Adjusted PTC, and Adjusted EPS are non-GAAP supplemental measures that are used by management and external users of our Consolidated Financial Statements such as investors, industry analysts, and lenders.
For the year endedDecember 31, 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. There were no such costs in 2020, 2021 or 2022. 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 which occurred in 2020, and also impacted 2021. We believe the inclusion of the effects of this non-recurring transaction would result
--------------------------------------------------------------------------------
94 | 2022 Annual Report
in a lack of comparability in our results of operations and would distort the metrics that our investors use to measure us.
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, 2022 2021 2020 Operating Margin$ 2,548 $ 2,711 $ 2,693 Noncontrolling interests adjustment (1) (473) (722) (831) Unrealized derivative losses (gains) 75 (28) 24 Disposition/acquisition losses 3 11 24 Net gains from early contract terminations at Angamos - (251) (182) Total Adjusted Operating Margin$ 2,153 $ 1,721 $ 1,728 _____________________________
(1)The allocation of HLBV earnings to noncontrolling interests is not adjusted out of Adjusted Operating Margin.
[[Image Removed: aes-20221231_g20.jpg]]
--------------------------------------------------------------------------------
95 | 2022 Annual Report Adjusted PTC We define Adjusted PTC as pre-tax income from continuing operations attributable toThe AES Corporation excluding gains or losses of the consolidated entity due to (a) unrealized gains or losses related to derivative transactions and equity securities; (b) unrealized foreign currency gains or losses; (c) gains, losses, benefits and costs associated with dispositions and acquisitions of business interests, including early plant closures, and gains and losses recognized at commencement of sales-type leases; (d) losses due to impairments; (e) gains, losses and costs due to the early retirement of debt; 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
Reconciliation of Adjusted PTC (in millions)
Years Ended
2022 2021 2020
Income (loss) from continuing operations, net of tax, attributable
$ (413) $ 43
to The AES Corporation
Income tax expense (benefit) attributable to
(31) 130 Pre-tax contribution (336) (444) 173 Unrealized derivative and equity securities losses (gains) 128 (1) 3 Unrealized foreign currency losses (gains) 42 14 (10) Disposition/acquisition losses 40 861 112 Impairment losses 1,658 1,153 928 Loss on extinguishment of debt 35 91 223 Net gains from early contract terminations at Angamos - (256) (182) Total Adjusted PTC$ 1,567 $ 1,418 $ 1,247
--------------------------------------------------------------------------------
96 | 2022 Annual Report
[[Image Removed: aes-20221231_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. The Company reported a loss from continuing operations of$0.82 and$0.62 for the years endedDecember 31, 2022 and 2021, respectively. 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.
--------------------------------------------------------------------------------
97 | 2022 Annual Report
Reconciliation of Denominator Used for Adjusted EPS Year Ended December 31, 2022 Year Ended December 31, 2021 (in millions, except per share data) Loss Shares $ per Share Loss Shares $ per Share GAAP DILUTED LOSS PER SHARE Loss from continuing operations attributable toThe AES Corporation common stockholders$ (546) 668$ (0.82) $ (413) 666$ (0.62) EFFECT OF DILUTIVE SECURITIES Stock options - 1 - - 1 - Restricted stock units - 2 - - 3 - Equity units - 40 0.05 2 33 0.03 NON-GAAP DILUTED LOSS PER SHARE$ (546) 711$ (0.77) $ (411) 703$ (0.59) Reconciliation of Adjusted EPS
Years Ended
2022 2021 2020
Diluted earnings (loss) per share from continuing operations
$ (0.59) $ 0.06 Unrealized derivative and equity securities losses 0.18 (1) - 0.01 Unrealized foreign currency losses (gains) 0.07 (2) 0.02 (0.01) Disposition/acquisition losses
0.06 (3) 1.22 (4) 0.17 (5) Impairment losses
2.33 (6) 1.65 (7) 1.39 (8) Loss on extinguishment of debt
0.05 (9) 0.13 (10) 0.33 (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) Less: Net income tax benefit (0.25) (15) (0.29) (16) (0.26) (17) Adjusted EPS$ 1.67 $ 1.52 $ 1.44
_____________________________
(1)Amount primarily relates to unrealized losses on power swaps at Southland
Energy of
(2)Amount primarily relates to unrealized foreign currency losses inArgentina of$39 million , or$0.05 per share, mainly associated with the devaluation of long-term receivables denominated in Argentine pesos. (3)Amount primarily relates to costs on disposition of AES Gilbert, including the recognition of an allowance on the sales-type lease receivable, of$13 million , or$0.02 per share, and a day-one loss recognized at commencement of a sales-type lease at AES Waikoloa Solar of$5 million , or$0.01 per share. (4)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. (5)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. (6)Amount primarily relates to goodwill impairments atAES Andes of$644 million , or$0.91 per share, and at AES El Salvador of$133 million , or$0.19 per share, other-than-temporary impairment at sPower of$175 million , or$0.25 , as well as long-lived asset impairments at Maritza of$468 million , or$0.66 per share, at TEG TEP of$191 million , or$0.27 per share, and inJordan of$28 million , or$0.04 per share. (7)Amount primarily relates to asset impairments atAES 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 AES Clean Energy of$14 million , or$0.02 per share, and atLaurel Mountain of$7 million , or$0.01 per share. (8)Amount primarily relates to asset impairments atAES 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. (9)Amount primarily relates to losses on early retirement of debt due to refinancing atAES Renewable Holdings of$12 million , or$0.02 per share, at AES Clean Energy of$5 million , or$0.01 per share, at Mong Duong of$4 million , or$0.01 per share, and at TEG TEP of$4 million , or$0.01 per share. (10)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, atAES Andes of$15 million , or$0.02 per share, and at Andres andLos Mina of$15 million , or$0.02 per share. (11)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. (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
(15)Amount primarily relates to the income tax benefits associated with the impairment at Maritza of$48 million , or$0.07 per share, the income tax benefits associated with the other-than-temporary impairment at sPower of$39 million , or$0.06 per share, the income tax benefits associated with the impairment at TEG TEP of$34 million , or$0.05 , and the income tax benefits associated with the unrealized losses on power swaps at Southland Energy of$24 million , or$0.03 per share. (16)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 atAES 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. (17)Amount primarily relates to income tax benefits associated with the impairments atAES 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.
