Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of The AES Corporation:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of The AES Corporation (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2019, expressed an unqualified opinion thereon.

Adoption of New Accounting Standards

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue as a result of the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-08, 2016-10, 2016-12, 2016-20, 2017-10 and 2017-13 effective January 1, 2018.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company's auditor since 2008.

Tysons, Virginia

February 26, 2019

THE AES CORPORATION

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2018 AND 2017

	2018				2017
	(in millions, except share and per share data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,166			$	949
Restricted cash	370				274
Short-term investments	313				424
Accounts receivable, net of allowance for doubtful accounts of $23 and $10, respectively	1,595				1,463
Inventory	577				562
Prepaid expenses	130				62
Other current assets	807				630
Current assets of discontinued operations and held-for-sale businesses	57				2,034
Total current assets	5,015				6,398
NONCURRENT ASSETS
Property, Plant and Equipment:
Land	449				502
Electric generation, distribution assets and other	25,242				24,119
Accumulated depreciation	(8,227		)		(7,942		)
Construction in progress	3,932				3,617
Property, plant and equipment, net	21,396				20,296
Other Assets:
Investments in and advances to affiliates	1,114				1,197
Debt service reserves and other deposits	467				565
Goodwill	1,059				1,059
Other intangible assets, net of accumulated amortization of $457 and $441, respectively	436				366
Deferred income taxes	97				130
Service concession assets, net of accumulated amortization of $0 and $206, respectively	—				1,360
Loan receivable	1,423				—
Other noncurrent assets	1,514				1,741
Total other assets	6,110				6,418
TOTAL ASSETS	$	32,521			$	33,112
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable	$	1,329			$	1,371
Accrued interest	191				228
Accrued non-income taxes	250				252
Accrued and other liabilities	962				980
Non-recourse debt, including $479 and $1,012, respectively, related to variable interest entities	1,659				2,164
Current liabilities of discontinued operations and held-for-sale businesses	8				1,033
Total current liabilities	4,399				6,028
NONCURRENT LIABILITIES
Recourse debt	3,650				4,625
Non-recourse debt, including $2,922 and $1,358 respectively, related to variable interest entities	13,986				13,176
Deferred income taxes	1,280				1,006
Other noncurrent liabilities	2,723				2,595
Total noncurrent liabilities	21,639				21,402
Commitments and Contingencies (see Notes 11 and 12)
Redeemable stock of subsidiaries	879				837
EQUITY
THE AES CORPORATION STOCKHOLDERS’ EQUITY
Common stock ($0.01 par value, 1,200,000,000 shares authorized; 817,203,691 issued and 662,298,096 outstanding at December 31, 2018 and 816,312,913 issued and 660,388,128 outstanding at December 31, 2017)	8				8
Additional paid-in capital	8,154				8,501
Accumulated deficit	(1,005		)		(2,276		)
Accumulated other comprehensive loss	(2,071		)		(1,876		)
Treasury stock, at cost (154,905,595 and 155,924,785 shares at December 31, 2018 and 2017, respectively)	(1,878		)		(1,892		)
Total AES Corporation stockholders’ equity	3,208				2,465
NONCONTROLLING INTERESTS	2,396				2,380
Total equity	5,604				4,845
TOTAL LIABILITIES AND EQUITY	$	32,521			$	33,112

See Accompanying Notes to Consolidated Financial Statements.

THE AES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2018**,** 2017**, AND** 2016

	2018				2017				2016
	(in millions, except per share amounts)
Revenue:
Regulated	$	2,939			$	3,109			$	3,310
Non-Regulated	7,797				7,421				6,971
Total revenue	10,736				10,530				10,281
Cost of Sales:
Regulated	(2,473		)		(2,650		)		(2,839		)
Non-Regulated	(5,690		)		(5,415		)		(5,059		)
Total cost of sales	(8,163		)		(8,065		)		(7,898		)
Operating margin	2,573				2,465				2,383
General and administrative expenses	(192		)		(215		)		(194		)
Interest expense	(1,056		)		(1,170		)		(1,134		)
Interest income	310				244				245
Loss on extinguishment of debt	(188		)		(68		)		(13		)
Other expense	(58		)		(58		)		(80		)
Other income	72				120				64
Gain (loss) on disposal and sale of business interests	984				(52		)		29
Asset impairment expense	(208		)		(537		)		(1,096		)
Foreign currency transaction gains (losses)	(72		)		42				(15		)
Other non-operating expense	(147		)		—				(2		)
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES AND EQUITY IN EARNINGS OF AFFILIATES	2,018				771				187
Income tax expense	(708		)		(990		)		(32		)
Net equity in earnings of affiliates	39				71				36
INCOME (LOSS) FROM CONTINUING OPERATIONS	1,349				(148		)		191
Income (loss) from operations of discontinued businesses, net of income tax benefit (expense) of $(2), $(21), and $229, respectively	(9		)		(18		)		151
Gain (loss) from disposal and impairments of discontinued businesses, net of income tax benefit (expense) of $(44), $0, and $266, respectively	225				(611		)		(1,119		)
NET INCOME (LOSS)	1,565				(777		)		(777		)
Noncontrolling interests:
Less: Income from continuing operations attributable to noncontrolling interests and redeemable stock of subsidiaries	(364		)		(359		)		(211		)
Less: Loss (income) from discontinued operations attributable to noncontrolling interests	2				(25		)		(142		)
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION	$	1,203			$	(1,161	)		$	(1,130	)
AMOUNTS ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS:
Income (loss) from continuing operations, net of tax	$	985			$	(507	)		$	(20	)
Income (loss) from discontinued operations, net of tax	218				(654		)		(1,110		)
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION	$	1,203			$	(1,161	)		$	(1,130	)
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations attributable to The AES Corporation common stockholders, net of tax	$	1.49			$	(0.77	)		$	(0.04	)
Income (loss) from discontinued operations attributable to The AES Corporation common stockholders, net of tax	0.33				(0.99		)		(1.68		)
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS	$	1.82			$	(1.76	)		$	(1.72	)
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations attributable to The AES Corporation common stockholders, net of tax	$	1.48			$	(0.77	)		$	(0.04	)
Income (loss) from discontinued operations attributable to The AES Corporation common stockholders, net of tax	0.33				(0.99		)		(1.68		)
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS	$	1.81			$	(1.76	)		$	(1.72	)
DIVIDENDS DECLARED PER COMMON SHARE	$	0.53			$	0.49			$	0.45

See Accompanying Notes to Consolidated Financial Statements.

THE AES CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

YEARS ENDED DECEMBER 31, 2018**,** 2017**, AND** 2016

	2018				2017				2016
	(in millions)
NET INCOME (LOSS)	$	1,565			$	(777	)		$	(777	)
Foreign currency translation activity:
Foreign currency translation adjustments, net of income tax benefit of $2, $17, and $1, respectively	(161		)		(9		)		189
Reclassification to earnings, net of $0 income tax for all periods	(21		)		643				992
Total foreign currency translation adjustments	(182		)		634				1,181
Derivative activity:
Change in derivative fair value, net of income tax benefit (expense) of $27, $10 and $(7), respectively	(67		)		(12		)		5
Reclassification to earnings, net of income tax expense of $24, $1 and $8, respectively	93				50				37
Total change in fair value of derivatives	26				38				42
Pension activity:
Change in pension adjustments due to prior service cost, net of income tax benefit (expense) of $1, $(1), and $(6) respectively	(2		)		2				11
Change in pension adjustments due to net actuarial gain (loss) for the period, net of income tax benefit of $1, $6, and $106, respectively	(1		)		(21		)		(208		)
Reclassification to earnings, net of income tax expense of $2, $135, and $3 respectively	8				266				10
Total pension adjustments	5				247				(187		)
OTHER COMPREHENSIVE INCOME (LOSS)	(151		)		919				1,036
COMPREHENSIVE INCOME	1,414				142				259
Less: Comprehensive income attributable to noncontrolling interests	(425		)		(390		)		(262		)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION	$	989			$	(248	)		$	(3	)

See Accompanying Notes to Consolidated Financial Statements.

THE AES CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

YEARS ENDED DECEMBER 31, 2018**,** 2017**, AND** 2016

	THE AES CORPORATION STOCKHOLDERS
	Common Stock							Treasury Stock							Additional Paid-In Capital				Retained Earnings (Accumulated Deficit)				Accumulated Other Comprehensive Loss				Noncontrolling Interests
(in millions)	Shares			Amount				Shares			Amount
Balance at December 31, 2015	815.8			$	8			149.0			$	(1,837	)		$	8,718			$	143			$	(3,883	)		$	3,022
Net income (loss)	—			—				—			—				—				(1,130		)		—				353
Total foreign currency translation adjustment, net of income tax	—			—				—			—				—				—				1,109				72
Total change in derivative fair value, net of income tax	—			—				—			—				—				—				30				12
Total pension adjustments, net of income tax	—			—				—			—				—				—				(12		)		(175		)
Total other comprehensive income (loss)	—			—				—			—				—				—				1,127				(91		)
Fair value adjustment (1)	—			—				—			—				17				(4		)		—				(17		)
Disposition of business interests (2)	—			—				—			—				—				—				—				(2		)
Distributions to noncontrolling interests	—			—				—			—				(10		)		—				—				(430		)
Contributions from noncontrolling interests	—			—				—			—				—				—				—				60
Dividends declared on common stock	—			—				—			—				(226		)		(71		)		—				—
Purchase of treasury stock	—			—				8.7			(79		)		—				—				—				—
Issuance and exercise of stock-based compensation benefit plans, net of income tax	0.3			—				(0.8	)		12				11				—				—				—
Sale of subsidiary shares to noncontrolling interests	—			—				—			—				84				(84		)		—				17
Acquisition of subsidiary shares from noncontrolling interests	—			—				—			—				(2		)		—				—				(17		)
Less: Net loss attributable to redeemable stock of subsidiaries	—			—				—			—				—				—				—				11
Balance at December 31, 2016	816.1			$	8			156.9			$	(1,904	)		$	8,592			$	(1,146	)		$	(2,756	)		$	2,906
Net income (loss)	—			—				—			—				—				(1,161		)		—				384
Total foreign currency translation adjustment, net of income tax	—			—				—			—				—				—				661				(27		)
Total change in derivative fair value, net of income tax	—			—				—			—				—				—				23				15
Total pension adjustments, net of income tax	—			—				—			—				—				—				229				18
Total other comprehensive income	—			—				—			—				—				—				913				6
Cumulative effect of a change in accounting principle (3)	—			—				—			—				—				31				—				—
Fair value adjustment (1)	—			—				—			—				(25		)		—				—				—
Disposition of business interests (2)	—			—				—			—				—				—				—				(666		)
Distributions to noncontrolling interests	—			—				—			—				—				—				—				(426		)
Contributions from noncontrolling interests	—			—				—			—				—				—				—				11
Dividends declared on common stock	—			—				—			—				(324		)		—				—				—
Issuance and exercise of stock-based compensation benefit plans, net of income tax	0.2			—				(1.0	)		12				5				—				—				—
Sale of subsidiary shares to noncontrolling interests	—			—				—			—				13				—				7				83
Acquisition of subsidiary shares from noncontrolling interests	—			—				—			—				240				—				(40		)		68
Less: Net loss attributable to redeemable stock of subsidiaries	—			—				—			—				—				—				—				14
Balance at December 31, 2017	816.3			$	8			155.9			$	(1,892	)		$	8,501			$	(2,276	)		$	(1,876	)		$	2,380
Net income	—			—				—			—				—				1,203				—				360
Total foreign currency translation adjustment, net of income tax	—			—				—			—				—				—				(235		)		53
Total change in derivative fair value, net of income tax	—			—				—			—				—				—				14				10
Total pension adjustments, net of income tax	—			—				—			—				—				—				7				(2		)
Total other comprehensive income (loss)	—			—				—			—				—				—				(214		)		61
Cumulative effect of a change in accounting principle (3)	—			—				—			—				—				68				19				81
Fair value adjustment (1)	—			—				—			—				(4		)		—				—				—
Disposition of business interests (2)	—			—				—			—				—				—				—				(250		)
Distributions to noncontrolling interests	—			—				—			—				—				—				—				(343		)
Contributions from noncontrolling interests	—			—				—			—				—				—				—				9
Dividends declared on common stock	—			—				—			—				(348		)		—				—				—
Issuance and exercise of stock-based compensation benefit plans, net of income tax	0.9			—				(1.0	)		14				8				—				—				—
Sale of subsidiary shares to noncontrolling interests	—			—				—			—				(3		)		—				—				98
Balance at December 31, 2018	817.2			$	8			154.9			$	(1,878	)		$	8,154			$	(1,005	)		$	(2,071	)		$	2,396

(1) Adjustment to the carrying amount of noncontrolling interest and redeemable stock of subsidiaries to fair value.

(2) See Note 23*—Held-for-Sale and Dispositions* for further information.

(3) See Note 1—General and Summary of Significant Accounting Policies for further information.

See Accompanying Notes to Consolidated Financial Statements

THE AES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2018**,** 2017**, AND** 2016

	2018				2017				2016
OPERATING ACTIVITIES:	(in millions)
Net income (loss)	$	1,565			$	(777	)		$	(777	)
Adjustments to net income (loss):
Depreciation and amortization	1,003				1,169				1,176
Loss (gain) on disposal and sale of business interests	(984		)		52				(29		)
Impairment expenses	355				537				1,098
Deferred income taxes	313				672				(793		)
Provisions for contingencies	14				34				48
Loss on extinguishment of debt	188				68				20
Loss on sale and disposal of assets	27				43				38
Net loss (gain) from disposal and impairments of discontinued businesses	(269		)		611				1,383
Other	317				160				180
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable	(206		)		(177		)		237
(Increase) decrease in inventory	(36		)		(28		)		42
(Increase) decrease in prepaid expenses and other current assets	(22		)		107				870
(Increase) decrease in other assets	(32		)		(295		)		(251		)
Increase (decrease) in accounts payable and other current liabilities	62				163				(619		)
Increase (decrease) in income tax payables, net and other tax payables	(7		)		53				(199		)
Increase (decrease) in other liabilities	55				112				473
Net cash provided by operating activities	2,343				2,504				2,897
INVESTING ACTIVITIES:
Capital expenditures	(2,121		)		(2,177		)		(2,345		)
Acquisitions of business interests, net of cash and restricted cash acquired	(66		)		(609		)		(52		)
Proceeds from the sale of business interests, net of cash and restricted cash sold	2,020				108				538
Sale of short-term investments	1,302				3,540				4,904
Purchase of short-term investments	(1,411		)		(3,310		)		(5,151		)
Contributions to equity investments	(145		)		(89		)		(6		)
Other investing	(84		)		(62		)		(24		)
Net cash used in investing activities	(505		)		(2,599		)		(2,136		)
FINANCING ACTIVITIES:
Borrowings under the revolving credit facilities	1,865				2,156				1,465
Repayments under the revolving credit facilities	(2,238		)		(1,742		)		(1,433		)
Issuance of recourse debt	1,000				1,025				500
Repayments of recourse debt	(1,933		)		(1,353		)		(808		)
Issuance of non-recourse debt	1,928				3,222				2,978
Repayments of non-recourse debt	(1,411		)		(2,360		)		(2,666		)
Payments for financing fees	(39		)		(100		)		(105		)
Distributions to noncontrolling interests	(340		)		(424		)		(476		)
Contributions from noncontrolling interests and redeemable security holders	43				73				190
Proceeds from the sale of redeemable stock of subsidiaries	—				—				134
Dividends paid on AES common stock	(344		)		(317		)		(290		)
Payments for financed capital expenditures	(275		)		(179		)		(113		)
Purchase of treasury stock	—				—				(79		)
Proceeds from sales to noncontrolling interests, net of transaction costs	—				94				—
Other financing	101				(52		)		(44		)
Net cash provided by (used in) financing activities	(1,643		)		43				(747		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(54		)		8				37
(Increase) decrease in cash, cash equivalents and restricted cash of discontinued operations and held-for-sale businesses	74				(128		)		(42		)
Total increase (decrease) in cash, cash equivalents and restricted cash	215				(172		)		9
Cash, cash equivalents and restricted cash, beginning	1,788				1,960				1,951
Cash, cash equivalents and restricted cash, ending	$	2,003			$	1,788			$	1,960
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest, net of amounts capitalized	$	1,003			$	1,196			$	1,273
Cash payments for income taxes, net of refunds	370				377				487
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Non-cash acquisition of intangible assets	16				—				—
Non-cash contributions of assets and liabilities for the Fluence transaction (see Note 7)	20				—				—
Non-cash exchange of debentures for the acquisition of the Guaimbê Solar Complex (see Note 24)	119				—				—
Non-cash acquisition of the remaining interest in a Distributed Energy equity affiliate (see Note 24)	23				—				—
Dividends declared but not yet paid	90				86				174
Conversion of Alto Maipo loans and accounts payable into equity (see Note 14)	—				279				—
Return Share Transfer Payment due (see Note 23)	—				75				—

See Accompanying Notes to Consolidated Financial Statements

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018, 2017, AND 2016

1**. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

The AES Corporation is a holding company (the "Parent Company") that, through its subsidiaries and affiliates, (collectively, "AES" or "the Company") operates a geographically diversified portfolio of electricity generation and distribution businesses. Generally, the liabilities of individual operating entities are non-recourse to the Parent Company and are isolated to the operating entities. Most of our operating entities are structured as limited liability entities, which limit the liability of shareholders. The structure is generally the same regardless of whether a subsidiary is consolidated under a voting or variable interest model. The preparation of these consolidated financial statements is in conformity with accounting principles generally accepted in the United States of America ("US GAAP").

PRINCIPLES OF CONSOLIDATION — The consolidated financial statements of the Company include the accounts of The AES Corporation and its controlled subsidiaries. Furthermore, VIEs in which the Company has an ownership interest and is the primary beneficiary, thus controlling the VIE, have been consolidated. Intercompany transactions and balances are eliminated in consolidation. Investments in entities where the Company has the ability to exercise significant influence, but not control, are accounted for using the equity method of accounting.

NONCONTROLLING INTERESTS — Noncontrolling interests are classified as a separate component of equity in the Consolidated Balance Sheets and Consolidated Statements of Changes in Equity. Additionally, net income and comprehensive income attributable to noncontrolling interests are reflected separately from consolidated net income and comprehensive income on the Consolidated Statements of Operations and Consolidated Statements of Changes in Equity. Any change in ownership of a subsidiary while the controlling financial interest is retained is accounted for as an equity transaction between the controlling and noncontrolling interests (unless the transaction qualified as a sale of in-substance real estate). Losses continue to be attributed to the noncontrolling interests, even when the noncontrolling interests' basis has been reduced to zero.

Equity securities with redemption features that are not solely within the control of the issuer are classified outside of permanent equity. Generally, initial measurement will be at fair value. Subsequent measurement and classification vary depending on whether the instrument is probable of becoming redeemable. When the equity instrument is not probable of becoming redeemable, subsequent allocation of income and dividends is classified in permanent equity. For those securities where it is probable that the instrument will become redeemable or that are currently redeemable, AES recognizes changes in the fair value at each accounting period against retained earnings or additional paid-in-capital in the absence of retained earnings, subject to the floor of the initial fair value. Further, the allocation of income and dividends, as well as the adjustment to fair value, is classified outside permanent equity. Instruments that are mandatorily redeemable are classified as a liability.

EQUITY METHOD INVESTMENTS — Investments in entities over which the Company has the ability to exercise significant influence, but not control, are accounted for using the equity method of accounting and reported in Investments in and advances to affiliates on the Consolidated Balance Sheets. The Company’s proportionate share of the net income or loss of these companies is included in our results of operations.

The Company utilizes the cumulative earning approach to determine whether distributions received from equity method investees are returns on investment or returns of investment. The Company discontinues the application of the equity method when an investment is reduced to zero and the Company is not otherwise committed to provide further financial support to the investee. The Company resumes the application of the equity method accounting to the extent that net income is greater than the share of net losses not previously recorded.

Upon acquiring the investment, we determine the fair value of the identifiable assets and assumed liabilities and the basis difference between each fair value and the carrying amount of the corresponding asset or liability in the financial statements of the investee. The AES share of the amortization of the basis difference is recognized in Net equity in earnings of affiliates in the Consolidated Statements of Operations over the life of the asset or liability.

The Company periodically assesses if impairment indicators exist at our equity method investments. When an impairment is observed, any excess of the carrying amount over its estimated fair value is recognized as impairment expense when the loss in value is deemed other-than-temporary and included in Other non-operating expense in the Consolidated Statements of Operations.

