Risks and Uncertainties

12 Months Ended

Dec. 31, 2023

Risks and Uncertainties [Abstract]

RISKS AND UNCERTAINTIES

RISKS AND UNCERTAINTIES

AES is a diversified power generation and utility company organized into four technology-based SBUs. See additional discussion of the Company's principal markets in Note 18—Segments and Geographic Information. Within our four SBUs, we have two primary lines of business: generation and utilities. The generation line of business uses a wide range of fuels and technologies to generate electricity such as coal, gas, hydro, wind, solar, and biomass. Our utilities business comprises businesses that transmit, distribute, and in certain circumstances, generate power. In addition, the Company has operations in the renewables area. These efforts include projects primarily in wind, solar, and energy storage.

Operating and Economic Risks — The Company operates in several developing economies where macroeconomic conditions are typically more volatile than developed economies. Deteriorating market conditions and evolving industry expectations to transition away from fossil fuel sources for generation expose the Company to the risk of decreased earnings and cash flows due to, among other factors, adverse fluctuations in the commodities and foreign currency spot markets, and potential changes in the estimated useful lives of our thermal plants. Additionally, credit markets around the globe continue to tighten their standards, which could impact our ability to finance growth projects through access to capital markets. Currently, the Company has an investment grade rating from both Standard & Poor's and Fitch of BBB- and an investment grade rating from Moody's of Baa3. A downgrade in our current investment grade ratings could affect the Company's ability to finance new and/or existing development projects at competitive interest rates. As of December 31, 2023, the Company had $1.4 billion of unrestricted cash and cash equivalents.

During 2023, 65% of our revenue was generated outside the U.S. and a significant portion of our international operations is conducted in developing countries. We continue to invest in several developing countries to expand our existing platform and operations. International operations, particularly the operation, financing, and development of projects in developing countries, entail significant risks and uncertainties, including, without limitation:

•economic, social, and political instability in any particular country or region;

•inability to economically hedge energy prices;

•volatility in commodity prices;

•adverse changes in currency exchange rates;

•government restrictions on converting currencies or repatriating funds;

•unexpected changes in foreign laws, regulatory framework, or in trade, monetary or fiscal policies;

•high inflation and monetary fluctuations;

•restrictions on imports of solar panels, wind turbines, coal, oil, gas, or other raw materials required by our generation businesses to operate;

•threatened or consummated expropriation or nationalization of our assets by foreign governments;

•unwillingness of governments, government agencies, similar organizations, or other counterparties to honor their commitments;

•unwillingness of governments, government agencies, courts, or similar bodies to enforce contracts that are economically advantageous to subsidiaries of the Company and economically unfavorable to

counterparties, against such counterparties, whether such counterparties are governments or private parties;

•inability to obtain access to fair and equitable political, regulatory, administrative, and legal systems;

•adverse changes in government tax policy;

•potentially adverse tax consequences of operating in multiple jurisdictions;

•difficulties in enforcing our contractual rights, enforcing judgments, or obtaining a just result in local jurisdictions; and

•inability to obtain financing on expected terms.

Any of these factors, individually or in combination with others, could materially and adversely affect our business, results of operations, and financial condition. In addition, our Latin American operations experience volatility in revenue and earnings which have caused and are expected to cause significant volatility in our results of operations and cash flows. The volatility is caused by regulatory and economic difficulties, political instability, indexation of certain PPAs to fuel prices, and currency fluctuations being experienced in many of these countries. This volatility reduces the predictability and enhances the uncertainty associated with cash flows from these businesses.

Our inability to predict, influence or respond appropriately to changes in law or regulatory schemes, including any inability to obtain reasonable increases in tariffs or tariff adjustments for increased expenses, could adversely impact our results of operations or our ability to meet publicly announced projections or analysts' expectations. Furthermore, changes in laws or regulations or changes in the application or interpretation of regulatory provisions in jurisdictions where we operate, particularly our utility businesses where electricity tariffs are subject to regulatory review or approval, could adversely affect our business, including, but not limited to:

•changes in the determination, definition, or classification of costs to be included as reimbursable or pass-through costs;

•changes in the definition or determination of controllable or noncontrollable costs;

•adverse changes in tax law;

•changes in the definition of events which may or may not qualify as changes in economic equilibrium;

•changes in the timing of tariff increases;

•other changes in the regulatory determinations under the relevant concessions; or

•changes in environmental regulations, including regulations relating to GHG emissions in any of our businesses.

Any of the above events may result in lower margins for the affected businesses, which can adversely affect our results of operations.

Puerto Rico — Earlier this year, AES Puerto Rico took certain measures to address identified liquidity challenges. On July 6, 2023, PREPA agreed to the release of funds in the escrow account guaranteeing AES Puerto Rico’s obligations under the Power Purchase and Operating Agreement (“PPOA”) in order to provide additional liquidity for the business. AES Puerto Rico continues to work with PREPA and its noteholders on these liquidity challenges. During Q4 2023, a restructuring support agreement was executed by AES Puerto Rico and its noteholders and a PPOA amendment was approved by PREPA. These agreements require Puerto Rico Energy Bureau ("PREB") approval to become effective. On February 2, 2024 a resolution was issued by PREB approving the PPOA amendment subject to the incorporation of certain additional terms and conditions. The Company expects the PPOA amendment and restructuring support agreement to become effective during the first quarter of 2024.

Despite these challenges and considering the information available as of the filing date, management believes the carrying amount of our long-lived assets at AES Puerto Rico of $76 million is recoverable as of December 31, 2023. However, it is reasonably possible that the estimate of undiscounted cash flows may change in the near term resulting in the need to write down our long-lived assets in Puerto Rico to fair value.

Foreign Currency Risks — AES operates businesses in many foreign countries and such operations could be impacted by significant fluctuations in foreign currency exchange rates. Fluctuations in currency exchange rate between the USD and the following currencies could create significant fluctuations in earnings and cash flows: the Argentine peso, the Brazilian real, the Chilean peso, the Colombian peso, the Dominican peso, the Euro, the Indian rupee, and the Mexican peso.

Concentrations — Due to the geographical diversity of its operations, the Company does not have any significant concentration of customers or sources of fuel supply. Several of the Company's generation businesses rely on PPAs with one or a limited number of customers for the majority of, and in some cases all of, the relevant businesses' output over the term of the PPAs. However, no single customer accounted for 10% or more of total revenue in 2023, 2022 or 2021.

The cash flows and results of operations of our businesses depend on the credit quality of our customers and the continued ability of our customers and suppliers to meet their obligations under PPAs and fuel supply agreements. If a substantial portion of the Company's long-term PPAs and/or fuel supply were modified or terminated, the Company would be adversely affected to the extent that it would be unable to replace such contracts at equally favorable terms.