--------------------------------------------------------------------------------
98 | 2022 Annual Report US and Utilities SBU
The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated:
$ Change For the Years Ended 2022 vs. % Change 2022 $ Change 2021 % Change 2021 December 31, 2022 2021 2020 2021 vs. 2021 vs. 2020 vs. 2020 Operating Margin$ 564 $ 792 $ 638 $ (228) -29 %$ 154 24 % Adjusted Operating Margin (1) 523 617 577 (94) -15 % 40 7 % Adjusted PTC (1) 570 660 505 (90) -14 % 155 31 %
_____________________________
(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 2022 versus 2021
Operating Margin decreased
Decrease at Southland Energy primarily due to unrealized derivative losses and the impact of forced outages at the CCGT units
$ (127) Decrease at AES Ohio primarily due to the recognition of previously deferred purchased power costs and higher fixed costs, partially offset by higher transmission revenues due to higher rates
(34)
Decrease at AES Hawaii primarily due to increased outages in the current year and
closure of the plant in
(20)
Decrease in
(19)
Decrease at
(14)
Decrease at AES Clean Energy driven by increased costs associated with growing
the business, partially offset by higher revenue from new projects and the
Company's agreement to supply
Other
(3)
Total US and Utilities SBU Operating Margin Decrease
Adjusted Operating Margin decreased
Adjusted PTC decreased
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 AES 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.
--------------------------------------------------------------------------------
99 | 2022 Annual Report South America SBU
The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated:
$ Change $ Change For the Years Ended 2022 vs. % Change 2022 2021 vs. % Change 2021 December 31, 2022 2021 2020 2021 vs. 2021 2020 vs. 2020 Operating Margin$ 823 $ 1,069 $ 1,243 $ (246) -23 %$ (174) -14 % Adjusted Operating Margin (1) 672 432 550 240 56 % (118) -21 % Adjusted PTC (1) 573 423 534 150 35 % (111) -21 %
_____________________________
(1) A non-GAAP financial measure, adjusted for the impact of NCI. See SBU Performance Analysis-Non-GAAP Measures for definition and Item 1.- Business for the respective ownership interest for key businesses. AES' indirect beneficial interest in AES Brasil increased from 24.35% to 44.13% in 2020 and to 47.4% in . In the first quarter of 2022, AES' indirect beneficial interest inAES Andes increased from 67% to 99%. See Item 1.- Business-South America SBU and Note 17 -Equity included in Item 8.-Financial Statements and Supplementary Data of this Form 10-K for further information.
Fiscal year 2022 versus 2021
Operating Margin decreased
Lower revenue recognized on contract terminations at Angamos in
$ (382) Decrease inArgentina primarily due to an increase in regulatory receivable credit loss allowances and lower thermal dispatch, partially offset by higher availability atTermoAndes and higher tariffs as per inflation adjustments granted in 2022
(16)
Increase inChile primarily due to an increase in contract margin, new generation and lower depreciation of coal assets, partially offset by higher operational costs
80
Increase in
52
Increase in
20
Total South America SBU Operating Margin Decrease
After adjusting for the net gains on early contract terminations at Angamos in the prior year, Adjusted Operating Margin increased$240 million mainly due to the increase in ownership inAES Andes from 67% to 99% in the first quarter of 2022 and the drivers explained above. Adjusted PTC increased$150 million , primarily associated with the increase in Adjusted Operating Margin described above and higher interest income inBrazil andArgentina ; partially offset by higher interest expense and lower capitalized interest in construction projects inChile , higher realized foreign currency losses inArgentina , and the impact of a prior year favorable award in an arbitration proceeding inChile .
Fiscal year 2021 versus 2020
Operating Margin decreased
Lower margin inBrazil primarily due to the prior year GSF settlement gain and$ (251) higher energy purchases led by drier hydrology Recovery of previously expensed payments from customers inChile
(47)
Decrease in energy and capacity tariffs in
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.
--------------------------------------------------------------------------------
100 | 2022 Annual Report MCAC SBU
The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated:
For the Years Ended $ Change 2022 % Change 2022 $ Change 2021 % Change 2021 December 31, 2022 2021 2020 vs. 2021 vs. 2021 vs. 2020 vs. 2020 Operating Margin$ 820 $ 521 $ 559 $ 299 57 %$ (38) -7 % Adjusted Operating Margin (1) 679 398 394 281 71 % 4 1 % Adjusted PTC (1) 559 314 287 245 78 % 27 9 %
_____________________________
(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 2022 versus 2021
Operating Margin increased
Increase inPanama driven by favorable LNG transactions, higher prices due to increase in NYMEX Henry Hub index and lower cost of sales resulting from favorable hydrology$ 217 Increase in theDominican Republic driven by favorable LNG transactions and higher contract sales due to increased demand and higher prices 97 Decrease in theDominican Republic mainly driven by the sale of Itabo onApril 8, 2021 (19) Other 4 Total MCAC SBU Operating Margin Increase
Adjusted Operating Margin increased
Adjusted PTC increased
Fiscal year 2021 versus 2020
Operating Margin decreased
Decrease in the
$ (64) 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 transaction, partially offset by lower capacity due to the incorporation of new plants into the system and higher fixed costs 48 Increase inPanama mainly driven byPanama's demand recovery, new wind and solar projects, higher capacity prices, and lower fixed costs, partially offset by the Estrella del Mar I power barge disconnection inJuly 2020 , higher cost of gas, and drier hydrology in 2021, mainly during Q4 11 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 2021 gain on pension plan buyout inMexico .