BUSINESS INTERESTS — Acquisitions and disposals of business interests are generally transactions pertaining to legal entities, which may be accounted for as a consolidated business, an asset, or an equity method

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

investment. Losses on sales of business interests are limited to the impairment of long-lived assets as of the date of execution of the sales agreement. Any additional gains/(losses) on sales are recognized in Gain (loss) on disposal and sale of business interests in the Consolidated Statement of Operations upon completion of the sale.

ALLOCATION OF EARNINGS — Certain of the Company's businesses are subject to profit-sharing arrangements where the allocation of cash distributions and the sharing of tax benefits are not based on fixed ownership percentages. These arrangements exist for certain U.S. renewable generation partnerships to designate different allocations of value among investors, where the allocations change in form or percentage over the life of the partnership. For these businesses, the Company uses the hypothetical liquidation at book value (“HLBV”) method when it is a reasonable approximation of the profit-sharing arrangement. The HLBV method calculates the proceeds that would be attributable to each partner based on the liquidation provisions of the respective operating partnership agreement if the partnership was to be liquidated at book value at the balance sheet date. Each partner’s share of income in the period is equal to the change in the amount of net equity they are legally able to claim based on a hypothetical liquidation of the entity at the end of a reporting period compared to the beginning of that period, adjusted for any capital transactions.

The HLBV method is used both to allocate the equity earnings attributable to AES when the Company accounts for the renewable business as an equity method investment and to calculate the earnings attributable to noncontrolling interest when the business is consolidated by AES. Where, prior to the commencement of operating activities for a respective renewable energy facility, HLBV results in an immediate decrease in the hypothetical liquidation proceeds attributable to the tax equity investor due to the recognition of ITCs or other adjustments as required by the U.S. Internal Revenue Code, the Company records the impact (sometimes referred to as the ‘Day one gain’) to income in the same period.

USE OF ESTIMATES — US GAAP requires the Company to make estimates and assumptions that affect the asset and liability balances reported as of the date of the consolidated financial statements, as well as the revenues and expenses recognized during the reporting period. Actual results could differ from those estimates. Items subject to such estimates and assumptions include: the carrying amount and estimated useful lives of long-lived assets; asset retirement obligations; impairment of goodwill, long-lived assets and equity method investments; valuation allowances for receivables and deferred tax assets; the recoverability of regulatory assets; regulatory liabilities; the fair value of financial instruments; the fair value of assets and liabilities acquired as business combinations or as asset acquisitions by variable interest entities; the measurement of equity method investments or noncontrolling interest using the HLBV method for certain renewable generation partnerships; the determination of whether a sale of noncontrolling interests is considered to be a sale of in-substance real estate (as opposed to an equity transaction); pension liabilities; environmental liabilities; the impact of U.S. tax reform; and potential litigation claims and settlements.

HELD-FOR-SALE DISPOSAL GROUPS— A disposal group classified as held-for-sale is reflected on the balance sheet at the lower of its carrying amount or estimated fair value less cost to sell. A loss is recognized if the carrying amount of the disposal group exceeds its estimated fair value less cost to sell. This loss is limited to the carrying value of long-lived assets until the completion of the sale, at which point, any additional loss is recognized. If the fair value of the disposal group subsequently exceeds the carrying amount while the disposal group is still held-for-sale, any impairment expense previously recognized will be reversed up to the lesser of the previously recognized expense or the subsequent excess.

Assets and liabilities related to a disposal group classified as held-for-sale are segregated in the current balance sheet in the period in which the disposal group is classified as held-for-sale. Assets and liabilities of held-for-sale disposal groups are classified as current when they are expected to be disposed of within twelve months. Transactions between the held-for-sale disposal group and businesses that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and balances held-for-sale. See Note 23—Held-for-Sale and Dispositions for further information.

DISCONTINUED OPERATIONS — Discontinued operations reporting occurs only when the disposal of a business or a group of businesses represents a strategic shift that has (or will have) a major effect on the Company's operations and financial results. The Company reports financial results for discontinued operations separately from continuing operations to distinguish the financial impact of disposal transactions from ongoing operations. Prior period amounts in the Consolidated Statements of Operations and Consolidated Balance Sheets are retrospectively revised to reflect the businesses determined to be discontinued operations. The cash flows of

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

businesses that are determined to be discontinued operations are included within the relevant categories within operating, investing and financing activities on the face of the Consolidated Statements of Cash Flows.

Transactions between the businesses determined to be discontinued operations and businesses that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and balances held-for-sale. The results of discontinued operations include any gain or loss recognized on closing or adjustment of the carrying amount to fair value less cost to sell, including gains or losses associated with noncontrolling interests upon completion of the disposal transaction. Adjustments related to components previously reported as discontinued operations under prior accounting guidance are presented as discontinued operations in the current period even if the disposed-of component to which the adjustments are related would not meet the criteria for presentation as a discontinued operation under current guidance. See Note 22—Discontinued Operations for further information.

FAIR VALUE — Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly, hypothetical transaction between market participants at the measurement date, or exit price. The Company applies the fair value measurement accounting guidance to financial assets and liabilities in determining the fair value of investments in marketable debt and equity securities, included in the Consolidated Balance Sheet line items Short-term investments and Other noncurrent assets; derivative assets, included in Other current assets and Other noncurrent assets; and, derivative liabilities, included in Accrued and other liabilities (current) and Other noncurrent liabilities. The Company applies the fair value measurement guidance to nonfinancial assets and liabilities upon the acquisition of a business or an asset acquisition by a variable interest entity, or in conjunction with the measurement of an asset retirement obligation or a potential impairment loss on an asset group or goodwill.

When determining the fair value measurements for assets and liabilities required to be reflected at their fair values, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions and risk of nonperformance. The Company is prohibited from including transaction costs and any adjustments for blockage factors in determining fair value.

In determining fair value measurements, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs. Assets and liabilities are categorized within a fair value hierarchy based upon the lowest level of input that is significant to the fair value measurement:

•	Level 1: Quoted prices in active markets for identical assets or liabilities;

•

Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

•	Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.

Any transfers between all levels within the fair value hierarchy levels are recognized at the end of the reporting period.

CASH AND CASH EQUIVALENTS — The Company considers unrestricted cash on hand, cash balances not restricted as to withdrawal or usage, deposits in banks, certificates of deposit and short-term marketable securities with original maturities of three months or less to be cash and cash equivalents.

RESTRICTED CASH AND DEBT SERVICE RESERVES — Cash balances restricted as to withdrawal or usage, primarily via contract, are considered restricted cash.

The following table provides a summary of cash, cash equivalents, and restricted cash amounts reported on the Consolidated Balance Sheets that reconcile to the total of such amounts as shown on the Consolidated Statements of Cash Flows (in millions):

	December 31, 2018				December 31, 2017
Cash and cash equivalents	$	1,166			$	949
Restricted cash	370				274
Debt service reserves and other deposits	467				565
Cash, Cash Equivalents and Restricted Cash	$	2,003			$	1,788

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

INVESTMENTS IN MARKETABLE SECURITIES — The Company's marketable investments are primarily unsecured debentures, certificates of deposit, government debt securities and money market funds.

Short-term investments consist of marketable equity securities and debt securities with original maturities in excess of three months with remaining maturities of less than one year. Marketable debt securities where the Company has both the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Remaining marketable debt securities are classified as available-for-sale or trading and are carried at fair value.

Unrealized gains or losses on available-for-sale debt securities are reflected in AOCL, a separate component of equity, and the Consolidated Statements of Operations, respectively. Unrealized gains or losses on equity investments are reported in Other income. Interest and dividends on investments are reported in Interest income and Other income, respectively. Gains and losses on sales of investments are determined using the specific identification method.

ACCOUNTS AND NOTES RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS — Accounts and notes receivable are carried at amortized cost. The Company periodically assesses the collectability of accounts receivable, considering factors such as historical collection experience, the age of accounts receivable and other currently available evidence supporting collectability, and records an allowance for doubtful accounts for the estimated uncollectible amount as appropriate. Certain of our businesses charge interest on accounts receivable. Interest income is recognized on an accrual basis. When collection of such interest is not reasonably assured, interest income is recognized as cash is received. Individual accounts and notes receivable are written off when they are no longer deemed collectible.

INVENTORY — Inventory primarily consists of fuel and other raw materials used to generate power, and operational spare parts and supplies used to maintain power generation and distribution facilities. Inventory is carried at lower of cost or net realizable value. Cost is the sum of the purchase price and expenditures incurred to bring the inventory to its existing location. Inventory is primarily valued using the average cost method. Generally, if it is expected fuel inventory will not be recovered through revenue earned from power generation, an impairment is recognized to reflect the fuel at market value. The carrying amount of spare parts and supplies is typically reduced only in instances where the items are considered obsolete.

LONG-LIVED ASSETS — Long-lived assets include property, plant and equipment, assets under capital leases and intangible assets subject to amortization (i.e., finite-lived intangible assets).

Property, plant and equipment — Property, plant and equipment are stated at cost, net of accumulated depreciation. The cost of renewals and improvements that extend the useful life of property, plant and equipment are capitalized.

Construction progress payments, engineering costs, insurance costs, salaries, interest and other costs directly relating to construction in progress are capitalized during the construction period, provided the completion of the construction project is deemed probable, or expensed at the time construction completion is determined to no longer be probable. The continued capitalization of such costs is subject to risks related to successful completion, including those related to government approvals, site identification, financing, construction permitting and contract compliance. Construction-in-progress balances are transferred to electric generation and distribution assets when an asset group is ready for its intended use. Government subsidies, liquidated damages recovered for construction delays, and income tax credits are recorded as a reduction to property, plant and equipment and reflected in cash flows from investing activities. Maintenance and repairs are charged to expense as incurred.

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. Capital spare parts, including rotable spare parts, are included in electric generation and distribution assets. If the spare part is considered a component, it is depreciated over its useful life after the part is placed in service. If the spare part is deemed part of a composite asset, the part is depreciated over the composite useful life even when being held as a spare part.

Certain of the Company's subsidiaries operate under concession contracts. Certain estimates are utilized to determine depreciation expense for the subsidiaries, including the useful lives of the property, plant and equipment and the amounts to be recovered at the end of the concession contract. The amounts to be recovered under these concession contracts are based on estimates that are inherently uncertain and actual amounts recovered may differ

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

from those estimates. These concession contracts are not within the scope of ASC 853—Service Concession Arrangements.

Intangible Assets Subject to Amortization — Finite-lived intangible assets are amortized over their useful lives which range from 1 – 50 years and are included in the Consolidated Balance Sheet line item Other intangible assets. The Company accounts for purchased emission allowances as intangible assets and records an expense when they are utilized or sold. Granted emission allowances are valued at zero.

Impairment of Long-lived Assets — When circumstances indicate the carrying amount of long-lived assets in a held-for-use asset group may not be recoverable, the Company evaluates the assets for potential impairment using internal projections of undiscounted cash flows resulting from the use and eventual disposal of the assets. Events or changes in circumstances that may necessitate a recoverability evaluation 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, or an expectation it is more likely than not that the asset will be disposed of before the end of its previously estimated useful life. If the carrying amount of the assets exceeds the undiscounted cash flows, an impairment expense is recognized for the amount by which the carrying amount of the asset group exceeds its fair value (subject to the carrying amount not being reduced below fair value for any individual long-lived asset that is determinable without undue cost and effort). An impairment expense for certain assets may be reduced by the establishment of a regulatory asset if recovery through approved rates is probable.

SERVICE CONCESSION ASSETS — Service concession assets are stated at cost, net of accumulated amortization, in accordance with ASC 853. Service concession assets represent the cost of all infrastructure to be transferred to the public-sector entity grantors at the end of the concession. These costs primarily represent construction progress payments, engineering costs, insurance costs, salaries, interest and other costs directly relating to construction of the service concession infrastructure. Government subsidies, liquidated damages recovered for construction delays and income tax credits are recorded as a reduction to Service Concession Assets. Service concession assets are amortized and recognized in earnings as a cost of goods sold as infrastructure construction revenue is recognized. Services provided under concession arrangements are recognized on a straight line basis. Effective January 1, 2018, the Company derecognized the service concession assets and recognized a loan receivable under ASC 606. See further detail in the new accounting pronouncements discussion below.

DEBT ISSUANCE COSTS — Costs incurred in connection with the issuance of long-term debt are deferred and presented as a direct reduction from the face amount of that debt and amortized over the related financing period using the effective interest method. Debt issuance costs related to a line-of-credit or revolving credit facility are deferred and presented as an asset and amortized over the related financing period. Make-whole payments in connection with early debt retirements are classified as cash flows used in financing activities.

GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS — The Company evaluates goodwill and indefinite-lived intangible assets for impairment on an annual basis and whenever events or changes in circumstances necessitate an evaluation for impairment. The Company's annual impairment testing date is October 1.

Goodwill — Goodwill represents the excess of the purchase price of the business acquisition over the fair value of identifiable net assets acquired. Goodwill resulting from an acquisition is assigned to the reporting units that are expected to benefit from the synergies of the acquisition. Generally, each AES business with a goodwill balance constitutes a reporting unit as they are not similar to other businesses in a segment nor are they reported to segment management together with other businesses.

Goodwill is evaluated for impairment either under the qualitative assessment option or the quantitative test option to determine the fair value of the reporting unit. If goodwill is determined to be impaired, an impairment loss measured at the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill, is recorded.

Indefinite-Lived Intangible Assets — The Company's indefinite-lived intangible assets primarily include land-use rights and water rights. Indefinite-lived intangible assets are evaluated for impairment either under the qualitative assessment option or the two-step quantitative test. If the carrying amount of an intangible asset being tested for impairment exceeds its fair value, the excess is recognized as impairment expense.

ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES — Accounts payable consists of amounts due to trade creditors related to the Company's core business operations. These payables include amounts owed to

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

vendors and suppliers for items such as energy purchased for resale, fuel, maintenance, inventory and other raw materials. Other accrued liabilities include items such as income taxes, regulatory liabilities, legal contingencies and employee-related costs, including payroll, and benefits.

REGULATORY ASSETS AND LIABILITIES — The Company recognizes assets and liabilities that result from regulated ratemaking processes. Regulatory assets generally represent incurred costs which have been deferred due to the probable future recovery via customer rates. Generally, returns earned on regulatory assets are reflected in the Consolidated Statement of Operations within Interest Income. Regulatory liabilities generally represent obligations to refund customers. Management continually assesses whether regulatory assets are probable of future recovery and regulatory liabilities are probable of future payment 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 previously deferred ceases to be probable, the related regulatory assets are written off and recognized in income from continuing operations.

PENSION AND OTHER POSTRETIREMENT PLANS — The Company recognizes in its Consolidated Balance Sheets an 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. All plan assets are recorded at fair value. AES follows the measurement date provisions of the accounting guidance, which require a year-end measurement date of plan assets and obligations for all defined benefit plans.

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 basis. 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's tax positions are evaluated under a more likely than not recognition threshold and measurement analysis before they are recognized for financial statement reporting.

Uncertain tax positions have been classified as noncurrent income tax liabilities unless expected to be paid within one year. The Company's policy for interest and penalties related to income tax exposures is to recognize interest and penalties as a component of the provision for income taxes in the Consolidated Statements of Operations.

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.

ASSET RETIREMENT OBLIGATIONS — The Company records the fair value of a liability for a legal obligation to retire an asset in the period in which the obligation is incurred. When a new liability is recognized, the Company capitalizes the costs of the liability by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the obligation, the Company eliminates the liability and, based on the actual cost to retire, may incur a gain or loss.

FOREIGN CURRENCY TRANSLATION — A business's functional currency is the currency of the primary economic environment in which the business operates and is generally the currency in which the business generates and expends cash. Subsidiaries and affiliates whose functional currency is a currency other than the U.S. dollar translate their assets and liabilities into U.S. dollars at the current exchange rates in effect at the end of the fiscal period. Adjustments arising from the translation of the balance sheet of such subsidiaries are included in AOCL. The revenue and expense accounts of such subsidiaries and affiliates are translated into U.S. dollars at the average exchange rates for the period. Gains and losses on intercompany foreign currency transactions that are long-term in nature and which the Company does not intend to settle in the foreseeable future, are also recognized in AOCL. Gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in determining net income. Accumulated foreign currency translation adjustments are reclassified from AOCL to net income only when realized upon sale or upon complete or substantially complete liquidation of the investment in a foreign entity. The accumulated adjustments are included in carrying amounts in impairment assessments where the Company has committed to a plan that will cause the accumulated adjustments to be reclassified to earnings.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

REVENUE RECOGNITION — Revenue is earned from the sale of electricity from our utilities and the production and sale of electricity and capacity from our generation facilities. Revenue is recognized upon the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Revenue is recorded net of any taxes assessed on and collected from customers, which are remitted to the governmental authorities.

Utilities — Our utilities sell electricity directly to end-users, such as homes and businesses, and bill customers directly. The majority of our utility contracts have a single performance obligation, as the promises to transfer energy, capacity, and other distribution and/or transmission services are not distinct. Additionally, as the performance obligation is satisfied over time as energy is delivered, and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series. Utility revenue is classified as regulated on the Consolidated Statements of Operations.

In exchange for the right to sell or distribute electricity in a service territory, our utility businesses are subject to government regulation. This regulation sets the framework for the prices (“tariffs”) that our utilities are allowed to charge customers for electricity. Since tariffs are determined by the regulator, the price that our utilities have the right to bill corresponds directly with the value to the customer of the utility's performance completed in each period. The Company also has some month-to-month contracts. Revenue under these contracts is recognized using an output method measured by the MWh delivered each month, which best depicts the transfer of goods or services to the customer, at the approved tariff.

The Company has businesses where it sells and purchases power to and from ISOs and RTOs. Our utility businesses generally purchase power to satisfy the demand of customers that is not contracted through separate PPAs. In these instances, the Company accounts for these transactions on a net hourly basis because the transactions are settled on a net hourly basis. In limited situations, a utility customer may choose to receive generation services from a third-party provider, in which case the Company may serve as a billing agent for the provider and recognize revenue on a net basis.

Generation — Most of our generation fleet sells electricity under contracts to customers such as utilities, industrial users, and other intermediaries. Our generation contracts, based on specific facts and circumstances, can have one or more performance obligations as the promise to transfer energy, capacity, and other services may or may not be distinct depending on the nature of the market and terms of the contract. As the performance obligations are generally satisfied over time and use the same method to measure progress, the performance obligations meet the criteria to be considered a series. In measuring progress toward satisfaction of a performance obligation, the Company applies the "right to invoice" practical expedient when available, and recognizes revenue in the amount to which the Company has a right to consideration from a customer that corresponds directly with the value of the performance completed to date. Revenue from generation businesses is classified as non-regulated on the Consolidated Statements of Operations.

For contracts determined to have multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price using a market or expected cost plus margin approach. Additionally, the Company allocates variable consideration to one or more, but not all, distinct goods or services that form part of a single performance obligation when (1) the variable consideration relates specifically to the efforts to transfer the distinct good or service and (2) the variable consideration depicts the amount to which the Company expects to be entitled in exchange for transferring the promised good or service to the customer.

Revenue from generation contracts is recognized using an output method, as energy and capacity delivered best depicts the transfer of goods or services to the customer. Performance obligations including energy or ancillary services (such as operations and maintenance and dispatch services) are generally measured by the MWh delivered. Capacity, which is a stand-ready obligation to deliver energy when required by the customer, is measured using MWs. In certain contracts, if plant availability exceeds a contractual target, the Company may receive a performance bonus payment, or if the plant availability falls below a guaranteed minimum target, we may incur a non-availability penalty. Such bonuses or penalties represent a form of variable consideration and are estimated and recognized when it is probable that there will not be a significant reversal.

In assessing whether variable quantities are considered variable consideration or an option to acquire additional goods and services, the Company evaluates the nature of the promise and the legally enforceable rights in the contract. In some contracts, such as requirement contracts, the legally enforceable rights merely give the customer a right to purchase additional goods and services which are distinct. In these contracts, the customer's action results in a new obligation, and the variable quantities are considered an option.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

When energy or capacity is sold or purchased in the spot market or to ISOs, the Company assesses the facts and circumstances to determine gross versus net presentation of spot revenues and purchases. Generally, the nature of the performance obligation is to sell surplus energy or capacity above contractual commitments, or to purchase energy or capacity to satisfy deficits. Generally, on an hourly basis, a generator is either a net seller or a net buyer in terms of the amount of energy or capacity transacted with the ISO. In these situations, the Company recognizes revenue for the hours where the generator is a net seller and cost of sales for the hours where the generator is a net buyer.