--------------------------------------------------------------------------------
101 | 2022 Annual Report Eurasia SBU
The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated:
For the Years Ended $ Change 2022 % Change 2022 $ Change 2021 % Change 2021 December 31, 2022 2021 2020 vs. 2021 vs. 2021 vs. 2020 vs. 2020 Operating Margin$ 236 $ 216 $ 186 $ 20 9 %$ 30 16 % Adjusted Operating Margin (1) 172 162 142 10 6 % 20 14 % Adjusted PTC (1) 192 196 177 (4) -2 % 19 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 2022 versus 2021
Operating Margin increased
Construction revenue for
$ 15 Higher merchant prices captured bySt. Nikola , partially offset by depreciation of the Euro 11 Other (6) Total Eurasia SBU Operating Margin Increase
Adjusted Operating Margin increased
Adjusted PTC decreased
Fiscal year 2021 versus 2020
Operating Margin increased
Increase at Maritza and
$ 19 Improved operational performance at Mong Duong 4 Other 7 Total Eurasia SBU Operating Margin Increase
Adjusted Operating Margin increased
Adjusted PTC increased
Key Trends and Uncertainties During 2023 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
Trade Restrictions and Supply Chain - OnMarch 29, 2022 , theU.S. Department of Commerce ("Commerce") announced the initiation of an investigation into whether imports into theU.S. of solar cells and panels imported fromCambodia ,Malaysia ,Thailand , andVietnam are circumventing antidumping and countervailing duty orders on solar cells and panels fromChina . This investigation resulted in significant systemic disruptions to the import of solar cells and panels fromSoutheast Asia . OnJune 6, 2022 ,President Biden issued a Proclamation waiving any tariffs that result from this investigation for a 24-month period. SincePresident Biden's proclamation, suppliers inSoutheast Asia have imported cells and panels again to theU.S.
--------------------------------------------------------------------------------
102 | 2022 Annual Report
OnDecember 2, 2022 , Commerce issued country-wide affirmative preliminary determinations that circumvention had occurred in each of the four Southeast Asian countries. Commerce also evaluated numerous individual companies and issued preliminary determinations that circumvention had occurred with respect to many but not all of these companies. Additionally, Commerce issued a preliminary determination that circumvention would not be deemed to occur for any solar cells and panels imported from the four countries if the wafers were manufactured outside ofChina or if no more than two out of six specifically identified components were produced inChina . These preliminary determinations could be modified and final determinations from Commerce are expected inMay 2023 . We have contracted and secured our expected requirements for solar panels forU.S. projects targeted to achieve commercial operations in 2023. Additionally, the Uyghur Forced Labor Prevention Act ("UFLPA") seeks to block the import of products made with forced labor in certain areas ofChina and may lead to certain suppliers being blocked from importing solar cells and panels to theU.S. While this has impacted the U.S. market, AES has managed this issue without significant impact to our projects. Further disruptions may impact our suppliers' ability or willingness to meet their contractual agreements or to continue to supply cells or panels into the U.S. market on terms that we deem satisfactory. The impact of any adverse Commerce determination, the impact of the UFLPA, future disruptions to the solar panel supply chain and their effect on AES'U.S. solar project development and construction activities are uncertain. AES will continue to monitor developments and take prudent steps towards maintaining a robust supply chain for our renewable projects. 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 three 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 2022, 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. Also see Item 1A.- Risk Factors of this Form 10-K. Estí Hydro Plant Flooding Incident - OnSeptember 30, 2022 , there was a flooding incident that impacted Estí, a 120 MW hydro plant inPanama . The plant was taken out of service for a complete assessment of the damages, which has now been completed. Repairs will be needed to ensure the long-term performance of the facility. During this time, the plant will continue to be out of service. The plant is covered by business interruption and property damage insurance and, inDecember 2022 , a partial settlement was reached with the insurer. The Company has not identified any indicators of impairment and believes the carrying value of the plant of$130 million is recoverable as ofDecember 31, 2022 . Macroeconomic and Political The macroeconomic and political environments in some countries where our subsidiaries conduct business have changed during 2022. This could result in significant impacts to tax laws and environmental and energy policies. Additionally, we operate in multiple countries and as such are subject to volatility in exchange rates at the subsidiary level. See Item 7A.- Quantitative and Qualitative Disclosures About Market Risk for further information. Inflation Reduction Act andU.S. Renewable Energy Tax Credits - The Inflation Reduction Act (the "IRA") was signed into law inthe United States . The IRA includes provisions that are expected to benefit theU.S. clean energy industry, including increases, extensions and/or new tax credits for onshore and offshore wind, solar, storage and hydrogen projects. We expect that the extension of the current solar investment tax credits ("ITCs"), as well as higher credits available for projects that satisfy wage and apprenticeship requirements, will increase demand for our renewables products. OurU.S. renewables business has a 51 GW pipeline that we intend to utilize to continue to grow our business, and these changes in tax policy are supportive of this strategy. We account forU.S. renewables projects according toU.S. GAAP, which, when partnering with tax-equity investors to monetize tax benefits, utilizes the HLBV method. This method recognizes the tax-credit value that is transferred to tax equity partners at the time of its creation, which for projects utilizing the investment tax credit is in the quarter the project begins commercial operation. For projects utilizing the production tax credit, this value is recognized over 10 years as the facility produces energy. In 2022, we
--------------------------------------------------------------------------------
103 | 2022 Annual Report
realized$246 million of Adjusted PTC from tax credits earned by ourU.S. renewables business. In 2023, we expect to realize significantly increased amounts of Adjusted PTC from tax credits earned by ourU.S. renewables business in line with the growth in that business. Based on construction schedules, a significant portion of these earnings will be realized in the fourth quarter.