Certain generation contracts contain operating leases where capacity payments are generally considered lease elements. In such cases, the allocation between the lease and non-lease elements is made at the inception of the lease following the guidance in ASC 840. Minimum lease payments from such contracts are recognized as revenue on a straight-line basis over the lease term whereas contingent rentals are recognized when earned.

The transaction price allocated to a construction performance obligation is recognized as revenue over time as construction activity occurs, with revenue being fully recognized upon completion of construction. These contracts may include a difference in timing between revenue recognition and the collection of cash receipts, which may be collected over the term of the entire arrangement. The timing difference could result in a significant financing component for the construction performance obligation if determined to be a material component of the transaction price. The Company accounts for a significant financing component under the effective interest rate method, recognizing a long-term receivable for the expected future payments related to the construction performance obligation in the Loan Receivable line item on the Consolidated Balance Sheets. As payments are collected from the customer over the term of the contract, consideration related to the construction performance obligation is bifurcated between the principal repayment of the long-term receivable and the related interest income, recognized in the Consolidated Statements of Operations.

SHARE-BASED COMPENSATION — The Company grants share-based compensation in the form of stock options, restricted stock units, performance stock units, and performance cash units. The expense is based on the grant-date fair value of the equity or liability instrument issued and is recognized on a straight-line basis over the requisite service period, net of estimated forfeitures. The Company uses a Black-Scholes option pricing model to estimate the fair value of stock options granted to its employees.

GENERAL AND ADMINISTRATIVE EXPENSES — General and administrative expenses include corporate and other expenses related to corporate staff functions and initiatives, primarily executive management, finance, legal, human resources and information systems, which are not directly allocable to our business segments. Additionally, all costs associated with corporate business development efforts are classified as general and administrative expenses.

DERIVATIVES AND HEDGING ACTIVITIES — Under the accounting standards for derivatives and hedging, the Company recognizes all contracts that meet the definition of a derivative, except those designated as normal purchase or normal sale at inception, as either assets or liabilities in the Consolidated Balance Sheets and measures those instruments at fair value. See Note 4—Fair Value and Fair value in this section for additional discussion regarding the determination of fair value.

PPAs and fuel supply agreements are evaluated to assess if they contain either a derivative or an embedded derivative requiring separate valuation and accounting. Generally, these agreements do not meet the definition of a derivative, often due to the inability to be net settled. On a quarterly basis, we evaluate the markets for commodities to be delivered under these agreements to determine if facts and circumstances have changed such that the agreements could be net settled and meet the definition of a derivative.

The Company typically designates its derivative instruments as cash flow hedges if they meet the criteria specified in ASC 815, Derivatives and Hedging. The Company enters into interest rate swap agreements in order to hedge the variability of expected future cash interest payments. Foreign currency contracts are used to reduce risks arising from the change in fair value of certain foreign currency denominated assets and liabilities. The objective of these practices is to minimize the impact of foreign currency fluctuations on operating results. The Company also enters into commodity contracts to economically hedge price variability inherent in electricity sales arrangements. The objectives of the commodity contracts are to minimize the impact of variability in spot electricity prices and stabilize estimated revenue streams. The Company does not use derivative instruments for speculative purposes.

For our hedges, changes in fair value that are considered highly effective are deferred in AOCL and are recognized into earnings as the hedged transactions affect earnings. Any ineffectiveness is recognized in earnings

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

immediately. If a derivative is no longer highly effective, hedge accounting will be discontinued prospectively. For cash flow hedges of forecasted transactions, AES estimates the future cash flows of the forecasted transactions and evaluates the probability of the occurrence and timing of such transactions.

Changes in the fair value of derivatives not designated and qualifying as cash flow hedges are immediately recognized in earnings. Regardless of when gains or losses on derivatives are recognized in earnings, they are generally classified as interest expense for interest rate and cross-currency derivatives, foreign currency transaction gains or losses for foreign currency derivatives, and non-regulated revenue or non-regulated cost of sales for commodity and other derivatives. Cash flows arising from derivatives are included in the Consolidated Statements of Cash Flows as an operating activity given the nature of the underlying risk being economically hedged and the lack of significant financing elements, except that cash flows on designated and qualifying hedges of variable-rate interest during construction are classified as an investing activity. The Company has elected not to offset net derivative positions in the financial statements.

NEW ACCOUNTING PRONOUNCEMENTS — The following table provides a brief description of recent accounting pronouncements that had an impact on the Company’s consolidated financial statements. Accounting pronouncements not listed below were assessed and determined to be either not applicable or did not have a material impact on the Company’s consolidated financial statements.

New Accounting Standards Adopted
ASU Number and Name	Description	Date of Adoption	Effect on the financial statements upon adoption
2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract	This standard aligns the accounting for implementation costs incurred for a cloud computing arrangement that is a service with the requirement for capitalizing implementation costs associated with developing or obtaining internal-use software. Transition method: retrospective or prospective.	October 1, 2018	The Company elected to early-adopt this standard on a prospective basis, effective for fiscal year 2018. The adoption of this standard did not have a material impact on the financial statements.
2018-14, Compensation— Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework	This standard modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Transition method: retrospective.	Early adoption elected, January 1, 2018	Impact limited to changes in financial statement disclosures.
2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost	This standard changes the presentation of non-service costs associated with defined benefit and other postretirement plans and updates the guidance so that only the service cost component will be eligible for capitalization. Transition method: retrospective for presentation of non-service cost and prospective for the change in capitalization.	January 1, 2018	For the year ended December 31, 2017 and 2016, $1 million and $3 million of non-service costs associated with defined benefit and other postretirement plans were reclassified from Costs of Sales to Other Expense, respectively.
2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets	This standard clarifies the scope and application of ASC 610-20 on the sale, transfer, and derecognition of nonfinancial assets and in substance nonfinancial assets to non-customers, including partial sales. It also provides guidance on how gains and losses on transfers of nonfinancial assets and in substance nonfinancial assets to non-customers are recognized. The standard also clarifies that the derecognition of businesses is under the scope of ASC 810. The standard must be adopted concurrently with ASC 606, however an entity will not have to apply the same transition method as ASC 606. Transition method: modified retrospective.	January 1, 2018	Following adoption of ASU 2017-01, fewer transactions are expected to meet the definition of a business under the scope of ASC 810 and will fall under the scope under this standard.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment	This standard simplifies the accounting for goodwill impairments by removing the requirement to calculate the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if it had been acquired in a business combination. Instead, it requires that an entity record an impairment charge based on the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Transition method: prospective.	October 1, 2018	In anticipation of our annual goodwill process, the Company early-adopted this standard to ease the administrative burden for the measurement of any potential goodwill impairment losses. There was no impact to the financial statements upon adoption of the standard.
2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business	The standard requires an entity to first evaluate whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, and if that threshold is met, the set is not a business. As a second step, at least one substantive process should exist to be considered a business. Transition method: prospective.	January 1, 2018	Some acquisitions and dispositions are expected to now fall under a different accounting model. This will reduce the number of transactions that are accounted for as business combinations and therefore future acquired goodwill.
2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)	This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Transition method: retrospective.	January 1, 2018	For the years ended December 31, 2017 and 2016, cash provided by operating activities increased by $15 million and $13 million, respectively, cash used in investing activities decreased by $150 million and increased by $28 million, respectively, and cash provided by financing activities was unchanged.
2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities	The standard significantly revises an entity’s accounting related to (1) classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosures of financial instruments. Transition method: modified retrospective. Prospective for equity investments without readily determinable fair value.	January 1, 2018	No material impact upon adoption of the standard.
2014-09, 2015-14, 2016-08, 2016-10, 2016-12, 2016-20, 2017-10, 2017-13, Revenue from Contracts with Customers (Topic 606)	See discussion of the ASU below.	January 1, 2018	See impact upon adoption of the standard below.

On January 1, 2018, the Company adopted ASU 2014-09, "Revenue from Contracts with Customers," and its subsequent corresponding updates ("ASC 606"). Under this standard, an entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company applied the modified retrospective method of adoption to the contracts that were not completed as of January 1, 2018. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with the previous revenue recognition standard. For contracts that were modified before January 1, 2018, the Company reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price.

The cumulative effect to our January 1, 2018 Consolidated Balance Sheet resulting from the adoption of ASC 606 was as follows (in millions):

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

Consolidated Balance Sheet	Balance at December 31, 2017				Adjustments Due to ASC 606				Balance at January 1, 2018
Assets
Other current assets	$	630			$	61			$	691
Deferred income taxes	130				(24		)		106
Service concession assets, net	1,360				(1,360		)		—
Loan receivable	—				1,490				1,490
Equity
Accumulated deficit	(2,276		)		67				(2,209		)
Accumulated other comprehensive loss	(1,876		)		19				(1,857		)
Noncontrolling interest	2,380				81				2,461

The Mong Duong II power plant in Vietnam is the primary driver of changes in revenue recognition under the new standard. This plant is operated under a build, operate, and transfer contract and will be transferred to the Vietnamese government after the completion of a 25-year PPA. Under the previous revenue recognition standard, construction costs were deferred to a service concession asset, which was expensed in proportion to revenue recognized for the construction element over the term of the PPA. Under ASC 606, construction revenue and associated costs are recognized as construction activity occurs. As construction of the plant was substantially completed in 2015, revenues and costs associated with the construction were recognized through retained earnings, and the service concession asset was derecognized. A loan receivable was recognized for the future expected payments for the construction performance obligation. As the payments for the construction performance obligation occur over a 25-year term, a significant financing element was determined to exist which is accounted for under the effective interest rate method. The other performance obligation to operate and maintain the facility is measured based on the capacity made available.

The impact to our Consolidated Balance Sheet as of December 31, 2018 resulting from the adoption of ASC 606 as compared to the previous revenue recognition standard was as follows (in millions):

	December 31, 2018
Consolidated Balance Sheet	As Reported				Balances Without Adoption of ASC 606				Adoption Impact
Assets
Other current assets	$	807			$	741			$	66
Deferred income taxes	97				122				(25		)
Service concession assets, net	—				1,261				(1,261		)
Loan receivable	1,423				—				1,423
TOTAL ASSETS	32,521				32,318				203
Equity
Accumulated deficit	(1,005		)		(1,112		)		107
Accumulated other comprehensive loss	(2,071		)		(2,088		)		17
Noncontrolling interest	2,396				2,317				79
TOTAL LIABILITIES AND EQUITY	32,521				32,318				203

The impact to our Consolidated Statement of Operations for the year ended December 31, 2018 resulting from the adoption of ASC 606 as compared to the previous revenue recognition standard was as follows (in millions):

	Year Ended December 31, 2018
Consolidated Statement of Operations	As Reported				Balances Without Adoption of ASC 606				Adoption Impact
Total revenue	$	10,736			$	10,800			$	(64	)
Total cost of sales	(8,163		)		(8,207		)		44
Operating margin	2,573				2,593				(20		)
Interest income	310				252				58
Other Income	72				70				2
Income from continuing operations before taxes and equity in earnings of affiliates	2,018				1,978				40
INCOME FROM CONTINUING OPERATIONS	1,349				1,309				40
NET INCOME	1,565				1,525				40
NET INCOME ATTRIBUTABLE TO THE AES CORPORATION	1,203				1,163				40

New Accounting Pronouncements Issued But Not Yet Effective — The following table provides a brief description of recent accounting pronouncements that could have a material impact on the Company’s consolidated financial statements once adopted. Accounting pronouncements not listed below were assessed and determined to

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

be either not applicable or are expected to have no material impact on the Company’s consolidated financial statements.

New Accounting Standards Issued But Not Yet Effective
ASU Number and Name	Description	Date of Adoption	Effect on the financial statements upon adoption
2018-02, Income Statement — Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from AOCI	This amendment allows a reclassification of the stranded tax effects resulting from the implementation of the Tax Cuts and Jobs Act from AOCI to retained earnings. Because this amendment only relates to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected.	January 1, 2019. Early adoption is permitted.	The Company does not expect any impact on its consolidated financial statements upon adoption of the standard on January 1, 2019.
2017-12, Derivatives and Hedging (Topic 815): Targeted improvements to Accounting for Hedging Activities	The standard updates the hedge accounting model to expand the ability to hedge nonfinancial and financial risk components, reduce complexity, and ease certain documentation and assessment requirements. When facts and circumstances are the same as at the previous quantitative test, a subsequent quantitative effectiveness test is not required. The standard also eliminates the requirement to separately measure and report hedge ineffectiveness. For cash flow hedges, this means that the entire change in the fair value of a hedging instrument will be recorded in other comprehensive income and amounts deferred will be reclassified to earnings in the same income statement line as the hedged item in the period in which it settles. Transition method: modified retrospective with the cumulative effect adjustment recorded to the opening balance of retained earnings as of the initial application date. Prospective for presentation and disclosures.	January 1, 2019. Early adoption is permitted.	The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.
2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments	The standard updates the impairment model for financial assets measured at amortized cost. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking "expected loss" model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses as it is done today, except that the losses will be recognized as an allowance rather than a reduction in the amortized cost of the securities. Transition method: various.	January 1, 2020. Early adoption is permitted only as of January 1, 2019.	The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.
2016-02, 2018-01, 2018-10, 2018-11, 2018-20 Leases (Topic 842)	See discussion of the ASU below.	January 1, 2019. Early adoption is permitted.	The Company will adopt the standard on January 1, 2019; see below for the evaluation of the impact of its adoption on the consolidated financial statements.

ASU 2016-02 and its subsequent corresponding updates require lessees to recognize assets and liabilities for most leases, and recognize expenses in a manner similar to the current accounting method. For lessors, the guidance modifies the lease classification criteria and the accounting for sales-type and direct financing leases. The guidance also eliminates current real estate-specific provisions.

The standard must be adopted using a modified retrospective approach. The FASB has provided an optional transition method, which the Company has elected, that allows entities to continue to apply the guidance in ASC 840 Leases to the comparative periods presented in the year of adoption. Under this transition method, the Company will apply the transition provisions starting on January 1, 2019.

The Company has elected to apply a package of practical expedients that allow lessees and lessors not to reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) whether initial direct costs for any expired or existing leases qualify for capitalization under ASC 842. These three practical expedients must be elected as a package and must be consistently applied to all leases. The Company has also elected to apply an optional transition practical expedient for land easements that allows an entity to continue applying its current accounting policy for all land easements that exist before the standard’s effective date that were not previously accounted for under ASC 840.

The Company established a task force focused on the identification of contracts that are under the scope of the new standard and the assessment and measurement of their corresponding right-of-use assets and related liabilities. Additionally, the implementation team has been working on the configuration of a lease accounting tool that will support the implementation and the subsequent accounting. The implementation team has also evaluated

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

changes to our business processes, systems and controls to support recognition and disclosure under the new standard.

Under ASC 842, it is expected that fewer contracts will contain a lease. However, due to the elimination of the real estate-specific guidance and changes to certain lessor classification criteria, more leases will qualify as sales-type leases and direct financing leases. Under these two models, a lessor will derecognize the asset and will recognize a lease receivable. According to ASC 842, the lease receivable includes the fair value of the plant after the contract period but does not include any variable payments such as margin on the sale of energy. Therefore, the lease receivable could be significantly different than the carrying amount of the underlying asset at lease commencement. In such circumstances, the difference between the initially recognized lease receivable and the carrying amount of the underlying asset is recognized as a gain/loss at lease commencement.

The primary expected impact as of the effective date is the recognition of approximately $300 million of lease liabilities and the corresponding right of use assets for all contracts that contain an operating lease and for which the Company is the lessee. In addition, the Company expects to reclassify various account balances to different line items on the Consolidated Balance Sheet to reflect the new presentation requirements. Consolidated Statement of Operations presentation and the expense recognition pattern are not expected to change for lessees.

2**. INVENTORY**

Inventory is valued primarily using the average-cost method. The following table summarizes the Company's inventory balances as of the dates indicated (in millions):

December 31,		2018				2017
Fuel and other raw materials		$	300			$	284
Spare parts and supplies		277				278
Total		$	577			$	562

3**. PROPERTY, PLANT AND EQUIPMENT**

The following table summarizes the components of the electric generation and distribution assets and other property, plant and equipment (in millions) with their estimated useful lives (in years). The amounts are stated net of all prior asset impairment losses recognized.

			December 31,
	Estimated Useful Life	2018				2017
Electric generation and distribution facilities	7-40		$	22,875			$	21,529
Other buildings	5-72		1,651				1,971
Furniture, fixtures and equipment	3-25		310				284
Other	5-44		406				335
Total electric generation and distribution assets and other			25,242				24,119
Accumulated depreciation			(8,227		)		(7,942		)
Net electric generation and distribution assets and other			$	17,015			$	16,177

The following table summarizes depreciation expense (including the amortization of assets recorded under capital leases and the amortization of asset retirement obligations) and interest capitalized during development and construction on qualifying assets for the periods indicated (in millions):

Years Ended December 31,		2018				2017				2016
Depreciation expense		$	960			$	1,005			$	1,002
Interest capitalized during development and construction		199				139				118

Property, plant and equipment, net of accumulated depreciation, of $11 billion and $10 billion was mortgaged, pledged or subject to liens as of December 31, 2018 and 2017, respectively, including assets classified as held-for-sale.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

The following table summarizes regulated and non-regulated generation and distribution property, plant and equipment and accumulated depreciation as of the dates indicated (in millions):

December 31,		2018				2017
Regulated generation, distribution assets and other, gross		$	8,959			$	8,093
Regulated accumulated depreciation		(3,504		)		(3,357		)
Regulated generation, distribution assets and other, net		5,455				4,736
Non-regulated generation, distribution assets and other, gross		16,283				16,026
Non-regulated accumulated depreciation		(4,723		)		(4,585		)
Non-regulated generation, distribution assets and other, net		11,560				11,441
Net electric generation, distribution assets and other		$	17,015			$	16,177

The following table presents amounts recognized related to asset retirement obligations for the periods indicated (in millions):

		2018				2017
Balance at January 1		$	368			$	357
Additional liabilities incurred		19				1
Liabilities settled		(14		)		(21		)
Accretion expense		18				16
Change in estimated cash flows		24				25
Other		—				(10		)
Balance at December 31		$	415			$	368

The Company's asset retirement obligations include active ash landfills, water treatment basins and the removal or dismantlement of certain plants and equipment. The $24 million increase in estimated cash flows in 2018 is primarily due to an increase of $55 million in estimated ash pond closure costs and revised closure dates associated with an EPA rule regulating CCR at IPL and an increase in coal pile remediation costs at DPL. These were partially offset by a decrease of $32 million due to reductions in estimated closure costs associated with ash ponds and landfills at DPL resulting in a reduction to Cost of Sales on the Consolidated Statements of Operations.

The Company used the cost approach to determine the fair value of the ARO liabilities, which was estimated by discounting expected cash outflows to their present value using market based rates at the initial recording of the liabilities. Cash outflows were based on the approximate future disposal costs as determined by market information, historical information or other management estimates. These inputs to the fair value of the ARO liabilities are considered Level 3 inputs under the fair value hierarchy.

4**. FAIR VALUE**

The fair value of current financial assets and liabilities, debt service reserves and other deposits approximate their reported carrying amounts. The estimated fair values of the Company's assets and liabilities have been determined using available market information. Because these amounts are estimates and based on hypothetical transactions to sell assets or transfer liabilities, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Valuation Techniques — The fair value measurement accounting guidance describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach, (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on current market expectations of the return on those future amounts. The cost approach is based on the amount that would currently be required to replace an asset. The Company measures its investments and derivatives at fair value on a recurring basis. Additionally, in connection with annual or event-driven impairment evaluations, certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis. These include long-lived tangible assets (i.e., property, plant and equipment), goodwill and intangible assets (e.g., sales concessions, land use rights and water rights, etc.). In general, the Company determines the fair value of investments and derivatives using the market approach and the income approach, respectively. In the nonrecurring measurements of nonfinancial assets and liabilities, all three approaches are considered; however, the value estimated under the income approach is often the most representative of fair value.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

Investments — The Company's investments measured at fair value generally consist of marketable debt and equity securities. Equity securities are either measured at fair value using quoted market prices or based on comparisons to market data obtained for similar assets. Debt securities primarily consist of unsecured debentures and certificates of deposit held by our Brazilian subsidiaries. Returns and pricing on these instruments are generally indexed to the market interest rates in Brazil. Debt securities are measured at fair value based on comparisons to market data obtained for similar assets.

Derivatives — Derivatives are measured at fair value using quoted market prices or the income approach utilizing volatilities, spot and forward benchmark interest rates (such as LIBOR and EURIBOR), foreign exchange rates, credit data, and commodity prices, as applicable. When significant inputs are not observable, the Company uses relevant techniques to determine the inputs, such as regression analysis or prices for similarly traded instruments available in the market.

The Company's methodology to fair value its derivatives is to start with any observable inputs; however, in certain instances the published forward rates or prices may not extend through the remaining term of the contract and management must make assumptions to extrapolate the curve, which necessitates the use of unobservable inputs, such as proxy commodity prices or historical settlements to forecast forward prices. 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. Similarly, in certain instances, the spread that reflects the credit or nonperformance risk is unobservable requiring the use of proxy yield curves of similar credit quality.

To determine the fair value of a derivative, cash flows are discounted using the relevant spot benchmark interest rate. The Company then makes a credit valuation adjustment ("CVA"), as applicable, by further discounting the cash flows for nonperformance or credit risk based on the observable or estimated debt spread of the Company's subsidiary or its counterparty and the tenor of the respective derivative instrument. The CVA for potential future scenarios in which the derivative is in an asset position is based on the counterparty's credit ratings, credit default swap spreads, and debt spreads, as available. The CVA for potential future scenarios in which the derivative is in a liability position is based on the Parent Company's or the subsidiary's current debt spread. In the absence of readily obtainable credit information, the Parent Company's or the subsidiary's estimated credit rating (based on applying a standard industry model to historical financial information and then considering other relevant information) and spreads of comparably rated entities or the respective country's debt spreads are used as a proxy. All derivative instruments are analyzed individually and are subject to unique risk exposures.

The fair value hierarchy of an asset or a liability is based on the level of significance of the input assumptions. An input assumption is considered significant if it affects the fair value by at least 10%. Assets and liabilities are classified as Level 3 when the use of unobservable inputs is significant. When the use of unobservable inputs is insignificant, assets and liabilities are classified as Level 2. Transfers between Level 3 and Level 2 are determined as of the end of the reporting period and result from changes in significance of unobservable inputs used to calculate the CVA.

Debt — Recourse and non-recourse debt are carried at amortized cost. The fair value of recourse debt is estimated based on quoted market prices. The fair value of non-recourse debt is estimated based upon interest rates and other features of the loan. In general, the carrying amount of variable rate debt is a close approximation of its fair value. For fixed rate loans, the fair value is estimated using quoted market prices or discounted cash flow ("DCF") analyses. The fair value of recourse and non-recourse debt excludes accrued interest at the valuation date. The fair value was determined using available market information as of December 31, 2018. The Company is not aware of any factors that would significantly affect the fair value amounts subsequent to December 31, 2018.

Nonrecurring measurements — For nonrecurring measurements derived using the income approach, fair value is generally determined using valuation models based on the principles of DCF. The income approach is most often used in the impairment evaluation of long-lived tangible assets, equity method investments, goodwill, and intangible assets. Where the use of market observable data is limited or not available for certain input assumptions, the Company develops its own estimates using a variety of techniques such as regression analysis and extrapolations. Depending on the complexity of a valuation, an independent valuation firm may be engaged to assist management in the valuation process.

For nonrecurring measurements derived using the market approach, recent market transactions involving the sale of identical or similar assets are considered. The use of this approach is limited because it is often difficult to

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

identify sale transactions of identical or similar assets. This approach is used in impairment evaluations of certain intangible assets. Otherwise, it is used to corroborate the fair value determined under the income approach.

For nonrecurring measurements derived using the cost approach, fair value is typically based upon a replacement cost approach. This approach involves a considerable amount of judgment, which is why its use is limited to the measurement of long-lived tangible assets. Like the market approach, this approach is also used to corroborate the fair value determined under the income approach.

Fair Value Considerations — In determining fair value, the Company considers the source of observable market data inputs, liquidity of the instrument, the credit risk of the counterparty and the risk of the Company's or its counterparty's nonperformance. The conditions and criteria used to assess these factors are:

Sources of market assumptions — The Company derives most of its market assumptions from market efficient data sources (e.g., Bloomberg and Reuters). To determine fair value, where market data is not readily available, management uses comparable market sources and empirical evidence to develop its own estimates of market assumptions.

Market liquidity — The Company evaluates market liquidity based on whether the financial or physical instrument, or the underlying asset, is traded in an active or inactive market. An active market exists if the prices are fully transparent to market participants, can be measured by market bid and ask quotes, the market has a relatively large proportion of trading volume as compared to the Company's current trading volume and the market has a significant number of market participants that will allow the market to rapidly absorb the quantity of assets traded without significantly affecting the market price. Another factor the Company considers when determining whether a market is active or inactive is the presence of government or regulatory controls over pricing that could make it difficult to establish a market-based price when entering into a transaction.

Nonperformance risk — Nonperformance risk refers to the risk that an obligation will not be fulfilled and affects the value at which a liability is transferred or an asset is sold. Nonperformance risk includes, but may not be limited to, the Company or its counterparty's credit and settlement risk. Nonperformance risk adjustments are dependent on credit spreads, letters of credit, collateral, other arrangements available and the nature of master netting arrangements. The Company is party to various interest rate swaps and options; foreign currency options and forwards; and derivatives and embedded derivatives, which subject the Company to nonperformance risk. The financial and physical instruments held at the subsidiary level are generally non-recourse to the Parent Company.

Nonperformance risk on the investments held by the Company is incorporated in the fair value derived from quoted market data to mark the investments to fair value.

Recurring Measurements — The following table presents, by level within the fair value hierarchy, as described in Note 1—General and Summary of Significant Accounting Policies, the Company's financial assets and liabilities that were measured at fair value on a recurring basis as of the dates indicated (in millions). For the Company's investments in marketable debt and equity securities, the security classes presented were determined based on the nature and risk of the security and are consistent with how the Company manages, monitors and measures its marketable securities:

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

		December 31, 2018																December 31, 2017
		Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
Assets
DEBT SECURITIES:
Available-for-sale:
Unsecured debentures		$	—			$	5			$	—			$	5			$	—			$	207			$	—			$	207
Certificates of deposit		—				243				—				243				—				153				—				153
Total debt securities		—				248				—				248				—				360				—				360
EQUITY SECURITIES:
Mutual funds		19				49				—				68				20				52				—				72
Total equity securities		19				49				—				68				20				52				—				72
DERIVATIVES:
Interest rate derivatives		—				28				1				29				—				15				—				15
Cross-currency derivatives		—				6				—				6				—				29				—				29
Foreign currency derivatives		—				18				199				217				—				29				240				269
Commodity derivatives		—				6				4				10				—				30				5				35
Total derivatives — assets		—				58				204				262				—				103				245				348
TOTAL ASSETS		$	19			$	355			$	204			$	578			$	20			$	515			$	245			$	780
Liabilities
DERIVATIVES:
Interest rate derivatives		$	—			$	67			$	141			$	208			$	—			$	111			$	151			$	262
Cross-currency derivatives		—				5				—				5				—				3				—				3
Foreign currency derivatives		—				41				—				41				—				30				—				30
Commodity derivatives		—				3				—				3				—				19				1				20
Total derivatives — liabilities		—				116				141				257				—				163				152				315
TOTAL LIABILITIES		$	—			$	116			$	141			$	257			$	—			$	163			$	152			$	315

As of December 31, 2018, all AFS debt securities had stated maturities within one year. For the years ended December 31, 2018, 2017, and 2016, no other-than-temporary impairment of marketable securities were recognized in earnings or Other Comprehensive Income (Loss). Gains and losses on the sale of investments are determined using the specific-identification method. The following table presents gross proceeds from sale of AFS securities for the periods indicated (in millions):

Year Ended December 31,		2018				2017				2016
Gross proceeds from sale of AFS securities (1)		$	1,403			$	1,398			$	1,726

---

(1)	Proceeds include $119 million of non-cash proceeds from non-convertible debentures at Guaimbê Solar Complex. See Note 24—Acquisitions for further information.

Any Level 1 derivative instruments are exchange-traded commodity futures for which the pricing is observable in active markets, and as such, these are not expected to transfer to other levels. There have been no transfers between Level 1 and Level 2.

The following tables present a reconciliation of net derivative assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2018 and 2017 presented net by type of derivative. Transfers between Level 3 and Level 2 are determined as of the end of the reporting period and principally result from changes in the significance of unobservable inputs used to calculate the credit valuation adjustment (in millions).

Year Ended December 31, 2018	Interest Rate				Foreign Currency				Commodity				Total
Balance at January 1	$	(151	)		$	240			$	4			$	93
Total realized and unrealized gains (losses):
Included in earnings	22				(14		)		(1		)		7
Included in other comprehensive income — derivative activity	(8		)		—				—				(8		)
Included in regulatory (assets) liabilities	—				—				5				5
Settlements	14				(27		)		(4		)		(17		)
Transfers of assets/(liabilities), net into Level 3	(8		)		—				—				(8		)
Transfers of (assets)/liabilities, net out of Level 3	(9		)		—				—				(9		)
Balance at December 31	$	(140	)		$	199			$	4			$	63
Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities held at the end of the period	$	29			$	(41	)		$	(1	)		$	(13	)

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

Year Ended December 31, 2017	Interest Rate				Foreign Currency				Commodity				Total
Balance at January 1	$	(179	)		$	255			$	5			$	81
Total realized and unrealized gains (losses):
Included in earnings	(1		)		21				1				21
Included in other comprehensive income — derivative activity	(23		)		—				—				(23		)
Included in regulatory (assets) liabilities	—				—				10				10
Settlements	36				(36		)		(12		)		(12		)
Transfers of assets/(liabilities), net into Level 3	(4		)		—				—				(4		)
Transfers of (assets)/liabilities, net out of Level 3	20				—				—				20
Balance at December 31	$	(151	)		$	240			$	4			$	93
Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities held at the end of the period	$	7			$	(15	)		$	1			$	(7	)

The following table summarizes the significant unobservable inputs used for the Level 3 derivative assets (liabilities) as of December 31, 2018 (in millions, except range amounts):

Type of Derivative		Fair Value				Unobservable Input		Amount or Range (Weighted Average)
Interest rate		$	(140	)		Subsidiaries’ credit spreads		1.8% - 5.3% (3.7%)
Foreign currency:
Argentine peso		199				Argentine peso to U.S. dollar currency exchange rate after one year		52.7 - 142.6 (96.1)
Commodity:
Other		4
Total		$	63

For interest rate derivatives, and foreign currency derivatives, increases (decreases) in the estimates of the Company's own credit spreads would decrease (increase) the value of the derivatives in a liability position. For foreign currency derivatives, increases (decreases) in the estimate of the above exchange rate would increase (decrease) the value of the derivative.

Nonrecurring Measurements

When evaluating impairment of long-lived assets and equity method investments, the Company measures fair value using the applicable fair value measurement guidance. Impairment expense is measured by comparing the fair value at the evaluation date to their then-latest available carrying amount. The following table summarizes major categories of assets and liabilities measured at fair value on a nonrecurring basis during the period and their level within the fair value hierarchy (in millions):

Year Ended December 31, 2018		Measurement Date		Carrying Amount (1)				Fair Value												Pre-tax Loss
Assets			Level 1				Level 2				Level 3
Dispositions and held-for-sale businesses:
Shady Point		12/31/2018		$	211			$	—			$	—			$	30			$	157
Long-lived assets held and used: (2)
Nejapa		12/31/2018		42				—				—				5				37
Equity method investments:
Guacolda		10/01/2018		354				—				—				209				144
Elsta		09/30/2018		19				—				16				—				3

Year Ended December 31, 2017		Measurement Date		Carrying Amount (1)				Fair Value												Pre-tax Loss
Assets			Level 1				Level 2				Level 3
Long-lived assets held and used: (2)
Laurel Mountain		12/31/2017		$	154			$	—			$	—			$	33			$	121
Kilroot		12/31/2017		69				—				—				20				37
DPL		02/28/2017		77				—				—				11				66
Other		Various		18				—				—				—				18
Dispositions and held-for-sale businesses:
DPL Peaker Assets		12/31/2017		346				—				237				—				109
Kazakhstan Hydroelectric (3)		06/30/2017		190				—				92				—				92
Kazakhstan CHPs		03/31/2017		171				—				29				—				94

---

(1)	Represents the carrying values at the dates of initial measurement, before fair value adjustment.

(2)	See Note 20—Asset Impairment Expense for further information.

(3)	Per the Company's policy, pre-tax loss is limited to the impairment of long-lived assets. Any additional loss will be recognized on completion of the sale. Upon disposal of Kazakhstan HPPs, the Company incurred an additional pre-tax loss on disposal of $33 million. See Note 20—Asset Impairment Expense and Note 23—Held-for-Sale and Dispositions for further information.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

The following table summarizes the significant unobservable inputs used in the Level 3 measurement of long-lived assets held and used measured on a nonrecurring basis during the year ended December 31, 2018 (in millions, except range amounts):

December 31, 2018		Fair Value				Valuation Technique		Unobservable Input		Range (Weighted Average)
Long-lived assets held and used:
Nejapa		5				Discounted cash flow		Annual revenue growth		-70% to -1% (-15%)
								Pre-tax operating margin		37% to 82% (59%)
								Weighted-average cost of capital		12	%
Equity method invesments:
Guacolda		209				Discounted cash flow		Annual dividend growth		-70% to 467% (48%)
								Weighted-average cost of equity		10	%
Total		$	214

When determining the fair value of the Shady Point held-for-sale asset group, the Company used the market approach based on prices and unobservable inputs from transactions involving comparable assets as the inputs for the Level 3 nonrecurring measurement.

Financial Instruments not Measured at Fair Value in the Consolidated Balance Sheets

The following table presents the carrying amount, fair value and fair value hierarchy of the Company's financial assets and liabilities that are not measured at fair value in the Consolidated Balance Sheets as of the periods indicated, but for which fair value is disclosed (in millions).

			December 31, 2018
			Carrying Amount				Fair Value
			Total				Level 1				Level 2				Level 3
Assets:	Accounts receivable — noncurrent (1)		$	100			$	209			$	—			$	—			$	209
Liabilities:	Non-recourse debt		15,645				16,225				—				13,524				2,701
	Recourse debt		3,655				3,621				—				3,621				—

			December 31, 2017
			Carrying Amount				Fair Value
			Total				Level 1				Level 2				Level 3
Assets:	Accounts receivable — noncurrent (1)		$	163			$	217			$	—			$	6			$	211
Liabilities:	Non-recourse debt		15,340				15,890				—				13,350				2,540
	Recourse debt		4,630				4,920				—				4,920				—

---

(1)	These amounts primarily relate to amounts due from CAMMESA, the administrator of the wholesale electricity market in Argentina, and are included in Other noncurrent assets in the accompanying Consolidated Balance Sheets. The fair value and carrying amount of these receivables exclude VAT of $16 million and $31 million as of December 31, 2018 and 2017, respectively.

5**. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES**

Volume of Activity — The following table presents the Company's maximum notional (in millions) over the remaining contractual period by type of derivative as of December 31, 2018, regardless of whether they are in qualifying cash flow hedging relationships, and the dates through which the maturities for each type of derivative range:

Derivatives		Maximum Notional Translated to USD				Latest Maturity
Interest Rate (LIBOR and EURIBOR)		$	4,584			2044
Cross-currency Swaps (Chilean Unidad de Fomento and Chilean peso)		344				2029
Foreign Currency:
Argentine peso		68				2026
Chilean peso		270				2021
Colombian peso		117				2021
Brazilian real		23				2019
Others, primarily with weighted average remaining maturities of a year or less		112				2021

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

Accounting and Reporting — Assets and Liabilities — The following tables present the fair value of assets and liabilities related to the Company's derivative instruments as of the periods indicated (in millions):

Fair Value		December 31, 2018												December 31, 2017
Assets		Designated				Not Designated				Total				Designated				Not Designated				Total
Interest rate derivatives		$	29			$	—			$	29			$	15			$	—			$	15
Cross-currency derivatives		6				—				6				29				—				29
Foreign currency derivatives		—				217				217				8				261				269
Commodity derivatives		—				10				10				5				30				35
Total assets		$	35			$	227			$	262			$	57			$	291			$	348
Liabilities
Interest rate derivatives		$	205			$	3			$	208			$	125			$	137			$	262
Cross-currency derivatives		5				—				5				3				—				3
Foreign currency derivatives		28				13				41				1				29				30
Commodity derivatives		—				3				3				9				11				20
Total liabilities		$	238			$	19			$	257			$	138			$	177			$	315

		December 31, 2018								December 31, 2017
Fair Value		Assets				Liabilities				Assets				Liabilities
Current		$	75			$	51			$	84			$	211
Noncurrent		187				206				264				104
Total		$	262			$	257			$	348			$	315

As of December 31, 2018, all derivative instruments subject to credit risk-related contingent features were in an asset position.

Credit Risk-Related Contingent Features (1)								December 31, 2017
Present value of liabilities subject to collateralization								$	15
Cash collateral held by third parties or in escrow								9

---

(1)	Based on the credit rating of certain subsidiaries

Earnings and Other Comprehensive Income (Loss) — The following table presents the pre-tax gains (losses) recognized in AOCL and earnings related to all derivative instruments for the periods indicated (in millions):

		Years Ended December 31,
2018				2017				2016
Effective portion of cash flow hedges
Gains (losses) recognized in AOCL
Interest rate derivatives		$	(16	)		$	(66	)		$	(35	)
Cross-currency derivatives		(26		)		31				21
Foreign currency derivatives		(52		)		(5		)		(4		)
Commodity derivatives		—				18				30
Total		$	(94	)		$	(22	)		$	12
Gains (losses) reclassified from AOCL to earnings
Interest rate derivatives		$	(52	)		$	(82	)		$	(101	)
Cross-currency derivatives		(43		)		34				8
Foreign currency derivatives		(16		)		(20		)		(8		)
Commodity derivatives		(6		)		17				56
Total		$	(117	)		$	(51	)		$	(45	)
Loss reclassified from AOCL to earnings due to discontinuance of hedge accounting (1)		$	—			$	(13	)		$	—
Gain (losses) recognized in earnings related to
Ineffective portion of cash flow hedges		$	(7	)		$	3			$	(1	)
Not designated as hedging instruments:
Foreign currency derivatives		148				1				19
Commodity derivatives and other		25				14				(16		)
Total		$	173			$	15			$	3

---

(1)	Cash flow hedge was discontinued because it was probable the forecasted transaction will not occur.

AOCL is expected to decrease pre-tax income from continuing operations for the twelve months ended December 31, 2019 by $59 million, primarily due to interest rate derivatives.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

6**. FINANCING RECEIVABLES**

Receivables with contractual maturities of greater than one year are considered financing receivables, primarily related to amended agreements or government resolutions due from CAMMESA. The following table presents financing receivables by country as of the dates indicated (in millions):

December 31,		2018				2017
Argentina		$	93			$	177
Panama		14				—
Other		9				17
Total		$	116			$	194

Argentina

Collection of the principal and interest on these receivables is subject to various business risks and uncertainties, including, but not limited to, the continued operation of power plants which generate cash for payments of these receivables, regulatory changes that could impact the timing and amount of collections, and economic conditions in Argentina. The Company monitors these risks, including the credit ratings of the Argentine government, on a quarterly basis to assess the collectability of these receivables. The Company accrues interest on these receivables if collectability is reasonably assured. The Company's collection estimates are based on assumptions it believes to be reasonable, but are inherently uncertain. Actual future cash flows could differ from these estimates. The decrease in Argentina financing receivables was primarily due to planned collections and unfavorable FX impacts.

FONINVEMEM Agreements — As a result of energy market reforms in 2004 and 2010, AES Argentina entered into three agreements with the Argentine government, referred to as the FONINVEMEM Agreements, to contribute a portion of their accounts receivable into a fund for financing the construction of combined cycle and gas-fired plants. These receivables accrue interest and are collected in monthly installments over 10 years once the related plant begins operations. In addition, AES Argentina receives an ownership interest in these newly built plants once the receivables have been fully repaid.

The FONINVEMEM receivables are denominated in Argentine pesos, but indexed to U.S. dollars, which represents a foreign currency derivative. Due to differences between spot rates, used to remeasure the receivables, and discounted forward rates, used to value the foreign currency derivative, these two items will not perfectly offset over the life of the receivable. Once settled, the foreign currency derivative will offset the accumulated unrealized foreign currency losses resulting from the devaluation of the FONINVEMEM receivable. As of December 31, 2018 and 2017, the amount of the foreign currency-related derivative assets associated with the FONINVEMEM financing receivables that were excluded from the table above had a fair value of $199 million and $240 million, respectively.