The implementation of the IRA is expected to require substantial guidance from
the
Global Tax - The macroeconomic and political environments in theU.S. and in some countries where our subsidiaries conduct business have changed during 2021 and 2022. This could result in significant impacts to tax law. For example, onJuly 1, 2022 , the Chilean government proposed to reduce the corporate tax rate from 27% to 25%, limit net operating loss utilization per year, and introduce a disintegrated system whereby dividends may be subject to a 22% withholding tax, among other changes. The potential impact to the Company may be material. In theU.S. , the IRA includes a 15% corporate alternative minimum tax based on adjusted financial statement income. We are currently evaluating the applicability and effect of the new law and additional guidance issued in the fourth quarter of 2022. In the fourth quarter of 2022, theEuropean Commission adopted an amended Directive on Pillar 2 establishing a global minimum tax at a 15% rate. The adoption requires EU Member States to transpose the Directive into their respective national laws byDecember 31, 2023 for the rules to come into effect as ofJanuary 1, 2024 . We will continue to monitor issuance of draft legislation inBulgaria and other relevant EU Member States. The impact to the Company remains unknown but may be material. Inflation - In the markets in which we operate, there have been higher rates of inflation recently. 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 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. 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.The ICE Benchmark Association ("IBA") has determined that it will cease publication of the one-month, three-month, six-month, and 12-month USD LIBOR rates byJune 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 negotiates contract amendments with counterparties or additional derivatives contracts.Puerto Rico - Our subsidiaries inPuerto Rico have long-term PPAs with state-owned PREPA, which has been facing economic challenges that could result in a material adverse effect on our business inPuerto Rico . Despite the Title III protection, PREPA has been making substantially all of its payments to the generators in line with historical payment patterns. 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 .
--------------------------------------------------------------------------------
104 | 2022 Annual Report
As a result of the bankruptcy filing,AES Puerto Rico and AES Ilumina's non-recourse debt of$143 million and$27 million , respectively, continue to be in technical default and are classified as current as ofDecember 31, 2022 . The Company is in compliance with its debt payment obligations as ofDecember 31, 2022 . OnApril 12, 2022 , a mediation team was appointed to prepare the plan to resolve the PREPA Title III case and related proceedings. A disclosure statement hearing was held onFebruary 28, 2023 ; the PREPA disclosure statement was approved and mediation was extended throughApril 28, 2023 . Considering the information available as of the filing date, management believes the carrying amount of our long-lived assets inPuerto Rico of$96 million is recoverable as ofDecember 31, 2022 .
Decarbonization Initiatives
Our strategy involves shifting towards clean energy platforms, including renewable energy, energy storage, LNG, and modernized grids. It is designed to position us for continued growth while reducing our carbon intensity and in support of our mission of accelerating the future of energy, together. InFebruary 2022 , we announced our intent to exit coal generation by year-end 2025, subject to necessary approvals. In addition, initiatives have been announced by regulators, including inChile ,Puerto Rico ,Bulgaria andHawaii , and offtakers in recent years, with the intention of reducing GHG emissions generated by the energy industry. In parallel, the shift towards renewables has caused certain customers to migrate to other low-carbon energy solutions and this trend may continue. Although we cannot currently estimate the financial impact of these decarbonization initiatives, new legislative or regulatory programs further restricting carbon emissions or other initiatives to voluntarily exit coal generation could require material capital expenditures, resulting in a reduction of the estimated useful life of certain coal facilities, or have other material adverse effects on our financial results. 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 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. As ofDecember 31, 2022 , the carrying value of our long-lived assets at Maritza is$427 million . AES Ohio Distribution Rate Case - OnDecember 14, 2022 , the PUCO issued an order on AES Ohio's application to increase its base rates for electric distribution service to address, in part, increased costs of materials and labor and substantial investments to improve distribution structures. Among other matters, the order establishes a revenue increase of$76 million for AES Ohio's base rates for electric distribution service. This increase will go into effect when AES Ohio has a new electric security plan in place, which is expected in 2023.
AES Ohio Electric Security Plan - On
--------------------------------------------------------------------------------
105 | 2022 Annual Report
service reliability, provide greater safeguards for price stability, and continue investments in local economic development.ESP 4 also seeks to recover outstanding regulatory assets not currently in rates. AES Ohio did not propose that the Rate Stabilization Charge continue underESP 4 . This plan requires PUCO approval, which is expected in 2023.
AES Indiana Integrated Resource Plan ("IRP") -
Foreign Exchange Rates
We operate in multiple countries and as such are subject to volatility in exchange rates at varying degrees at the subsidiary level and between our functional currency, the USD, and currencies of the countries in which we operate. For additional information, refer to Item 7A.- Quantitative and Qualitative Disclosures About Market Risk .
Impairments
Long-lived Assets and Equity Affiliates - During the year endedDecember 31, 2022 , the Company recognized asset and other-than-temporary impairment expenses of$938 million . See Note 8-Investments and Advances to Affiliates and Note 22- Asset Impairment Expense included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for further information. After recognizing these impairment expenses, the carrying value of our investments in equity affiliates and long-lived assets that were assessed for impairment in 2022 totaled$1.5 billion atDecember 31, 2022 . 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 has seen degradation in certain external factors used to determine the discount rate applied in our goodwill impairment analysis, such as increasing interest rates and country risk premiums in certain markets, as well as a decrease in forecast energy prices and other unfavorable macroeconomic assumptions inColombia . These changes to the inputs of our discount rate have negatively impacted our annual goodwill impairment test as ofOctober 1, 2022 and thus, an impairment of goodwill of$777 million has been recognized as ofDecember 31, 2022 , reducing the goodwill balances of bothAES Andes and AES El Salvador to zero. See Note 9-Goodwill and Other Intangibles Assets included in Item 8.-Financial Statements and Supplementary Data for further information. The Company had no other reporting units considered to be "at risk," as the fair value of all other reporting units exceeded their carrying amounts by more than 10%. Should the fair value of any of the Company's reporting units fall below its carrying amount as a result of these inputs or other changes such as 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, 2022 , the Company had unrestricted cash and cash equivalents of$1.4 billion , of which$24 million was held at the Parent Company and qualified holding companies. The Company had$730 million in short-term investments, held primarily at subsidiaries, and restricted cash and debt service reserves of$713 million . The Company also had non-recourse and recourse aggregate principal amounts of debt outstanding of$19.4 billion and$3.9 billion , respectively. Of the$1.8 billion of our current non-recourse debt,$1.6 billion was presented as such because it is due in the next twelve months and$177 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$170 million is due to
--------------------------------------------------------------------------------
106 | 2022 Annual Report
the bankruptcy of the offtaker. As ofDecember 31, 2022 , the Company also had$662 million outstanding related to supplier financing arrangements, which are classified as Accrued and other liabilities. We expect current maturities of non-recourse debt and amounts due under supplier financing arrangements to be repaid from net cash provided by operating activities of the subsidiary to which the liability relates, through opportunistic refinancing activity, or some combination thereof. While we have no recourse debt which matures within the next twelve months, we do have amounts due under supplier financing arrangements, of which$296 million has a Parent Company guarantee. From time to time, we may elect to repurchase our outstanding debt through cash purchases, privately negotiated transactions or otherwise when management believes that such securities are attractively priced. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, and other factors. The amounts involved in any such repurchases may be material. We rely mainly on long-term debt obligations to fund our construction activities. We have, to the extent available at acceptable terms, utilized non-recourse debt to fund a significant portion of the capital expenditures and investments required to construct and acquire our electric power plants, distribution companies, and related assets. Our non-recourse financing is designed to limit cross-default risk to the Parent Company or other subsidiaries and affiliates. Our non-recourse long-term debt is a combination of fixed and variable interest rate instruments. Debt is typically denominated in the currency that matches the currency of the revenue expected to be generated from the benefiting project, thereby reducing currency risk. In certain cases, the currency is matched through the use of derivative instruments. The majority of our non-recourse debt is funded by international commercial banks, with debt capacity supplemented by multilaterals and local regional banks. Given our long-term debt obligations, the Company is subject to interest rate risk on debt balances that accrue interest at variable rates. When possible, the Company will borrow funds at fixed interest rates or hedge its variable rate debt to fix its interest costs on such obligations. In addition, the Company has historically tried to maintain at least 70% of its consolidated long-term obligations at fixed interest rates, including fixing the interest rate through the use of interest rate swaps. These efforts apply to the notional amount of the swaps compared to the amount of related underlying debt. Presently, the Parent Company's only material unhedged exposure to variable interest rate debt relates to drawings of$325 million under its revolving credit facility and a$200 million senior unsecured term loan. On a consolidated basis, of the Company's$23.7 billion of total gross debt outstanding as ofDecember 31, 2022 , approximately$6 billion bore interest at variable rates that were not subject to a derivative instrument which fixed the interest rate.Brazil holds$2 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 in support of tax equity partnerships or 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 or other obligation under the terms of the relevant agreement, 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, 2022 , 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$2.4 billion in aggregate (excluding those collateralized by letters of credit and other obligations discussed below). 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, 2022 , we had$128 million in letters of credit outstanding provided under our unsecured credit facilities,$123 million in letters of credit under bilateral agreements, and$34 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
--------------------------------------------------------------------------------
107 | 2022 Annual Report
business operations. During the year ended
We expect to continue to seek, where possible, non-recourse debt financing in connection with the assets or businesses that we or our affiliates may develop, construct or acquire. However, depending on local and global market conditions and the unique characteristics of individual businesses, non-recourse debt may not be available on economically attractive terms or at all. If we decide not to provide any additional funding or credit support to a subsidiary project that is under construction or has near-term debt payment obligations and that subsidiary is unable to obtain additional non-recourse debt, such subsidiary may become insolvent, and we may lose our investment in that subsidiary. Additionally, if any of our subsidiaries lose a significant customer, the subsidiary may need to withdraw from a project or restructure the non-recourse debt financing. If we or the subsidiary choose not to proceed with a project or are unable to successfully complete a restructuring of the non-recourse debt, we may lose our investment in that subsidiary. Many of our subsidiaries depend on timely and continued access to capital markets to manage their liquidity needs. The inability to raise capital on favorable terms, to refinance existing indebtedness or to fund operations and other commitments during times of political or economic uncertainty may have material adverse effects on the financial condition and results of operations of those subsidiaries. In addition, changes in the timing of tariff increases or delays in the regulatory determinations under the relevant concessions could affect the cash flows and results of operations of our businesses.