The receivables under the FONINVEMEM Agreements have been actively collected since the related plants commenced operations in 2010 and 2016. In assessing the collectability of the receivables under these agreements, the Company also considers historic collection evidence in accordance with the agreements.

Other Agreements — Other agreements primarily consist of resolutions passed by the Argentine government in which AES Argentina will receive compensation for investments in new generation plants and technologies. The timing of collections depend on corresponding agreements and collectability of these receivables are assessed on an ongoing basis.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

7**. INVESTMENTS IN AND ADVANCES TO AFFILIATES**

The following table summarizes the relevant effective equity ownership interest and carrying values for the Company's investments accounted for under the equity method as of the periods indicated:

December 31,			2018				2017				2018			2017
Affiliate	Country		Carrying Value (in millions)								Ownership Interest %
sPower	United States		$	515			$	508			50	%		50	%
OPGC (1)	India		293				269				49	%		49	%
Guacolda (2)	Chile		209				357				33	%		33	%
Other affiliates (3)	Various		97				63
Total			$	1,114			$	1,197

---

(1)	OPGC has one coal-fired project under development which is an expansion of our existing OPGC business. The project started construction in April 2014 and is expected to begin operations in 2019.

(2)	The Company's ownership in Guacolda is held through AES Gener, a 67%-owned consolidated subsidiary. AES Gener owns 50% of Guacolda, resulting in an AES effective ownership in Guacolda of 33%.

(3)	Includes Fluence, Simple Energy, Bosforo, Elsta, Distributed Energy equity method investments, and others.

Guacolda — In October 2018, an other-than-temporary impairment was identified at Guacolda primarily as a result of increased renewable generation in Chile lowering energy prices, impacting management's ability to re-contract Guacolda's generation after expiration of existing PPAs. A calculation of the fair value of Gener's investment in Guacolda was required to evaluate whether there was a loss in the carrying value of the investment. Based on management's estimate of fair value of $209 million, the Company recognized an other-than-temporary impairment of $144 million in Other non-operating expense. The Guacolda equity method investment is reported in the South America SBU reportable segment.

Distributed Energy — In December 2018, Distributed Energy acquired the remaining equity interest in a partnership holding various solar projects for consideration of $23 million. This transaction resulted in a loss of $5 million, reported in Other expense in the Consolidated Statement of Operations. The projects, previously recorded as equity method investments, have been consolidated. See Note 24*—Acquisitions* for further discussion.

Simple Energy — In April 2018, the Company invested $35 million in Simple Energy, a provider of utility-branded marketplaces and omni-channel instant rebates. As the Company does not control Simple Energy, the investment is accounted for as an equity method investment and is reported as part of Corporate and Other.

Fluence — On January 1, 2018, Siemens and AES closed on the creation of the Fluence joint venture with each party holding a 50% ownership interest. The Company contributed $7 million in cash and $20 million in non-cash assets from the AES Advancion energy storage development business as consideration for the transaction, and received an equity interest in Fluence with a fair value of $50 million. See Note 23*—Held-for-Sale and Dispositions* for further discussion. Fluence is a global energy storage technology and services company. As the Company does not control Fluence, the investment is accounted for as an equity method investment. The Fluence equity method investment is reported as part of Corporate and Other.

sPower — In February 2017, the Company and Alberta Investment Management Corporation (“AIMCo”) entered into an agreement to acquire FTP Power LLC (“sPower”). In July 2017, AES closed on the acquisition of its 48% ownership interest in sPower for $461 million. In November 2017, AES acquired an additional 2% ownership interest in sPower for $19 million. As the Company does not control sPower, it is accounted for as an equity method investment. The sPower portfolio includes solar and wind projects in operation, under construction, and in development located in the United States. The sPower equity method investment is reported in the US and Utilities SBU reportable segment.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

AES Barry Ltd. — The Company holds a 100% ownership interest in AES Barry Ltd. ("Barry"), a dormant entity in the U.K. that disposed of its generation and other operating assets. Due to a debt agreement, no material financial or operating decisions can be made without the banks' consent, and the Company does not control Barry. As of December 31, 2018 and 2017, other long-term liabilities included $43 million and $45 million related to this debt agreement.

Summarized Financial Information — The following tables summarize financial information of the Company's 50%-or-less-owned affiliates and majority-owned unconsolidated subsidiaries that are accounted for using the equity method (in millions):

	50%-or-less Owned Affiliates												Majority-Owned Unconsolidated Subsidiaries
Years ended December 31,	2018				2017				2016				2018				2017				2016
Revenue	$	962			$	762			$	586			$	40			$	16			$	23
Operating margin	135				165				145				3				5				9
Net income (loss)	14				72				64				(3		)		(15		)		(2		)
December 31,	2018				2017								2018				2017
Current assets	$	558			$	418							$	89			$	70
Noncurrent assets	5,918				5,372								41				102
Current liabilities	546				633								35				10
Noncurrent liabilities	3,309				2,629								122				147
Stockholders' equity	2,622				2,527								(27		)		15

At December 31, 2018, retained earnings included $236 million related to the undistributed earnings of the Company's 50%-or-less owned affiliates. Distributions received from these affiliates were $42 million, $69 million, and $24 million for the years ended December 31, 2018, 2017, and 2016, respectively. As of December 31, 2018, the underlying equity in the net assets of our equity affiliates exceeded the aggregate carrying amount of our investments in equity affiliates by $49 million.

8**. GOODWILL AND OTHER INTANGIBLE ASSETS**

Goodwill — The following table summarizes the carrying amount of goodwill by reportable segment for the years ended December 31, 2018 and 2017 (in millions):

	US and Utilities				South America				MCAC				Eurasia				Total
Balance as of December 31, 2017
Goodwill	$	2,786			$	868			$	16			$	122			$	3,792
Accumulated impairment losses	(2,611		)		—				—				(122		)		(2,733		)
Net balance	175				868				16				—				1,059
Balance as of December 31, 2018
Goodwill	2,786				868				16				122				3,792
Accumulated impairment losses	(2,611		)		—				—				(122		)		(2,733		)
Net balance	$	175			$	868			$	16			$	—			$	1,059

Other Intangible Assets — The following table summarizes the balances comprising Other intangible assets in the accompanying Consolidated Balance Sheets (in millions) as of the periods indicated:

	December 31, 2018												December 31, 2017
	Gross Balance				Accumulated Amortization				Net Balance				Gross Balance				Accumulated Amortization				Net Balance
Subject to Amortization
Internal-use software	$	467			$	(344	)		$	123			$	416			$	(330	)		$	86
Contracts	137				(24		)		113				92				(21		)		71
Project development rights	93				(1		)		92				57				(1		)		56
Contractual payment rights (1)	57				(44		)		13				65				(47		)		18
Emissions allowances (2)	15				—				15				—				—				—
Other (3)	78				(44		)		34				98				(42		)		56
Subtotal	847				(457		)		390				728				(441		)		287
Indefinite-Lived Intangible Assets
Land use rights	21				—				21				45				—				45
Water rights	20				—				20				20				—				20
Other	5				—				5				14				—				14
Subtotal	46				—				46				79				—				79
Total	$	893			$	(457	)		$	436			$	807			$	(441	)		$	366

---

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

(1)	Represent legal rights to receive system reliability payments from the regulator.

(2)	Acquired or purchased emissions allowances are finite-lived intangible assets that are expensed when utilized and included in net income for the year.

(3)	Includes management rights, sales concessions, renewable energy credits and incentives, and other individually insignificant intangible assets. During the fourth quarter of 2018, the Company recognized an asset impairment of $23 million on gas extraction rights at Nejapa. See Note 20—Asset Impairment Expense for further information.

The following tables summarize other intangible assets acquired during the periods indicated (in millions):

December 31, 2018	Amount				Subject to Amortization/Indefinite-Lived		Weighted Average Amortization Period (in years)		Amortization Method
Internal-use software	$	67			Subject to Amortization		6		Straight-line
Contracts	50				Subject to Amortization		24		Straight-line
Project development rights	35				Subject to Amortization		23		Straight-line
Emissions allowances	16				Subject to Amortization		Various		As utilized
Other	11				Various		N/A		N/A
Total	$	179

December 31, 2017	Amount				Subject to Amortization/Indefinite-Lived		Weighted Average Amortization Period (in years)		Amortization Method
Project Development Rights	$	53			Subject to Amortization		30		Straight-line
Contracts	34				Subject to Amortization		25		Straight-line
Internal-use software	17				Subject to Amortization		7		Straight-line
Other	8				Various		N/A		N/A
Total	$	112

The following table summarizes the estimated amortization expense by intangible asset category for 2019 through 2023:

(in millions)	2019				2020				2021				2022				2023
Internal-use software	$	33			$	28			$	19			$	13			$	7
Contracts	4				4				4				4				4
Other	8				8				6				6				6
Total	$	45			$	40			$	29			$	23			$	17

Intangible asset amortization expense was $47 million, $34 million and $37 million for the years ended December 31, 2018, 2017 and 2016, respectively.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

9**. REGULATORY ASSETS AND LIABILITIES**

The Company has recorded regulatory assets and liabilities (in millions) that it expects to pass through to its customers in accordance with, and subject to, regulatory provisions as follows:

December 31,	2018				2017				Recovery/Refund Period
REGULATORY ASSETS
Current regulatory assets:
El Salvador energy pass through costs recovery	$	87			$	59			Quarterly
Other	69				60				Various
Total current regulatory assets	156				119
Noncurrent regulatory assets:
IPL and DPL defined benefit pension obligations (1)	283				298				Various
IPL deferred Midwest ISO costs	88				102				8 years
IPL environmental costs	89				48				Various
Other	87				94				Various
Total noncurrent regulatory assets	547				542
TOTAL REGULATORY ASSETS	$	703			$	661
REGULATORY LIABILITIES
Current regulatory liabilities:
Overcollection of costs to be passed back to customers	$	83			$	14			1 year
Other	3				3				Various
Total current regulatory liabilities	86				17
Noncurrent regulatory liabilities:
IPL and DPL accrued costs of removal and ARO's	847				830				Over life of assets
IPL and DPL income taxes payable to customers through rates	246				243				Various
Other	53				6				Various
Total noncurrent regulatory liabilities	1,146				1,079
TOTAL REGULATORY LIABILITIES	$	1,232			$	1,096

---

(1)	Past expenditures on which the Company earns a rate of return.

Our regulatory assets primarily consist of costs that are generally non-controllable, such as purchased electricity, energy transmission, the difference between actual fuel costs and the fuel costs recovered in the tariffs, and other sector costs. These costs are recoverable or refundable as defined by the laws and regulations in our markets. Our regulatory assets also include defined pension and postretirement benefit obligations equal to the previously unrecognized actuarial gains and losses and prior services costs that are expected to be recovered through future rates. Other current and noncurrent regulatory assets primarily consist of:

•	Demand charges at DPL;

•	Unamortized premiums reacquired or redeemed on long-term debt at IPL and DPL, which are amortized over the lives of the original issuances; and

•	Costs to comply with environmental regulations.

Our regulatory liabilities primarily consist of obligations for removal costs which do not have an associated legal retirement obligation. Our regulatory liabilities also include deferred income taxes associated with the reduction of the U.S. federal income tax rate which will be passed through to our regulated customers via a decrease in future retail rates, see Note 21—Income Taxes for further information.

In the accompanying Consolidated Balance Sheets the current regulatory assets and liabilities are reflected in Other current assets and Accrued and other liabilities, respectively, and the noncurrent regulatory assets and liabilities are reflected in Other noncurrent assets and Other noncurrent liabilities, respectively. The regulatory assets and liabilities primarily related to the US and Utilities SBU as of December 31, 2018 and December 31, 2017.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

10**. DEBT**

NON-RECOURSE DEBT — The following table summarizes the carrying amount and terms of non-recourse debt at our subsidiaries as of the periods indicated (in millions):

NON-RECOURSE DEBT	Weighted Average Interest Rate		Maturity		December 31,
2018				2017
Variable Rate:
Bank loans	4.46%		2019 – 2050		$	2,600			$	2,488
Notes and bonds	3.89%		2020 – 2030		821				900
Debt to (or guaranteed by) multilateral, export credit agencies or development banks (1)	3.56%		2023 – 2034		3,292				3,668
Fixed Rate:
Bank loans	4.62%		2019 – 2040		1,684				993
Notes and bonds	5.85%		2019 – 2073		7,346				7,388
Debt to (or guaranteed by) multilateral, export credit agencies or development banks (1)	5.45%		2023 – 2034		246				271
Other	5.87%		2023 – 2061		24				26
Unamortized (discount) premium & debt issuance (costs), net					(368		)		(394		)
Subtotal					$	15,645			$	15,340
Less: Current maturities					(1,659		)		(2,164		)
Noncurrent maturities					$	13,986			$	13,176

---

(1)	Multilateral loans include loans funded and guaranteed by bilaterals, multilaterals, development banks and other similar institutions.

The interest rate on variable rate debt represents the total of a variable component that is based on changes in an interest rate index and of a fixed component. The Company has interest rate swaps and option agreements in an aggregate notional principal amount of approximately $3.9 billion on non-recourse debt outstanding at December 31, 2018. These agreements economically fix the variable component of the interest rates on the portion of the variable rate debt being hedged so that the total interest rate on that debt has been fixed at rates ranging from approximately 2.24% to 8.00%.

Non-recourse debt as of December 31, 2018 is scheduled to reach maturity as shown below (in millions):

December 31,	Annual Maturities
2019	$	1,697
2020	1,458
2021	1,601
2022	1,530
2023	1,316
Thereafter	8,411
Unamortized (discount) premium & debt issuance (costs), net	(368		)
Total	$	15,645

As of December 31, 2018, AES subsidiaries with facilities under construction had a total of approximately $811 million of committed but unused credit facilities available to fund construction and other related costs. Excluding these facilities under construction, AES subsidiaries had approximately $1.8 billion in various unused committed credit lines to support their working capital, debt service reserves and other business needs. These credit lines can be used for borrowings, letters of credit, or a combination of these uses.

Significant transactions — During the year ended December 31, 2018, the Company's subsidiaries had the following significant debt transactions:

Subsidiary	Transaction Period		Issuances				Repayments				Gain (Loss) on Extinguishment of Debt
Southland (1)	Q1, Q2, Q3, Q4		$	757			$	—			$	—
Tietê	Q1		385				(231		)		—
Alto Maipo	Q2		104				—				—
DPL	Q2		—				(106		)		(6		)
Gener	Q3		—				(104		)		(7		)
Angamos	Q3		—				(98		)		—
IPALCO	Q4		105				(89		)		—
Total			$	1,351			$	(628	)		$	(13	)

---

(1)	Issuances relate to the June 2017, long-term non-recourse debt financing to fund the Southland re-powering construction projects.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

AES Argentina — In February 2017, AES Argentina issued $300 million aggregate principal of unsecured and unsubordinated notes due in 2024. The net proceeds from this issuance were used for the prepayment of $75 million of non-recourse debt related to the construction of the San Nicolas Plant resulting in a gain on extinguishment of debt of approximately $65 million.

Non-Recourse Debt Covenants, Restrictions and Defaults — The terms of the Company's non-recourse debt include certain financial and nonfinancial covenants. These covenants are limited to subsidiary activity and vary among the subsidiaries. These covenants may include, but are not limited to, maintenance of certain reserves and financial ratios, minimum levels of working capital and limitations on incurring additional indebtedness.

As of December 31, 2018 and 2017, approximately $627 million and $642 million, respectively, of restricted cash was maintained in accordance with certain covenants of the non-recourse debt agreements, and these amounts were included within Restricted cash and Debt service reserves and other deposits in the accompanying Consolidated Balance Sheets.

Various lender and governmental provisions restrict the ability of certain of the Company's subsidiaries to transfer their net assets to the Parent Company. Such restricted net assets of subsidiaries amounted to approximately $2.9 billion at December 31, 2018.

The following table summarizes the Company's subsidiary non-recourse debt in default (in millions) as of December 31, 2018. Due to the defaults, these amounts are included in the current portion of non-recourse debt:

	Primary Nature of Default		December 31, 2018
Subsidiary	Default				Net Assets
AES Puerto Rico	Covenant		$	317			$	139
AES Ilumina (Puerto Rico)	Covenant		34				17
Total			$	351		(1)

---

(1) This does not include $483 million of non-recourse debt at Colon, one of the Company’s subsidiaries in Panama, that has been classified as current. Colon is currently in compliance with all provisions of its financing agreements, but does not expect to complete a required contract assignment to the lenders by the March 31, 2019 deadline. The Company is working with the lenders to modify the loan agreement to amend the requirement of this technical covenant in 2019. If this amendment is executed, the debt will be re-classified as noncurrent.

The above defaults are not payment defaults. All of the subsidiary non-recourse defaults were triggered by failure to comply with covenants and/or conditions such as (but not limited to) failure to meet information covenants, complete construction or other milestones in an allocated time, meet certain minimum or maximum financial ratios, or other requirements contained in the non-recourse debt documents of the applicable subsidiary.

The AES Corporation's recourse debt agreements include cross-default clauses that will trigger if a subsidiary or group of subsidiaries for which the non-recourse debt is in default provides more than 20% of the Parent Company's total cash distributions from businesses for the four most recently completed fiscal quarters. As of December 31, 2018, the Company has no defaults which result in or are at risk of triggering a cross-default under the recourse debt of the Parent Company. In the event the Parent Company is not in compliance with the financial covenants of its senior secured revolving credit facility, restricted payments will be limited to regular quarterly shareholder dividends at the then-prevailing rate. Payment defaults and bankruptcy defaults would preclude the making of any restricted payments.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

RECOURSE DEBT — The following table summarizes the carrying amount and terms of recourse debt of the Company as of the periods indicated (in millions):

	Interest Rate		Final Maturity		December 31, 2018				December 31, 2017
Senior Unsecured Note	8.00%		2020		$	—			$	228
Senior Unsecured Note	4.00%		2021		500				—
Senior Unsecured Note	7.38%		2021		—				690
Drawings on secured credit facility	LIBOR + 2.00%		2021		—				207
Senior Secured Term Loan	LIBOR + 1.75%		2022		366				521
Senior Unsecured Note	4.88%		2023		713				713
Senior Unsecured Note	4.50%		2023		500				—
Senior Unsecured Note	5.50%		2024		63				738
Senior Unsecured Note	5.50%		2025		544				573
Senior Unsecured Note	6.00%		2026		500				500
Senior Unsecured Note	5.13%		2027		500				500
Unamortized (discount) premium & debt issuance (costs), net					(31		)		(40		)
Subtotal					$	3,655			$	4,630
Less: Current maturities					(5		)		(5		)
Noncurrent maturities					$	3,650			$	4,625

The following table summarizes the principal amounts due under our recourse debt for the next five years and thereafter (in millions):

December 31,	Net Principal Amounts Due
2019	$	5
2020	5
2021	505
2022	350
2023	1,213
Thereafter	1,608
Unamortized (discount) premium & debt issuance (costs), net	(31		)
Total recourse debt	$	3,655

In December 2018, the Company prepaid $150 million aggregate principal of its existing senior secured term loan due in 2022. As a result of the transaction, the Company recognized a loss on extinguishment of debt of $1 million.

In March 2018, the Company purchased via tender offers $671 million aggregate principal of its existing 5.50% senior unsecured notes due in 2024 and $29 million of its existing 5.50% senior unsecured notes due in 2025. As a result of these transactions, the Company recognized a loss on extinguishment of debt of $44 million.

In March 2018, the Company issued $500 million aggregate principal of 4.00% senior notes due in 2021 and $500 million of 4.50% senior notes due in 2023. The Company used the proceeds from these issuances to purchase via tender offer in full the $228 million balance of its 8.00% senior notes due in 2020 and the $690 million balance of its 7.375% senior notes due in 2021. As a result of these transactions, the Company recognized a loss on extinguishment of debt of $125 million.

In August 2017, the Company issued $500 million aggregate principal amount of 5.125% senior notes due in 2027. The Company used these proceeds to redeem at par $240 million aggregate principal of its existing LIBOR + 3.00% senior unsecured notes due in 2019 and purchased $217 million of its existing 8.00% senior unsecured notes due in 2020. As a result of the latter transactions, the Company recognized a loss on extinguishment of debt of $36 million.

In May 2017, the Company closed on $525 million aggregate principal LIBOR + 2.00% secured term loan due in 2022. In June 2017, the Company used these proceeds to redeem at par all $517 million aggregate principal of its existing Term Convertible Securities. As a result of the latter transaction, the Company recognized a loss on extinguishment of debt of $6 million.