Long-Term Receivables
As ofDecember 31, 2022 , the Company had approximately$303 million of gross accounts receivable classified as Other noncurrent assets. These noncurrent receivables mostly consist of accounts receivable inChile and in theU.S. that, pursuant to amended agreements or government resolutions, have collection periods that extend beyondDecember 31, 2023 , or one year from the latest balance sheet date. Noncurrent receivables inChile pertain primarily to revenues recognized on regulated energy contracts that were impacted by theStabilization Fund created by the Chilean government. The receivables in theU.S. are associated with future premium payments on a heat rate call option which are expected to be received in 2024. 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, 2022 , the Company had approximately$1 billion of loans receivable primarily related to a facility constructed under a BOT contract inVietnam . This loan receivable represents contract consideration related to the construction of the facility, which was substantially completed in 2015, and will be collected over the 25-year term of the plant's PPA. As ofDecember 31, 2021 ,Mong Duong met the held-for-sale criteria and the loan receivable balance, net of CECL reserve, was classified in held-for-sale assets. Of the loan receivable balance,$91 million was classified as Current held-for-sale assets, and$1 billion was classified as Noncurrent held-for-sale assets. As ofDecember 31, 2022 ,Mong Duong no longer met the held-for-sale criteria. As such, the loan receivable balance of$1 billion , net of CECL reserve of$28 million , was classified as a Loan receivable on the Consolidated Balance Sheet. See Note 20- Revenue included in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for further information.
Cash Sources and Uses
The primary sources of cash for the Company in the year endedDecember 31, 2022 were debt financings and supplier financing arrangements, cash flows from operating activities, sales of short-term investments, and sales to noncontrolling interests. The primary uses of cash in the year endedDecember 31, 2022 were repayments of debt, capital expenditures, purchases of short-term investments, acquisitions of noncontrolling interests, and purchases of emissions allowances inBulgaria . The primary sources of cash for the Company in the year endedDecember 31, 2021 were debt financings, cash flows from operating activities, proceeds from the issuance of Equity Units, and sales of short-term investments. The primary uses of cash in the year endedDecember 31, 2021 were repayments of debt, capital expenditures, acquisitions of business interests, and purchases of short-term investments.
--------------------------------------------------------------------------------
108 | 2022 Annual Report
The primary sources of cash for the Company in the year endedDecember 31, 2020 were debt financings, cash flows from operating activities, sales of short-term investments, and sales to noncontrolling interests. The primary uses of cash in the year endedDecember 31, 2020 were repayments of debt, capital expenditures, and purchases of short-term investments.
A summary of cash-based activities are as follows (in millions):
Year Ended December 31, Cash Sources: 2022 2021 2020 Issuance of non-recourse debt$ 5,788 $ 1,644 $ 4,680 Borrowings under the revolving credit facilities 5,424 2,802 2,420 Net cash provided by operating activities 2,715 1,902 2,755 Sale of short-term investments 1,049 616 627 Purchases under supplier financing arrangements 1,042 91 72 Sales to noncontrolling interests 742 173 553 Contributions from noncontrolling interests 233 365 1 Issuance of recourse debt 200 7 3,419 Affiliate repayments and returns of capital 149 320 158 Issuance of preferred shares in subsidiaries 60 153 112
Proceeds from the sale of business interests, net of cash and restricted cash sold
1 95 169 Issuance of preferred stock - 1,014 - Other 25 55 - Total Cash Sources$ 17,428 $ 9,237 $ 14,966 Cash Uses: Repayments under the revolving credit facilities$ (4,687) $ (2,420) $ (2,479) Capital expenditures (4,551) (2,116) (1,900) Repayments of non-recourse debt (3,144) (2,012) (4,136) Purchase of short-term investments (1,492) (519) (653) Acquisitions of noncontrolling interests (602) (117) (259) Purchase of emissions allowances (488) (265) (188) Repayments of obligations under supplier financing (432) (35) (96)
arrangements
Dividends paid on AES common stock (422) (401) (381) Distributions to noncontrolling interests (265) (284) (422) Acquisitions of business interests, net of cash and (243) (658) (136) restricted cash acquired Contributions and loans to equity affiliates (232) (427) (332) Payments for financing fees (120) (32) (107) Repayments of recourse debt (29) (26) (3,366) Other (118) (268) (256) Total Cash Uses$ (16,825) $ (9,580) $ (14,711) Net increase (decrease) in Cash, Cash Equivalents, and$ 603 $ (343) $ 255 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): 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Operating activities$ 2,715 $ 1,902 $ 2,755 $ 813 $ (853) Investing activities (5,836) (3,051) (2,295) (2,785) (756) Financing activities 3,758 797 (78) 2,961 875
--------------------------------------------------------------------------------
109 | 2022 Annual Report Operating Activities Fiscal Year 2022 versus 2021
Net cash provided by operating activities increased
Operating Cash Flows (in millions) [[Image Removed: aes-20221231_g22.jpg]] (1)The change in adjusted net income is defined as the variance in net income, net of the total adjustments to net income as shown on the Consolidated Statements of Cash Flows in Item 8.- Financial Statements and Supplementary Data of this Form 10-K. (2)The change in working capital is defined as the variance in total changes in operating assets and liabilities as shown on the Consolidated Statements of Cash Flows in Item 8.- Financial Statements and Supplementary Data of this Form 10-K. •Adjusted net income decreased$260 million , primarily due to lower margins at ourSouth America and US and Utilities SBUs and an increase in interest expense, partially offset by higher margins at our MCAC and Eurasia SBUs and an increase in interest income. •Working capital requirements decreased$1.1 billion , primarily due to deferred income at Angamos in the 2021 due to revenue recognized for the early contract terminations with Minera Escondida andMinera Spence , the GSF liability payment at Tietê in 2021, and the change in income tax liabilities, partially offset by an increase in inventory, primarily fuel and other raw materials, atAES Andes , AES Panama, andAES Indiana . Fiscal Year 2021 versus 2020
Net cash provided by operating activities decreased
Operating Cash Flows (in millions) [[Image Removed: aes-20221231_g23.jpg]] (1)The change in adjusted net income is defined as the variance in net income, net of the total adjustments to net income as shown on the Consolidated Statements of Cash Flows in Item 8.- Financial Statements and Supplementary Data of this Form 10-K. (2)The change in working capital is defined as the variance in total changes in operating assets and liabilities as shown on the Consolidated Statements of Cash Flows in Item 8.- Financial Statements and Supplementary Data of this Form 10-K.
--------------------------------------------------------------------------------
110 | 2022 Annual Report
•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
Investing Activities
Fiscal Year 2022 versus 2021
Net cash used in investing activities increased
Investing Cash Flows (in millions) [[Image Removed: aes-20221231_g24.jpg]]
•Cash used for short-term investing activities increased
•Purchases of emissions allowances increased
•Acquisitions of business interests decreased$415 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 in 2021, partially offset by the acquisition of theCubico II Wind Complex at AES Brasil and Agua Clara in theDominican Republic in 2022.
•Capital expenditures increased
--------------------------------------------------------------------------------
111 | 2022 Annual Report Capital Expenditures (in millions) [[Image Removed: aes-20221231_g25.jpg]] (1)Growth expenditures generally include expenditures related to development projects in construction, expenditures that increase capacity of a facility beyond the original design, and investments in general load growth or system modernization.
(2)Maintenance expenditures generally include expenditures that are necessary to maintain regular operations or net maximum capacity of a facility.
(3)Environmental expenditures generally include expenditures to comply with environmental laws and regulations, expenditures for safety programs and other expenditures to ensure a facility continues to operate in an environmentally responsible manner. •Growth expenditures increased$2.3 billion , primarily driven by an increase in renewable projects at AES Clean Energy and AES Brasil, and by higher transmission and distribution and renewable project investments atAES Indiana and AES Ohio, partially offset by the timing of payments for the construction of the Alamitos Energy Center at Southland Energy in 2021.
•Maintenance expenditures increased
•Environmental expenditures decreased
Fiscal Year 2021 versus 2020
Net cash used in investing activities increased
Investing Cash Flows (in millions) [[Image Removed: aes-20221231_g26.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 AES Panama acquisition of Penonome I in 2020.
--------------------------------------------------------------------------------
112 | 2022 Annual Report
•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 contributions to sPower and to Gas Natural Atlántico II, which was previously recorded as an equity investment inPanama in 2020 and is now consolidated by AES.
•Repayments from equity affiliates increased
•Cash from short-term investing activities increased
•Capital expenditures increased
Capital Expenditures (in millions) [[Image Removed: aes-20221231_g27.jpg]] (1)Growth expenditures generally include expenditures related to development projects in construction, expenditures that increase capacity of a facility beyond the original design, and investments in general load growth or system modernization.
(2)Maintenance expenditures generally include expenditures that are necessary to maintain regular operations or net maximum capacity of a facility.
(3)Environmental expenditures generally include expenditures to comply with environmental laws and regulations, expenditures for safety programs and other expenditures to ensure a facility continues to operate in an environmentally responsible manner. •Growth expenditures increased$190 million , primarily driven by higher transmission and distribution investments at AES Ohio andAES Indiana , and renewable projects at AES Clean Energy, AES Brasil, andAES 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 atAES Andes , AES Ohio,El Salvador , andMexico , partially offset by expenditures at Andres in 2020 as a result of the steam turbine lightning damage, and by decreased expenditures atAES Indiana and Itabo, due to its sale in 2021.
•Environmental expenditures decreased
--------------------------------------------------------------------------------
113 | 2022 Annual Report Financing Activities Fiscal Year 2022 versus 2021
Net cash provided by financing activities increased
Financing Cash Flows (in millions) [[Image Removed: aes-20221231_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$3 billion impact from non-recourse debt transactions is primarily due to an increase in net borrowings inthe Netherlands andPanama , theUnited Kingdom ,AES Andes , AES Brasil,AES Indiana , AES Ohio, AES Clean Energy, and inBulgaria . •The$690 million impact from from non-recourse revolver transactions is primarily due to higher net borrowings at AES Clean Energy, AES Ohio, and in theDominican Republic , partially offset by higher net repayments atAES Andes andAES Indiana and lower net borrowings inPanama . •The$569 million impact from sales to noncontrolling interests is primarily due to proceeds received at AES Clean Energy from the sales of ownership in project companies to tax equity partners, the sale of a 14.9% ownership interest in Southland Energy, and from the sales of ownership interests in Andes Solar 2a andLos Olmos as part of the Chile Renovables renewable partnership. •The$554 million impact from supplier financing arrangements is primarily due to higher financed purchases, net of repayments, at AES Clean Energy,AES Andes , and AES Brasil.
•The
•The$485 million impact from acquisitions of noncontrolling interests is mainly due to the acquisition of an additional 32% ownership interest inAES Andes , partially offset by the first installment for the acquisition of the remaining 49.9% minority ownership interest in Colon in 2021.