In March 2017, the Company redeemed via tender offers $276 million aggregate principal of its existing 7.375% senior unsecured notes due in 2021 and $24 million of its existing 8.00% senior unsecured notes due in 2020. As a result of these transactions, the Company recognized a loss on extinguishment of debt of $47 million.

Recourse Debt Covenants and Guarantees — The Company's obligations under the senior secured credit facility and senior secured term loan are, subject to certain exceptions, secured by (i) all of the capital stock of

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

domestic subsidiaries owned directly by the Company and 65% of the capital stock of certain foreign subsidiaries owned directly or indirectly by the Company; and (ii) certain intercompany receivables, certain intercompany notes and certain intercompany tax sharing agreements.

The senior secured credit facility and senior secured term loan are subject to mandatory prepayment under certain circumstances, including the sale of certain assets. In such a situation, the net cash proceeds from the sale must be applied pro rata to repay the term loan, if any, using 60% of net cash proceeds, reduced to 50% when and if the Parent Company's recourse debt to cash flow ratio is less than 5:1. The lenders have the option to waive their pro rata redemption.

The senior secured credit facility contains customary covenants and restrictions on the Company's ability to engage in certain activities, including, but not limited to, limitations on other indebtedness, liens, investments and guarantees; limitations on restricted payments such as shareholder dividends and equity repurchases; restrictions on mergers and acquisitions, sales of assets, leases, transactions with affiliates and off-balance sheet or derivative arrangements; and other financial reporting requirements.

The senior secured credit facility also contains financial covenants, evaluated quarterly, requiring the Company to maintain a minimum ratio of adjusted operating cash flow to interest charges on recourse debt of 1.3 times and a maximum ratio of recourse debt to adjusted operating cash flow of 7.5 times.

The terms of the Company's senior unsecured notes and senior secured term loan contain certain covenants including limitations on the Company's ability to incur liens or enter into sale and leaseback transactions.

TERM CONVERTIBLE TRUST SECURITIES — In 1999, AES Trust III, a wholly-owned special purpose business trust and a VIE, issued approximately 10.35 million of $50 par value TECONS with a quarterly coupon payment of $0.844 for total proceeds of $517 million and concurrently purchased $517 million of 6.75% Junior Subordinated Convertible Debentures due 2029 (the "6.75% Debentures") issued by AES. AES, at its option, may redeem the 6.75% Debentures which would result in the required redemption of the TECONS issued by AES Trust III for $50 per TECON. As of December 31, 2016, the sole assets of AES Trust III were the 6.75% Debentures. In June 2017, the Company redeemed the 6.75% Debentures and redeemed at par all remaining aggregate principal of its existing TECONs.

11**. COMMITMENTS**

LEASES — The Company enters into long-term non-cancelable lease arrangements which, for accounting purposes, are classified as either operating or capital leases. Operating leases primarily include certain transmission lines, office rental and site leases. Operating lease rental expense for the years ended December 31, 2018, 2017, and 2016 was $51 million, $61 million and $61 million, respectively. Capital leases primarily include transmission lines, vehicles, offices, and other operating equipment. Capital leases are recognized in Property, Plant and Equipment within Electric generation, distribution assets and other. The gross value of the capital lease assets as of December 31, 2018 and 2017 was $13 million and $27 million, respectively. The following table shows the future minimum lease payments under operating and capital leases for continuing operations together with the present value of the net minimum lease payments under capital leases as of December 31, 2018 for 2019 through 2023 and thereafter (in millions):

	Future Commitments for
December 31,	Capital Leases				Operating Leases
2019	$	1			$	74
2020	1				38
2021	1				25
2022	1				26
2023	1				25
Thereafter	7				455
Total	$	12			$	643
Less: Imputed interest	(6		)
Present value of total minimum lease payments	$	6

CONTRACTS — The Company enters into long-term contracts for construction projects, maintenance and service, transmission of electricity, operations services and purchases of electricity and fuel. In general, these contracts are subject to variable quantities or prices and are terminable only in limited circumstances. The following table shows the future minimum commitments for continuing operations under these contracts as of December 31,

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

2018 for 2019 through 2023 and thereafter as well as actual purchases under these contracts for the years ended December 31, 2018, 2017, and 2016 (in millions):

Actual purchases during the year ended December 31,	Electricity Purchase Contracts				Fuel Purchase Contracts				Other Purchase Contracts
2016	$	420			$	1,790			$	817
2017	747				1,619				1,945
2018	827				1,838				1,671
Future commitments for the year ending December 31,
2019	$	786			$	1,494			$	1,375
2020	602				1,027				681
2021	371				882				336
2022	234				575				561
2023	393				463				213
Thereafter	5,187				1,734				778
Total	$	7,573			$	6,175			$	3,944

12**. CONTINGENCIES**

Guarantees and Letters of Credit — In connection with certain project financings, acquisitions and dispositions, power purchases and other agreements, the Parent Company has expressly undertaken limited obligations and commitments, most of which will only be effective or will be terminated upon the occurrence of future events. In the normal course of business, the Parent Company has entered into various agreements, mainly guarantees and letters of credit, to provide financial or performance assurance to third parties on behalf of AES businesses. These agreements are entered into primarily to support or enhance the creditworthiness otherwise achieved by a business on a stand-alone basis, thereby facilitating the availability of sufficient credit to accomplish their intended business purposes. Most of the contingent obligations relate to future performance commitments which the Company expects to fulfill within the normal course of business. The expiration dates of these guarantees vary from less than one year to more than 16 years.

The following table summarizes the Parent Company's contingent contractual obligations as of December 31, 2018. Amounts presented in the following table represent the Parent Company's current undiscounted exposure to guarantees and the range of maximum undiscounted potential exposure. The maximum exposure is not reduced by the amounts, if any, that could be recovered under the recourse or collateralization provisions in the guarantees. There were no obligations made by the Parent Company for the direct benefit of the lenders associated with the non-recourse debt of its businesses.

Contingent Contractual Obligations		Amount (in millions)				Number of Agreements		Maximum Exposure Range for Each Agreement (in millions)
Guarantees and commitments		$	685			33		$0 — 157
Letters of credit under the unsecured credit facility		368				10		$1 — 247
Letters of credit under the senior secured credit facility		78				23		$0 — 49
Asset sale related indemnities (1)		27				1		$27
Total		$	1,158			67

---

(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.

During the year ended December 31, 2018, the Company paid letter of credit fees ranging from 1% to 3% per annum on the outstanding amounts of letters of credit.

Environmental — The Company periodically reviews its obligations as they relate to compliance with environmental laws, including site restoration and remediation. For the periods ended December 31, 2018 and 2017, the Company had recognized liabilities of $5 million for projected environmental remediation costs. Due to the uncertainties associated with environmental assessment and remediation activities, future costs of compliance or remediation could be higher or lower than the amount currently accrued. Moreover, where no liability has been recognized, it is reasonably possible that the Company may be required to incur remediation costs or make expenditures in amounts that could be material but could not be estimated as of December 31, 2018. In aggregate, the Company estimates the range of potential losses related to environmental matters, where estimable, to be up to $17 million. The amounts considered reasonably possible do not include amounts accrued as discussed above.

Litigation — The Company is involved in certain claims, suits and legal proceedings in the normal course of business. The Company accrues for litigation and claims when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company has recognized aggregate liabilities for all claims of

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

approximately $53 million and $50 million as of December 31, 2018 and 2017, respectively. These amounts are reported on the Consolidated Balance Sheets within Accrued and other liabilities and Other noncurrent liabilities. A significant portion of these accrued liabilities relate to regulatory matters and commercial disputes in international jurisdictions. There can be no assurance that these accrued liabilities will be adequate to cover all existing and future claims or that we will have the liquidity to pay such claims as they arise.

Where no accrued liability has been recognized, it is reasonably possible that some matters could be decided unfavorably to the Company and could require the Company to pay damages or make expenditures in amounts that could be material but could not be estimated as of December 31, 2018. The material contingencies where a loss is reasonably possible primarily include disputes with offtakers, suppliers and EPC contractors; alleged breaches of contract; alleged violation of laws and regulations; income tax and non-income tax matters with tax authorities; and regulatory matters. In aggregate, the Company estimates the range of potential losses, where estimable, related to these reasonably possible material contingencies to be between $79 million and $439 million. The amounts considered reasonably possible do not include amounts accrued, as discussed above. These material contingencies do not include income tax-related contingencies which are considered part of our uncertain tax positions.

13**. BENEFIT PLANS**

Defined Contribution Plan — The Company sponsors four defined contribution plans ("the DC Plans"). Two plans cover U.S. non-union employees; one for Parent Company and certain US and Utilities SBU business employees, and one for DPL employees. The remaining two plans include union and non-union employees at IPL and union employees at DPL. The DC Plans are qualified under section 401 of the Internal Revenue Code. Most U.S. employees of the Company are eligible to participate in the appropriate plan except for those employees who are covered by a collective bargaining agreement, unless such agreement specifically provides that the employee is considered an eligible employee under a plan. Within the DC Plans, the Company provides matching contributions in addition to other non-matching contributions. Participants are fully vested in their own contributions. The Company's contributions vest over various time periods ranging from immediate up to five years. For the years ended December 31, 2018, 2017 and 2016, costs for defined contribution plans were approximately $21 million, $23 million and $15 million, respectively.

Defined Benefit Plans — Certain of the Company's subsidiaries have defined benefit pension plans covering substantially all of their respective employees ("the DB Plans"). Pension benefits are based on years of credited service, age of the participant, and average earnings. Of the 30 active DB Plans as of December 31, 2018, five are at U.S. subsidiaries and the remaining plans are at foreign subsidiaries.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

The following table reconciles the Company's funded status, both domestic and foreign, as of the periods indicated (in millions):

		2018								2017
		U.S.				Foreign				U.S.				Foreign
CHANGE IN PROJECTED BENEFIT OBLIGATION:
Benefit obligation as of January 1		$	1,257			$	470			$	1,188			$	411
Service cost		15				12				13				10
Interest cost		40				22				41				22
Employee contributions		—				1				—				1
Plan amendments		10				—				1				(1		)
Plan curtailments		—				—				3				—
Plan settlements		—				(21		)		—				(2		)
Benefits paid		(105		)		(17		)		(71		)		(22		)
Plan combinations		—				(4		)		—				—
Actuarial (gain) loss		(99		)		(8		)		82				29
Effect of foreign currency exchange rate changes		—				(38		)		—				22
Benefit obligation as of December 31		$	1,118			$	417			$	1,257			$	470
CHANGE IN PLAN ASSETS:
Fair value of plan assets as of January 1		$	1,127			$	455			$	1,044			$	402
Actual return on plan assets		(35		)		6				141				31
Employer contributions		39				21				13				18
Employee contributions		—				1				—				1
Plan settlements		—				(21		)		—				(2		)
Benefits paid		(105		)		(17		)		(71		)		(22		)
Effect of foreign currency exchange rate changes		—				(35		)		—				27
Fair value of plan assets as of December 31		$	1,026			$	410			$	1,127			$	455
RECONCILIATION OF FUNDED STATUS
Funded status as of December 31		$	(92	)		$	(7	)		$	(130	)		$	(15	)

The following table summarizes the amounts recognized on the Consolidated Balance Sheets related to the funded status of the DB Plans, both domestic and foreign, as of the periods indicated (in millions):

December 31,		2018								2017
Amounts Recognized on the Consolidated Balance Sheets		U.S.				Foreign				U.S.				Foreign
Noncurrent assets		$	—			$	64			$	—			$	69
Accrued benefit liability—current		—				(6		)		—				(6		)
Accrued benefit liability—noncurrent		(92		)		(65		)		(130		)		(78		)
Net amount recognized at end of year		$	(92	)		$	(7	)		$	(130	)		$	(15	)

The following table summarizes the Company's U.S. and foreign accumulated benefit obligation as of the periods indicated (in millions):

December 31,	2018								2017
	U.S.				Foreign				U.S.				Foreign
Accumulated Benefit Obligation	$	1,101			$	376			$	1,236			$	433
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
Projected benefit obligation	$	1,118			$	89			$	1,257			$	109
Accumulated benefit obligation	1,101				79				1,236				97
Fair value of plan assets	1,026				33				1,127				33
Information for pension plans with a projected benefit obligation in excess of plan assets:
Projected benefit obligation	$	1,118			$	220			$	1,257			$	238
Fair value of plan assets	1,026				150				1,127				154

The following table summarizes the significant weighted average assumptions used in the calculation of benefit obligation and net periodic benefit cost, both domestic and foreign, as of the periods indicated:

December 31,		2018						2017
		U.S.			Foreign			U.S.			Foreign
Benefit Obligation:	Discount rate	4.35	%		5.63	%		3.67	%		5.23	%
	Rate of compensation increase	3.34	%		4.79	%		3.34	%		4.65	%
Periodic Benefit Cost:	Discount rate	3.67	%		5.23	%	(1)	4.28	%		5.83	%	(1)
	Expected long-term rate of return on plan assets	5.73	%		3.94	%		6.67	%		5.30	%
	Rate of compensation increase	3.34	%		4.65	%		3.34	%		4.86	%

---

(1)	Includes an inflation factor that is used to calculate future periodic benefit cost, but is not used to calculate the benefit obligation.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

The Company establishes its estimated long-term return on plan assets considering various factors, which include the targeted asset allocation percentages, historic returns, and expected future returns.

The measurement of pension obligations, costs, and liabilities is dependent on a variety of assumptions. These assumptions include estimates of the present value of projected future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. These assumptions may have an effect on the amount and timing of future contributions.

The assumptions used in developing the required estimates include the following key factors: discount rates; salary growth; retirement rates; inflation; expected return on plan assets; and mortality rates. The effects of actual results differing from the Company's assumptions are accumulated and amortized over future periods and, therefore, generally affect the Company's recognized expense in such future periods. Unrecognized gains or losses are amortized using the “corridor approach,” under which the net gain or loss in excess of 10% of the greater of the projected benefit obligation or the market-related value of the assets, if applicable, is amortized.

Sensitivity of the Company's pension funded status to the indicated increase or decrease in the discount rate and long-term rate of return on plan assets assumptions is shown below. Note that these sensitivities may be asymmetric and are specific to the base conditions at year-end 2018. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown. The funded status as of December 31, 2018 is affected by the assumptions as of that date. Pension expense for 2018 is affected by the December 31, 2017 assumptions. The impact on pension expense from a one percentage point change in these assumptions is shown in the following table (in millions):

Increase of 1% in the discount rate		$	(12	)
Decrease of 1% in the discount rate		12
Increase of 1% in the long-term rate of return on plan assets		(16		)
Decrease of 1% in the long-term rate of return on plan assets		16

The following table summarizes the components of the net periodic benefit cost, both domestic and foreign, for the years indicated (in millions):

December 31,		2018								2017								2016
Components of Net Periodic Benefit Cost:		U.S.				Foreign				U.S.				Foreign				U.S.				Foreign
Service cost		$	15			$	12			$	13			$	10			$	13			$	9
Interest cost		40				22				41				23				42				21
Expected return on plan assets		(64		)		(17		)		(69		)		(21		)		(68		)		(19		)
Amortization of prior service cost		5				—				6				—				7				(1		)
Amortization of net loss		18				3				18				2				18				2
Curtailment loss recognized		1				—				4				—				4				—
Settlement loss recognized		—				4				—				—				—				—
Total pension cost		$	15			$	24			$	13			$	14			$	16			$	12

The following table summarizes the amounts reflected in AOCL, including AOCL attributable to noncontrolling interests, on the Consolidated Balance Sheet as of December 31, 2018, that have not yet been recognized as components of net periodic benefit cost (in millions):

December 31, 2018	Accumulated Other Comprehensive Income (Loss)
	U.S.				Foreign
Prior service cost	$	(4	)		$	1
Unrecognized net actuarial loss	(19		)		(76		)
Total	$	(23	)		$	(75	)

The following table summarizes the Company's target allocation for 2018 and pension plan asset allocation, both domestic and foreign, as of the periods indicated:

					Percentage of Plan Assets as of December 31,
	Target Allocations				2018						2017
Asset Category	U.S.		Foreign		U.S.			Foreign			U.S.			Foreign
Equity securities	20%		3%		16.85	%		3.75	%		31.90	%		4.61	%
Debt securities	78%		94%		80.20	%		93.57	%		64.53	%		93.10	%
Real estate	2%		—%		2.35	%		0.44	%		3.20	%		0.44	%
Other	—%		3%		0.60	%		2.24	%		0.37	%		1.85	%
Total pension assets					100.00	%		100.00	%		100.00	%		100.00	%

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

The U.S. DB Plans seek to achieve the following long-term investment objectives:

•	maintenance of sufficient income and liquidity to pay retirement benefits and other lump sum payments;

•	long-term rate of return in excess of the annualized inflation rate;

•	long-term rate of return, net of relevant fees, that meets or exceeds the assumed actuarial rate; and

•	long-term competitive rate of return on investments, net of expenses, that equals or exceeds various benchmark rates.

The asset allocation is reviewed periodically to determine a suitable asset allocation which seeks to manage risk through portfolio diversification and takes into account the above-stated objectives, in conjunction with current funding levels, cash flow conditions and economic and industry trends. The following table summarizes the Company's U.S. DB Plan assets by category of investment and level within the fair value hierarchy as of the periods indicated (in millions):

		December 31, 2018																December 31, 2017
U.S. Plans		Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
Equity securities:	Mutual funds	$	173			$	—			$	—			$	173			$	359			$	—			$	—			$	359
Debt securities:	Government debt securities	170				—				—				170				135				—				—				135
	Mutual funds (1)	653				—				—				653				593				—				—				593
Real estate:	Real estate	—				24				—				24				—				36				—				36
Other:	Cash and cash equivalents	6				—				—				6				4				—				—				4
	Total plan assets	$	1,002			$	24			$	—			$	1,026			$	1,091			$	36			$	—			$	1,127

---

(1)	Mutual funds categorized as debt securities consist of mutual funds for which debt securities are the primary underlying investment.

The investment strategy of the foreign DB Plans seeks to maximize return on investment while minimizing risk. The assumed asset allocation has less exposure to equities in order to closely match market conditions and near term forecasts. The following table summarizes the Company's foreign DB plan assets by category of investment and level within the fair value hierarchy as of the periods indicated (in millions):

		December 31, 2018																December 31, 2017
Foreign Plans		Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
Equity securities:	Mutual funds	$	14			$	—			$	—			$	14			$	20			$	—			$	—			$	20
	Private equity	—				—				1				1				—				—				1				1
Debt securities:	Government debt securities	13				—				—				13				11				—				—				11
	Mutual funds (1)	287				84				—				371				323				90				—				413
Real estate:	Real estate	—				—				2				2				—				—				2				2
Other:	Cash and cash equivalents	2				—				—				2				—				—				—				—
	Other assets	1				—				6				7				1				—				7				8
	Total plan assets	$	317			$	84			$	9			$	410			$	355			$	90			$	10			$	455

---

(1)	Mutual funds categorized as debt securities consist of mutual funds for which debt securities are the primary underlying investment.

The following table summarizes the estimated cash flows for U.S. and foreign expected employer contributions and expected future benefit payments, both domestic and foreign (in millions):

		U.S.				Foreign
Expected employer contribution in 2019		$	9			$	14
Expected benefit payments for fiscal year ending:
2019		69				23
2020		70				21
2021		72				23
2022		72				24
2023		73				25
2024 - 2028		367				155

14**. EQUITY**

Equity Transactions with Noncontrolling Interests

Distributed Energy — In 2018, Distributed Energy, through multiple transactions, sold noncontrolling interests in multiple project companies to tax equity partners. These transactions resulted in a $98 million increase to noncontrolling interest. Distributed Energy is reported in the US and Utilities SBU reportable segment.

Alto Maipo — In March 2017, AES Gener completed the legal and financial restructuring of Alto Maipo. As part of this restructuring, AES indirectly acquired the 40% ownership interest of the noncontrolling shareholder for a de

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

minimis payment, and sold a 6.7% interest in the project to the construction contractor. This transaction resulted in a $196 million increase to the Parent Company’s Stockholders’ Equity due to an increase in additional paid-in-capital of $229 million, offset by the reclassification of accumulated other comprehensive losses from NCI to the Parent Company Stockholders’ Equity of $33 million. No gain or loss was recognized in net income as the sale was not considered to be a sale of in-substance real estate. After completion of the sale, the Company has an effective 62% economic interest in Alto Maipo. As the Company maintained control of the partnership after the sale, Alto Maipo continues to be consolidated by the Company within the South America SBU reportable segment.

Dominican Republic — In September 2017, Linda Group acquired 5% of our Dominican Republic business for $60 million, pre-tax. This transaction resulted in a net increase of $25 million to the Company’s additional paid-in-capital and noncontrolling interest, respectively. No gain or loss was recognized in net income as the sale was not considered a sale of in-substance real estate. As the Company maintained control after the sale, our businesses in the Dominican Republic continue to be consolidated by the Company within the MCAC SBU reportable segment.

The following table summarizes the net income attributable to The AES Corporation and all transfers (to) from noncontrolling interests for the periods indicated (in millions):

		December 31,
		2018				2017				2016
Net income (loss) attributable to The AES Corporation		$	1,203			$	(1,161	)		$	(1,130	)
Transfers from noncontrolling interest:
Increase (decrease) in The AES Corporation's paid-in capital for sale of subsidiary shares		(3		)		13				84
Additional paid-in-capital, IPALCO shares, transferred to redeemable stock of subsidiaries (1)		—				—				(84		)
Increase (decrease) in The AES Corporation's paid-in-capital for purchase of subsidiary shares		—				240				(2		)
Net transfers (to) from noncontrolling interest		(3		)		253				(2		)
Change from net income (loss) attributable to The AES Corporation and transfers (to) from noncontrolling interests		$	1,200			$	(908	)		$	(1,132	)

---

(1)	See Note 17—Redeemable stock of subsidiaries for further information on increase in paid-in-capital transferred to redeemable stock of subsidiaries.

Accumulated Other Comprehensive Loss — The changes in AOCL by component, net of tax and noncontrolling interests, for the periods indicated were as follows (in millions):

	Foreign currency translation adjustment, net				Derivative gains (losses), net				Unfunded pension obligations, net				Total
Balance at December 31, 2016	$	(2,147	)		$	(323	)		$	(286	)		$	(2,756	)
Other comprehensive income (loss) before reclassifications	18				(14		)		(19		)		(15		)
Amount reclassified to earnings	643				37				248				928
Other comprehensive income	$	661			$	23			$	229			$	913
Reclassification from NCI due to Alto Maipo Restructuring	—				(33		)		—				(33		)
Balance at December 31, 2017	$	(1,486	)		$	(333	)		$	(57	)		$	(1,876	)
Other comprehensive income (loss) before reclassifications	$	(214	)		$	(64	)		$	—			$	(278	)
Amount reclassified to earnings	(21		)		78				7				64
Other comprehensive income (loss)	$	(235	)		$	14			$	7			$	(214	)
Cumulative effect of a change in accounting principle	—				19				—				19
Balance at December 31, 2018	$	(1,721	)		$	(300	)		$	(50	)		$	(2,071	)

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

Reclassifications out of AOCL are presented in the following table. Amounts for the periods indicated are in millions and those in parenthesis indicate debits to the Consolidated Statements of Operations:

Details About				December 31,
AOCL Components		Affected Line Item in the Consolidated Statements of Operations		2018				2017				2016
Foreign currency translation adjustments, net
		Gain (loss) on disposal and sale of business interests		$	19			$	(188	)		$	—
		Net loss from disposal and impairments of discontinued operations		2				(455		)		(992		)
		Net income (loss) attributable to The AES Corporation		$	21			$	(643	)		$	(992	)
Derivative gains (losses), net
		Non-regulated revenue		$	(6	)		$	25			$	111
		Non-regulated cost of sales		(3		)		(12		)		(57		)
		Interest expense		(49		)		(79		)		(107		)
		Foreign currency transaction gains		(59		)		15				8
		Income from continuing operations before taxes and equity in earnings of affiliates		(117		)		(51		)		(45		)
		Income tax expense		24				1				8
		Income (loss) from continuing operations		(93		)		(50		)		(37		)
		Less: (Income) loss from continuing operations attributable to noncontrolling interests		15				13				9
		Net income (loss) attributable to The AES Corporation		$	(78	)		$	(37	)		$	(28	)
Amortization of defined benefit pension actuarial losses, net
		Non-regulated cost of sales		—				1				—
		General and administrative expenses		—				(1		)		(1		)
		Other expense		(6		)		—				(1		)
		Income from continuing operations before taxes and equity in earnings of affiliates		(6		)		—				(2		)
		Income tax expense		2				—				3
		Income from continuing operations		(4		)		—				1
		Net loss from disposal and impairments of discontinued operations		(2		)		(266		)		(11		)
		Net income (loss)		(6		)		(266		)		(10		)
		Less: (Income) loss from continuing operations attributable to noncontrolling interests		(1		)		—				9
		Add: Loss from discontinued operations attributable to noncontrolling interests		—				18				—
		Net income (loss) attributable to The AES Corporation		$	(7	)		$	(248	)		$	(1	)
Total reclassifications for the period, net of income tax and noncontrolling interests				$	(64	)		$	(928	)		$	(1,021	)

Common Stock Dividends — The Parent Company paid dividends of $0.13 per outstanding share to its common stockholders during the first, second, third and fourth quarters of 2018 for dividends declared in December 2017, February, July and October 2018, respectively.

On December 7, 2018, the Board of Directors declared a quarterly common stock dividend of $0.1365 per share payable on February 15, 2019 to shareholders of record at the close of business on February 1, 2019.

Stock Repurchase Program — No shares were repurchased in 2018. The cumulative repurchases from the commencement of the Program in July 2010 through December 31, 2018 totaled 154.3 million shares for a total cost of $1.9 billion, at an average price per share of $12.12 (including a nominal amount of commissions). As of December 31, 2018, $264 million remained available for repurchase under the Program.

The common stock repurchased has been classified as treasury stock and accounted for using the cost method. A total of 154,905,595 and 155,924,785 shares were held as treasury stock at December 31, 2018 and 2017, respectively. Restricted stock units under the Company's employee benefit plans are issued from treasury stock. The Company has not retired any common stock repurchased since it began the Program in July 2010.

15**. SEGMENTS AND GEOGRAPHIC INFORMATION**

The segment reporting structure uses the Company's management reporting structure as its foundation to reflect how the Company manages the businesses internally and is mainly organized by geographic regions which provides a socio-political-economic understanding of our business. During the first quarter of 2018, the Andes and Brazil SBUs were merged in order to leverage scale and are now reported together as part of the South America SBU. Further, the Puerto Rico and El Salvador businesses, formerly part of the MCAC SBU, were combined with the US SBU, which is now reported as the US and Utilities SBU. The management reporting structure is organized by four SBUs led by our President and Chief Executive Officer: US and Utilities, South America, MCAC, and Eurasia SBUs. Using the accounting guidance on segment reporting, the Company determined that its four operating segments are aligned with its four reportable segments corresponding to its SBUs. All prior period results have been retrospectively revised to reflect the new segment reporting structure.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

Corporate and Other — The results of the Fluence and Simple Energy equity affiliates are included in "Corporate and Other". Also included are the results of the AES self-insurance company and corporate overhead costs which are not directly associated with the operations of our four reportable segments, and certain intercompany charges such as self-insurance premiums which are fully eliminated in consolidation.

The Company uses Adjusted PTC as its primary segment performance measure. Adjusted PTC, a non-GAAP measure, is defined by the Company as pre-tax income from continuing operations attributable to The AES Corporation excluding gains or losses of the consolidated entity due to (a) unrealized gains or losses related to derivative transactions and equity securities; (b) unrealized foreign currency gains or losses; (c) gains, losses, benefits and costs associated with dispositions and acquisitions of business interests, including early plant closures; (d) losses due to impairments; (e) gains, losses and costs due to the early retirement of debt; and (f) costs directly associated with a major restructuring program, including, but not limited to, workforce reduction efforts, relocations and office consolidation. Adjusted PTC also includes net equity in earnings of affiliates on an after-tax basis adjusted for the same gains or losses excluded from consolidated entities. The Company has concluded 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. Additionally, 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.

Revenue and Adjusted PTC are presented before inter-segment eliminations, which includes the effect of intercompany transactions with other segments except for interest, charges for certain management fees, and the write-off of intercompany balances, as applicable. All intra-segment activity has been eliminated within the segment. Inter-segment activity has been eliminated within the total consolidated results.

The following tables present financial information by segment for the periods indicated (in millions):

	Total Revenue
Year Ended December 31,	2018				2017				2016
US and Utilities SBU	$	4,230			$	4,162			$	4,330
South America SBU	3,533				3,252				2,956
MCAC SBU	1,728				1,519				1,274
Eurasia SBU	1,255				1,590				1,670
Corporate and Other	41				35				77
Eliminations	(51		)		(28		)		(26		)
Total Revenue	$	10,736			$	10,530			$	10,281

Reconciliation from Income from Continuing Operations before Taxes and Equity in Earnings of Affiliates:	Total Adjusted PTC
Year Ended December 31,	2018				2017				2016
Income from continuing operations before taxes and equity in earnings of affiliates	$	2,018			$	771			$	187
Add: Net equity earnings in affiliates	39				71				36
Less: Income from continuing operations before taxes, attributable to noncontrolling interests	(509		)		(521		)		(354		)
Pre-tax contribution	1,548				321				(131		)
Unrealized derivative losses (gains)	33				(3		)		(9		)
Unrealized foreign currency losses (gains)	51				(59		)		22
Disposition/acquisition losses (gains)	(934		)		123				6
Impairment expense	307				542				933
Loss on extinguishment of debt	180				62				29
Restructuring costs	—				31				—
Total Adjusted PTC	$	1,185			$	1,017			$	850

	Total Adjusted PTC
Year Ended December 31,	2018				2017				2016
US and Utilities SBU	$	511			$	424			$	392
South America SBU	519				446				428
MCAC SBU	300				277				222
Eurasia SBU	222				290				283
Corporate, Other and Eliminations	(367		)		(420		)		(475		)
Total Adjusted PTC	$	1,185			$	1,017			$	850

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

	Total Assets												Depreciation and Amortization												Capital Expenditures
Year Ended December 31,	2018				2017				2016				2018				2017				2016				2018					2017					2016
US and Utilities SBU	$	12,286			$	11,548			$	10,815			$	449			$	487			$	519			$	1,373				$	905				$	858
South America SBU	10,941				11,126				10,487				300				301				251				662					477					569
MCAC SBU	4,462				4,087				3,680				141				122				117				302					435					431
Eurasia SBU	4,538				6,002				5,777				99				127				149				51			—		211			—		279
Discontinued operations	—				86				4,936				—				123				128				—					315					303
Corporate, Other and Eliminations	294				263				429				14				9				12				8					13					18
Total	$	32,521			$	33,112			$	36,124			$	1,003			$	1,169			$	1,176			$	2,396				$	2,356				$	2,458

	Interest Income												Interest Expense
Year Ended December 31,	2018				2017				2016				2018				2017				2016
US and Utilities SBU	$	10			$	5			$	4			$	287			$	315			$	299
South America SBU	92				95				95				283				297				247
MCAC SBU	20				13				7				124				111				100
Eurasia SBU	186				130				139				145				167				179
Corporate, Other and Eliminations	2				1				—				217				280				309
Total	$	310			$	244			$	245			$	1,056			$	1,170			$	1,134

	Investments in and Advances to Affiliates												Net Equity in Earnings of Affiliates
Year Ended December 31,	2018				2017				2016				2018				2017				2016
US and Utilities SBU	$	538			$	535			$	23			$	35			$	41			$	9
South America SBU	213				358				363				15				28				15
MCAC SBU	5				(5		)		(1		)		(7		)		(4		)		(2		)
Eurasia SBU	293				307				236				14				9				13
Corporate, Other and Eliminations	65				2				—				(18		)		(3		)		1
Total	$	1,114			$	1,197			$	621			$	39			$	71			$	36

The following table presents information, by country, about the Company's consolidated operations for each of the three years ended December 31, 2018, 2017, and 2016, and as of December 31, 2018 and 2017 (in millions). Revenue is recorded in the country in which it is earned and assets are recorded in the country in which they are located.

	Total Revenue												Property, Plant & Equipment, net
Year Ended December 31,	2018				2017				2016				2018				2017
United States (1)	$	3,462			$	3,487			$	3,790			$	8,731			$	7,968
Non-U.S.:
Chile	2,087				1,944				1,707				5,453				5,066
Dominican Republic	884				826				614				903				935
El Salvador	768				686				601				334				340
Brazil	527				541				450				1,287				1,286
Argentina	487				435				359				234				223
Panama	438				338				312				1,777				1,615
Colombia	428				332				437				302				332
Bulgaria	426				367				334				1,183				1,290
Mexico	399				352				342				666				687
United Kingdom	390				328				337				90				108
Vietnam (2)	245				278				340				2				2
Jordan	95				95				136				418				431
Philippines (3)	93				449				401				—				—
Kazakhstan	—				67				103				—				—
Other Non-U.S.	7				5				18				16				13
Total Non-U.S.	7,274				7,043				6,491				12,665				12,328
Total	$	10,736			$	10,530			$	10,281			$	21,396			$	20,296

---

(1)	Includes Puerto Rico revenues of $257 million, $247 million and $301 million for the years ended December 31, 2018, 2017 and 2016, respectively, and property, plant & equipment of $553 million and $565 million as of December 31, 2018 and 2017, respectively.

(2)	The Mong Duong II power project is operated under a build, operate and transfer contract. Future expected payments for the construction performance obligation are recognized in Loan receivable on the Consolidated Balance Sheets. See Note 18—Revenue for further information.

(3)	The Masinloc property, plant and equipment was classified as held-for-sale as of December 31, 2017, and deconsolidated upon completion of the sale in March 2018. See Note 23—Held-For-Sale and Dispositions for further information.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

16**. SHARE-BASED COMPENSATION**

RESTRICTED STOCK

Restricted Stock Units — The Company issues RSUs under its long-term compensation plan. The RSUs are generally granted based upon a percentage of the participant's base salary. The units have a three-year vesting schedule and vest in one-third increments over the three-year period. In all circumstances, RSUs granted by AES do not entitle the holder the right, or obligate AES, to settle the RSU in cash or other assets of AES.

For the years ended December 31, 2018, 2017, and 2016, RSUs issued had a grant date fair value equal to the closing price of the Company's stock on the grant date. The Company does not discount the grant date fair values to reflect any post-vesting restrictions. RSUs granted to employees during the years ended December 31, 2018, 2017, and 2016 had grant date fair values per RSU of $10.55, $11.93 and $9.42, respectively.

The following table summarizes the components of the Company's stock-based compensation related to its employee RSUs recognized in the Company's consolidated financial statements (in millions):

December 31,		2018				2017				2016
RSU expense before income tax		$	11			$	17			$	14
Tax benefit		(2		)		(4		)		(4		)
RSU expense, net of tax		$	9			$	13			$	10
Total value of RSUs converted (1)		$	10			$	10			$	7
Total fair value of RSUs vested		$	16			$	15			$	13

---

(1)	Amount represents fair market value on the date of conversion.

Cash was not used to settle RSUs or compensation cost capitalized as part of the cost of an asset for the years ended December 31, 2018, 2017, and 2016. As of December 31, 2018, total unrecognized compensation cost related to RSUs of $10 million is expected to be recognized over a weighted average period of approximately 1.7 years. There were no modifications to RSU awards during the year ended December 31, 2018.

A summary of the activity of RSUs for the year ended December 31, 2018 follows (RSUs in thousands):

		RSUs			Weighted Average Grant Date Fair Values				Weighted Average Remaining Vesting Term
Nonvested at December 31, 2017		2,966			$	11.02
Vested		(1,428	)		11.05
Forfeited and expired		(528	)		10.95
Granted		913			10.55
Nonvested at December 31, 2018		1,923			$	10.80			1.4
Vested and expected to vest at December 31, 2018		1,782			$	10.79

The Company initially recognizes compensation cost on the estimated number of instruments for which the requisite service is expected to be rendered. In 2018, AES has estimated a weighted average forfeiture rate of 9.35% for RSUs granted in 2018. This estimate will be revised if subsequent information indicates that the actual number of instruments forfeited is likely to differ from previous estimates. Based on the estimated forfeiture rate, the Company expects to expense $9 million on a straight-line basis over a three-year period.

The following table summarizes the RSUs that vested and were converted during the periods indicated (RSUs in thousands):

Year Ended December 31,		2018			2017			2016
RSUs vested during the year		1,428			1,337			1,063
RSUs converted during the year, net of shares withheld for taxes		950			865			705
Shares withheld for taxes		478			472			358

OTHER SHARE BASED COMPENSATION

The Company has three other share-based award programs. The Company has recorded expenses of $20 million, $8 million and $10 million for 2018, 2017 and 2016, respectively, related to these programs.

Stock options — AES grants options to purchase shares of common stock under stock option plans to non-employee directors. Under the terms of the plans, the Company may issue options to purchase shares of the Company's common stock at a price equal to 100% of the market price at the date the option is granted. Stock options issued in 2017 and 2018 have a three-year vesting schedule and vest in one-third increments over the

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

three-year period. The stock options have a contractual term of 10 years. In all circumstances, stock options granted by AES do not entitle the holder the right, or obligate AES, to settle the stock option in cash or other assets of AES.

Performance Stock Units — In 2016, 2017 and 2018, the Company issued PSUs to officers under its long-term compensation plan. PSUs are stock units which include performance conditions. Performance conditions are based on the Company's Proportional Free Cash Flow targets for 2016, 2017 and 2018. The performance conditions determine the vesting and final share equivalent per PSU and can result in earning an award payout range of 0% to 200%, depending on the achievement. The Company believes that it is probable that the performance condition will be met and will continue to be evaluated throughout the performance period. In all circumstances, PSUs granted by AES do not entitle the holder the right, or obligate AES, to settle the stock units in cash or other assets of AES.

Performance Cash Units — In 2016, 2017 and 2018, the Company issued PCUs to its officers under its long-term compensation plan. The value of these units is dependent on the market condition of total stockholder return on AES common stock as compared to the total stockholder return of the Standard and Poor's 500 Utilities Sector Index, Standard and Poor's 500 Index and MSCI Emerging Market Index over a three-year measurement period. Since PCUs are settled in cash, they qualify for liability accounting and periodic measurement is required.

17**. REDEEMABLE STOCK OF SUBSIDIARIES**

The following table is a reconciliation of changes in redeemable stock of subsidiaries (in millions):

December 31,	2018				2017
Balance at the beginning of the period	$	837			$	782
Contributions from holders of redeemable stock of subsidiaries	34				50
Net income (loss) attributable to redeemable stock of subsidiaries	2				(14		)
Fair value adjustment	4				25
Other comprehensive income (loss) attributable to redeemable stock of subsidiaries	2				(2		)
Acquisition and reclassification of stock of subsidiaries	—				(4		)
Balance at the end of the period	$	879			$	837

The following table summarizes the Company's redeemable stock of subsidiaries balances as of the periods indicated (in millions):

December 31,	2018				2017
IPALCO common stock	$	618			$	618
Colon quotas (1)	201				159
IPL preferred stock	60				60
Total redeemable stock of subsidiaries	$	879			$	837

---

(1)	Characteristics of quotas are similar to common stock.

Colon — Our partner in Colon made capital contributions of $34 million and $50 million during the year ended December 31, 2018 and 2017, respectively. Any subsequent adjustments to allocate earnings and dividends to our partner, or measure the investment at fair value, will be classified as temporary equity each reporting period as it is probable that the shares will become redeemable.

IPL — IPL had $60 million of cumulative preferred stock outstanding at December 31, 2018 and 2017, which represent five series of preferred stock. The total annual dividend requirements were approximately $3 million at December 31, 2018 and 2017. Certain series of the preferred stock were redeemable solely at the option of the issuer at prices between $100 and $118 per share. Holders of the preferred stock are entitled to elect a majority of IPL's board of directors if IPL has not paid dividends to its preferred stockholders for four consecutive quarters. Based on the preferred stockholders' ability to elect a majority of IPL's board of directors in this circumstance, the redemption of the preferred shares is considered to be not solely within the control of the issuer and the preferred stock is considered temporary equity.

IPALCO — As part of a purchase agreement executed in 2014, CDPQ had an option to invest $349 million in IPALCO through 2016 in exchange for a 17.65% equity stake. In March 2016, CDPQ exercised the remaining option by investing $134 million in IPALCO, which resulted in CDPQ's combined direct and indirect interest in IPALCO of 30%. The Company recognized an increase to additional paid-in-capital and a reduction to retained earnings of $84 million for the excess of the fair value of the shares over their book value. In June 2016, CDPQ contributed an additional $24 million to IPALCO, with no impact to the ownership structure of the investment. Any subsequent

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

adjustments to allocate earnings and dividends to CDPQ will be classified as NCI within permanent equity as it is not probable that the shares will become redeemable.