•The
--------------------------------------------------------------------------------
114 | 2022 Annual Report Fiscal Year 2021 versus 2020
Net cash provided by financing activities increased
Financing Cash Flows (in millions) [[Image Removed: aes-20221231_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
•The
•The$142 million impact from acquisitions of noncontrolling interests is due to the 2020 acquisition of an additional 19.8% ownership interest in AES Brasil, 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
•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 atAES Andes , AES Brasil, and Itabo, due to its sale in 2021. 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
--------------------------------------------------------------------------------
115 | 2022 Annual Report
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,
2022 December 31, 2021 Consolidated cash and cash equivalents$ 1,374 $ 943 Less: Cash and cash equivalents at subsidiaries (1,350) (902) Parent Company and qualified holding companies' cash and cash 24 41
equivalents
Commitments under the Parent Company credit facility 1,500 1,250 Less: Letters of credit under the credit facility (34) (48) Less: Borrowings under the credit facility (325) (365)
Borrowings available under the Parent Company credit facility 1,141
837 Total Parent Company Liquidity$ 1,165 $ 878The Parent Company paid dividends of$0.63 per outstanding share to its common stockholders during the year endedDecember 31, 2022 . 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$3.9 billion and$3.8 billion atDecember 31, 2022 and 2021, 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, 2022 , we were in compliance with these covenants at the Parent Company level.
Non-Recourse Debt
While the lenders under our non-recourse debt financings generally do not have direct recourse to the Parent Company, defaults thereunder can still have important consequences for our results of operations and liquidity, including, without limitation:
•reducing our cash flows as the subsidiary will typically be prohibited from distributing cash to the Parent Company during the time period of any default;
•triggering our obligation to make payments under any financial guarantee, letter of credit or other credit support we have provided to or on behalf of such subsidiary;
•causing us to record a loss in the event the lender forecloses on the assets; and
•triggering defaults in our outstanding debt at the Parent Company.
For example, our revolving credit facility and outstanding debt securities at the Parent Company include events of default for certain bankruptcy-related events involving material subsidiaries. In addition, our revolving
--------------------------------------------------------------------------------
116 | 2022 Annual Report
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$1.8 billion . The portion of current debt related to such defaults was$177 million atDecember 31, 2022 , 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$170 million is due to the bankruptcy of the offtaker. See Note 11- Debt in Item 8.- Financial Statements and Supplementary Data of this Form 10-K for additional detail. None of the subsidiaries that are currently in default are subsidiaries that met the applicable definition of materiality under the Parent Company's debt agreements as ofDecember 31, 2022 , in order for such defaults to trigger an event of default or permit acceleration under the Parent Company's indebtedness. However, as a result of additional dispositions of assets, other significant reductions in asset carrying values or other matters in the future that may impact our financial position and results of operations or the financial position of the individual subsidiary, it is possible that one or more of these subsidiaries could fall within the definition of a "material subsidiary" and thereby trigger an event of default and possible acceleration of the indebtedness under the Parent Company's outstanding debt securities. A material subsidiary is defined in the Parent Company's revolving credit facility as any business that contributed 20% or more of the Parent Company's total cash distributions from businesses for the four most recently completed fiscal quarters. As ofDecember 31, 2022 , none of the defaults listed above, individually or in the aggregate, results in or is at risk of triggering a cross-default under the recourse debt of the Parent Company.
Contractual Obligations and Parent Company Contingent Contractual Obligations
A summary of our contractual obligations, commitments and other liabilities as
of
Less than 1 More than 5 Contractual Obligations Total year 1-3 years 3-5 years years Other Footnote Reference(5) Debt obligations (1) (2)$ 23,663 $
1,761
- 11 Interest payments on long-term debt (3) 7,385 1,083 1,850 1,272 3,180 - n/a Finance lease obligations (2) 356 10 18 18 310 - 14 Operating lease obligations (2) 816 36 68 62 650 - 14 Electricity obligations 9,800 1,190 1,512 1,174 5,924 - 12 Fuel obligations 13,382 3,702 4,330 2,216 3,134 - 12 Other purchase obligations 7,341 4,642 780 404 1,515 - 12 Other long-term liabilities reflected on AES' consolidated balance sheet under GAAP (2) (4) 856 - 372 212 262 10 n/a Total$ 63,599 $ 12,424 $ 14,954 $ 10,243 $ 25,968 $ 10 _____________________________ (1)Includes recourse and non-recourse debt presented on the Consolidated Balance Sheets. 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, 2022 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, 2022 . (4)These amounts do not include current liabilities on the Consolidated Balance Sheets 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. (5)For further information see the note referenced below in Item 8.- Financial Statements and Supplementary Data of this Form 10-K.
--------------------------------------------------------------------------------
117 | 2022 Annual Report
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$ 2,406 81 <$1 - 400 Letters of credit under the unsecured credit facilities 128 39 <$1 - 36 Letters of credit under bilateral agreements 123 2$59 - 64 Letters of credit under the revolving credit facility 34 16 <$1 - 15 Surety bonds 2 2 <$1 -$1 Total$ 2,693 140 _____________________________ (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 2022, 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 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.
--------------------------------------------------------------------------------
118 | 2022 Annual Report
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. In addition, the Company has elected an accounting policy not to consider the effects of being subject to the corporate alternative minimum tax in future periods when assessing the realizability of our deferred tax assets, carryforwards, and tax credits. Any effect on the realization of deferred tax assets will be recognized in the period they arise. Impairments - Our accounting policies on goodwill and long-lived assets, including events that lead to possible impairment, 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. The Company exercises judgment in determining if these indicators or 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 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
--------------------------------------------------------------------------------
119 | 2022 Annual Report
goodwill) during the impairment evaluation process. In addition, the relevant accounting guidance requires the Company to recognize the majority of assets acquired and liabilities assumed in a business combination and asset acquisitions by VIEs at fair value. 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, rising interest rates, 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. 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.
--------------------------------------------------------------------------------
120 | 2022 Annual Report
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 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
--------------------------------------------------------------------------------
121 | 2022 Annual Report
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 2022 and accounting pronouncements issued, but not yet effective.
© Edgar Online, source