18**. REVENUE**

The following table presents our revenue from contracts with customers and other revenue for the year ended December 31, 2018 (in millions):

	Year Ended December 31, 2018
	US and Utilities SBU				South America SBU				MCAC SBU				Eurasia SBU				Corporate, Other and Eliminations				Total
Regulated Revenue
Revenue from contracts with customers	$	2,885			$	—			$	—			$	—			$	—			$	2,885
Other regulated revenue	54				—				—				—				—				54
Total regulated revenue	$	2,939			$	—			$	—			$	—			$	—			$	2,939
Non-Regulated Revenue
Revenue from contracts with customers	$	972			$	3,529			$	1,642			$	943			$	(11	)		$	7,075
Other non-regulated revenue (1)	319				4				86				312				1				722
Total non-regulated revenue	$	1,291			$	3,533			$	1,728			$	1,255			$	(10	)		$	7,797
Total revenue	$	4,230			$	3,533			$	1,728			$	1,255			$	(10	)		$	10,736

---

(1)	Other non-regulated revenue primarily includes lease and derivative revenue not accounted for under ASC 606.

Contract Balances — The timing of revenue recognition, billings, and cash collections results in accounts receivable and contract liabilities. Accounts receivable represent unconditional rights to consideration and consist of both billed amounts and unbilled amounts typically resulting from sales under long-term contracts when revenue recognized exceeds the amount billed to the customer. We bill both generation and utilities customers on a contractually agreed-upon schedule, typically at periodic intervals (e.g., monthly). The calculation of revenue earned but not yet billed is based on the number of days not billed in the month, the estimated amount of energy delivered during those days and the estimated average price per customer class for that month.

Our contract liabilities consist of deferred revenue which is classified as current or noncurrent based on the timing of when we expect to recognize revenue. The current portion of our contract liabilities is reported in Accrued and other liabilities and the noncurrent portion is reported in Other noncurrent liabilities on the Consolidated Balance Sheets. The contract liabilities from contracts with customers were $109 million and $131 million as of December 31, 2018 and January 1, 2018, respectively.

Of the $131 million of contract liabilities reported at January 1, 2018, $36 million was recognized as revenue during the period ended December 31, 2018.

A significant financing arrangement exists for our Mong Duong plant in Vietnam. The plant was constructed under a build, operate, and transfer contract and will be transferred to the Vietnamese government after the completion of a 25 year PPA. The performance obligation to construct the facility was substantially completed in 2015. Approximately $1.4 billion of contract consideration related to the construction, but not yet collected through the 25 year PPA, was reflected as a loan receivable as of December 31, 2018.

Remaining Performance Obligations — The transaction price allocated to remaining performance obligations represents future consideration for unsatisfied (or partially unsatisfied) performance obligations at the end of the reporting period. As of December 31, 2018, the aggregate amount of transaction price allocated to remaining performance obligations was $15 million, primarily consisting of fixed consideration for the sale of renewable energy credits (RECs) in long-term contracts in the U.S. We expect to recognize revenue on approximately one-fifth of the remaining performance obligations in 2019, with the remainder recognized thereafter. The Company has elected to apply the optional disclosure exemptions under ASC 606. Therefore, the amount above excludes contracts with an original length of one year or less, contracts for which we recognize revenue based on the amount we have the right to invoice for services performed, and variable consideration allocated entirely to a wholly unsatisfied performance obligation when the consideration relates specifically to our efforts to satisfy the performance obligation and depicts the amount to which we expect to be entitled. As such, consideration for energy is excluded from the amounts above as the variable consideration relates to the amount of energy delivered and reflects the value the Company expects to receive for the energy transferred. Estimates of revenue expected to be recognized in future periods also exclude unexercised customer options to purchase additional goods or services that do not represent material rights to the customer.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

19**. OTHER INCOME AND EXPENSE**

Other Income — Other income generally includes gains on asset sales and liability extinguishments, favorable judgments on contingencies, gains on contract terminations, allowance for funds used during construction and other income from miscellaneous transactions. The components are summarized as follows (in millions):

Year Ended December 31,	2018				2017				2016
Gain on remeasurement of contingent consideration (1)	$	32			$	—			$	—
Allowance for funds used during construction (US Utilities)	8				26				29
Gain on sale of assets	4				1				4
Legal settlements (2)	—				60				—
Other	28				33				31
Total other income	$	72			$	120			$	64

---

(1)	Related to the amendment of the Oahu purchase agreement. See Note 24 —Acquisitions for further information.

(2)	In December 2016, the Company and YPF entered into a settlement in which all parties agreed to give up any and all legal action related to gas supply contracts that were terminated in 2008 and have been in dispute since 2009. In January 2017, the YPF board approved the agreement and paid the Company $60 million, thereby resolving all uncertainties around the dispute.

Other Expense — Other expense generally includes losses on asset sales and dispositions, losses on legal contingencies, and losses from other miscellaneous transactions. The components are summarized as follows (in millions):

Year Ended December 31,	2018				2017				2016
Loss on sale and disposal of assets (1)	$	30			$	28			$	12
Non-service pension and other postretirement costs	10				1				3
Allowance for other receivables (2)	7				—				52
Water rights write-off	—				19				6
Other	11				10				7
Total other expense	$	58			$	58			$	80

---

(1)	In September 2018, the Company recorded a $20 million loss due to damage associated with a lightning incident at the Andres facility in the Dominican Republic.

(2)	During the fourth quarter of 2016, we recognized a full allowance on a non-trade receivable in the MCAC SBU as a result of payment delays and discussions with the counterparty. The allowance was related to certain reimbursements the Company was expecting in connection with a legal matter.

20**. ASSET IMPAIRMENT EXPENSE**

Year ended December 31, (in millions)		2018				2017				2016
Shady Point		$	157			$	—			$	—
Nejapa		37				—				—
DPL		—				175				859
Laurel Mountain		—				121				—
Kazakhstan Hydroelectric		—				92				—
Kazakhstan CHPs		—				94				—
Kilroot		—				37				—
Buffalo Gap II		—				—				159
Buffalo Gap I		—				—				77
Other		14				18				1
Total		$	208			$	537			$	1,096

Shady Point — In December 2018, the Company entered into an agreement to sell Shady Point, a coal-fired generation facility in the U.S. Due first to the uncertainty around future cash flows, and then upon meeting the held-for-sale criteria, the Company performed an impairment analysis of the Shady Point asset group in the second, third and fourth quarter of 2018, resulting in the recognition of total asset impairment expense of $157 million for the year ended December 31, 2018. Using the market approach, the asset group was determined to have a fair value of $30 million as of December 31, 2018. The sale is subject to regulatory approval and is expected to close during the second half of 2019. See Note 23—Held-for-Sale and Dispositions for further information. Shady Point is reported in the US and Utilities SBU reportable segment.

Nejapa — During the fourth quarter of 2018, the Company tested the recoverability of its long-lived assets at Nejapa, a landfill gas plant in El Salvador. Decreased production as a result of the landfill owner´s failure to perform improvements necessary to continue extracting gas from the landfill was identified as an impairment indicator. The Company determined that the carrying amount was not recoverable. The asset group, consisting of property, plant,

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

and equipment and intangible assets, was determined to have a fair value of $5 million using the income approach. As a result, the Company recognized an asset impairment expense of $37 million as of December 31, 2018. Nejapa is reported in the US and Utilities SBU reportable segment.

DPL — In March 2017, the Board of Directors of DPL approved the retirement of the DPL operated and co-owned Stuart coal-fired and diesel-fired generating units, and the Killen coal-fired generating unit and combustion turbine on or before June 1, 2018. The Company performed an impairment analysis and determined that the carrying amounts of the facilities were not recoverable. The Stuart and Killen asset groups were determined to have fair values of $3 million and $8 million, respectively, using the income approach. As a result, the Company recognized total asset impairment expense of $66 million. The Stuart and Killen units were retired in May 2018. Prior to their retirement, Stuart and Killen were reported in the US and Utilities SBU reportable segment.

In December 2017, DPL entered into an agreement for the sale of six of its combustion turbine and diesel-fired generation facilities and related assets ("DPL peaker assets"). Upon meeting the held-for-sale criteria, the Company performed an impairment analysis and determined that the carrying value of the asset group of $346 million was greater than its fair value less costs to sell of $237 million. As a result, the Company recognized asset impairment expense of $109 million. DPL completed the sale of the peaker assets in March 2018. Prior to their sale, the DPL peaker assets were reported in the US and Utilities SBU reportable segment. See Note 23—Held-for-Sale and Dispositions for further information.

During the second quarter of 2016, the Company tested the recoverability of its long-lived generation assets at DPL. Uncertainty created by the Supreme Court of Ohio’s June 20, 2016 opinion regarding ESP 2, lower expectations of future revenue resulting from the most recent PJM capacity auction and higher anticipated environmental compliance costs resulting from third party studies were collectively determined to be an impairment indicator for these assets. The Company performed an impairment analysis and determined that the carrying amount of Killen, a coal-fired generation facility, and certain DPL peaking generation facilities were not recoverable. The Killen and DPL peaking generation asset groups were determined to have a fair value of $84 million and $5 million, respectively, using the income approach. As a result, the Company recognized total asset impairment expense of $235 million. DPL is reported in the US and Utilities SBU reportable segment.

During the fourth quarter of 2016, the Company tested the recoverability of its long-lived coal-fired generation assets and one gas-fired peaking plant at DPL. Uncertainty around the useful life of Stuart and Killen related to the Company’s ESP proceedings and lower forward dark spreads and capacity prices were collectively determined to be an impairment indicator for these assets. Market information indicating a significant decrease in the fair value of Zimmer and Miami Fort was determined to be an indicator of impairment for these assets. The lower forward dark spreads and capacity prices, along with the indicators at the other coal-fired facilities, collectively, resulted in an indicator of impairment for the Conesville asset group. For the gas-fired peaking plant, significant incremental capital expenditures relative to its fair value, and an impairment charge taken at this facility in the second quarter of 2016, were collectively determined to be impairment indicators for this asset. The Company performed an impairment analysis for each of these asset groups and determined that their carrying amounts were not recoverable. The Stuart, Killen, Miami Fort, Zimmer, Conesville and the gas-fired peaking plant asset groups were determined to have fair values of $57 million, $43 million, $36 million, $24 million, $1 million and $2 million, respectively, using the market approach for Miami Fort and Zimmer and the income approach for the remaining asset groups. As a result, the Company recognized total asset impairment expense of $624 million. DPL is reported in the US and Utilities SBU reportable segment.

Laurel Mountain — During the fourth quarter of 2017, the Company tested the recoverability of its long-lived assets at Laurel Mountain, a wind farm in the U.S. Impairment indicators were identified based on a decline in forward pricing. The Company determined that the carrying amount was not recoverable. The Laurel Mountain asset group was determined to have a fair value of $33 million using the income approach. As a result, the Company recognized an asset impairment expense of $121 million. Laurel Mountain is reported in the US and Utilities SBU reportable segment.

Kilroot — During the fourth quarter of 2017, the Company tested the recoverability of its long-lived assets at Kilroot, a coal and oil-fired plant in Northern Ireland, as Kilroot was not successful in bidding its coal units into the December 2017 capacity auction for the newly implemented I-SEM market. The Company determined that the carrying amount of the asset group was not recoverable. The Kilroot asset group was determined to have a fair value of $20 million using the income approach. As a result, the Company recognized an asset impairment expense

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

of $37 million, which was limited to the carrying value of the coal units. Kilroot is reported in the Eurasia SBU reportable segment.

Kazakhstan Hydroelectric — In April 2017, the Republic of Kazakhstan stated the concession agreements would not be extended for Shulbinsk HPP and Ust-Kamenogorsk HPP, two hydroelectric plants in Kazakhstan, and initiated the process to transfer these plants back to the government. Upon meeting the held-for-sale criteria in the second quarter of 2017, the Company performed an impairment analysis and determined the carrying value of the asset group of $190 million, which included cumulative translation losses of $100 million, was greater than its fair value less costs to sell of $92 million. As a result, the Company recognized asset impairment expense of $92 million limited to the carrying value of the long-lived assets. The Company completed the transfer of the plants in October 2017. Prior to their transfer, the Kazakhstan hydroelectric plants were reported in the Eurasia SBU reportable segment. See Note 23—Held-for-Sale and Dispositions for further information.

Kazakhstan CHPs — In January 2017, the Company entered into an agreement for the sale of Ust-Kamenogorsk CHP and Sogrinsk CHP, its combined heating and power coal plants in Kazakhstan. Upon meeting the held-for-sale criteria in the first quarter of 2017, the Company performed an impairment analysis and determined that the carrying value of the asset group of $171 million, which included cumulative translation losses of $92 million, was greater than its fair value less costs to sell of $29 million. As a result, the Company recognized asset impairment expense of $94 million limited to the carrying value of the long-lived assets. The Company completed the sale of its interest in the Kazakhstan CHP plants in April 2017. Prior to their sale, the plants were reported in the Eurasia SBU reportable segment. See Note 23—Held-for-Sale and Dispositions for further information.

Buffalo Gap I — During 2016, the Company tested the recoverability of its long-lived assets at Buffalo Gap I. Low wind production during 2016 resulted in management lowering future expectations of production and therefore future forecasted revenues. As such this was determined to be an impairment indicator. The Company determined that the carrying amount of the asset group was not recoverable. The Buffalo Gap I asset group was determined to have a fair value of $36 million using the income approach. As a result, the Company recognized asset impairment expense of $77 million ($23 million attributable to AES). Buffalo Gap I is reported in the US and Utilities SBU reportable segment.

Buffalo Gap II — During 2016, the Company tested the recoverability of its long-lived assets at Buffalo Gap II. Impairment indicators were identified based on a decline in forward power curves. The Company determined that the carrying amount was not recoverable. The Buffalo Gap II asset group was determined to have a fair value of $92 million using the income approach. As a result, the Company recognized asset impairment expense of $159 million ($49 million attributable to AES). Buffalo Gap II is reported in the US and Utilities SBU reportable segment.

21**. INCOME TAXES**

U.S. Tax Reform — In 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “TCJA”). The TCJA significantly changed U.S. corporate income tax law. Among other changes effective in 2017, the TCJA required companies to pay a one-time tax on certain unrepatriated earnings of foreign subsidiaries. Many other changes took effect in 2018, including a limit on the deductibility of interest expense and a new regime for taxing certain earnings of foreign subsidiaries.

The Company recognized the income tax effects of the TCJA in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) which provides SEC guidance on the application of ASC 740, Income Taxes, in the reporting period in which the TCJA was signed into law. Accordingly, the Company’s 2017 financial statements reflected provisional amounts for those impacts for which the accounting under ASC 740 was incomplete, but a reasonable estimate could be determined. As of December 31, 2018, the Company's accounting for the initial impacts of the TCJA are complete under SAB 118.

For the year ended December 31, 2018 the Company increased its estimate of the one-time transition tax by $194 million to $869 million. The estimated tax expense recognized for the year ended December 31, 2017 relating to the remeasurement of deferred tax assets and liabilities from an income tax rate of 35% to 21%, decreased $77 million, resulting in a total remeasurement benefit of $38 million.

Argentine Tax Reform — In December 2017, the Argentine government enacted reforms to its income tax laws that resulted in a decrease to statutory income tax rates for our Argentine businesses from 35% to 30% in 2018-2019 and to 25% for 2020 and future years. The impact of remeasuring deferred taxes to account for the enacted change in future applicable income tax rates was recognized as income tax benefit in the fourth quarter

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

of 2017, resulting in a decrease of $21 million to consolidated income tax expense.

Chilean Tax Reform — In February 2016, the Chilean government enacted further reforms to its income tax laws that resulted in an increase to statutory income tax rates for most of our Chilean businesses from 25% to 25.5% in 2017 and to 27% for 2018 and future years. The impact of remeasuring deferred taxes to account for the enacted change in future applicable income tax rates was recognized as a discrete income tax expense in the first quarter of 2016, resulting in an increase of $26 million to consolidated income tax expense.

Income Tax Provision — The following table summarizes the expense for income taxes on continuing operations for the periods indicated (in millions):

December 31,		2018				2017				2016
Federal:	Current	$	7			$	—			$	2
	Deferred	186				545				(361		)
State:	Current	2				—				1
	Deferred	5				1				(4		)
Foreign:	Current	378				335				318
	Deferred	130				109				76
Total		$	708			$	990			$	32

Effective and Statutory Rate Reconciliation — The following table summarizes a reconciliation of the U.S. statutory federal income tax rate to the Company's effective tax rate as a percentage of income from continuing operations before taxes for the periods indicated:

December 31,		2018			2017			2016
Statutory Federal tax rate		21	%		35	%		35	%
State taxes, net of Federal tax benefit		2	%		(7	)%		(18	)%
Taxes on foreign earnings		9	%		—	%		(46	)%
Valuation allowance		(2	)%		10	%		10	%
Uncertain tax positions		—	%		—	%		4	%
Noncontrolling Interest on Buffalo Gap impairments		—	%		—	%		31	%
Change in tax law		6	%		90	%		12	%
Other—net		(1	)%		—	%		(11	)%
Effective tax rate		35	%		128	%		17	%

For 2018, the 6% change in tax law item relates primarily to changes in estimate under SAB 118 of the impacts of adoption of the TCJA. The Company recognized tax expense of $194 million related to revised estimates of the one-time transition tax in accordance with proposed regulations issued by the U.S. Treasury in 2018. The adjustment was due in large part to the approach the proposed regulations adopted to determine the fair value of our interests in publicly traded subsidiaries. The Company also recognized tax benefit of $77 million related to revised estimates of deferred tax remeasurement. Included in the 9% taxes on foreign earnings item is $124 million of U.S. GILTI tax expense related to foreign subsidiaries, including the sale of our interest in Masinloc.

For 2017, the 90% change in tax law item relates primarily to the impact of U.S. and Argentina tax reform. The impact of the U.S one-time transition tax and remeasurement of deferred taxes represents 88% and 5%, respectively, which is partially offset by the tax benefit resulting from Argentina tax reform representing 3%.

For 2016, the 31% Buffalo Gap impairments item relates to the amounts of impairment allocated to noncontrolling interest which is nondeductible.

Income Tax Receivables and Payables — The current income taxes receivable and payable are included in Other Current Assets and Accrued and Other Liabilities, respectively, on the accompanying Consolidated Balance Sheets. The noncurrent income taxes receivable and payable are included in Other Noncurrent Assets and Other Noncurrent Liabilities, respectively, on the accompanying Consolidated Balance Sheets. The following table summarizes the income taxes receivable and payable as of the periods indicated (in millions):

December 31,		2018				2017
Income taxes receivable—current		$	163			$	147
Income taxes receivable—noncurrent		8				—
Total income taxes receivable		$	171			$	147
Income taxes payable—current		$	210			$	129
Income taxes payable—noncurrent		7				17
Total income taxes payable		$	217			$	146

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

Deferred Income Taxes — Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (b) operating loss and tax credit carryforwards. These items are stated at the enacted tax rates that are expected to be in effect when taxes are actually paid or recovered.

As of December 31, 2018, the Company had federal net operating loss carryforwards for tax return purposes of approximately $1.1 billion expiring in years 2033 to 2036. The Company also had federal general business tax credit carryforwards of approximately $22 million expiring primarily from 2021 to 2038, and federal alternative minimum tax credits of approximately $15 million that may be fully recovered by 2021 under the TCJA. Additionally, the Company had state net operating loss carryforwards as of December 31, 2018 of approximately $8.5 billion expiring in years 2019 to 2038. As of December 31, 2018, the Company had foreign net operating loss carryforwards of approximately $2.4 billion that expire at various times beginning in 2019 and some of which carry forward without expiration, and tax credits available in foreign jurisdictions of approximately $14 million, $13 million of which expire in 2021 and $1 million of which expire in years 2024 to 2029.

Valuation allowances decreased $120 million during 2018 to $868 million at December 31, 2018. This net decrease was primarily the result of valuation allowance activity at certain of our Brazil subsidiaries and U.S. states.

Valuation allowances increased $112 million during 2017 to $988 million at December 31, 2017. This net increase was primarily the result of valuation allowance activity at certain of our Brazil subsidiaries.

The Company believes that it is more likely than not that the net deferred tax assets as shown below will be realized when future taxable income is generated through the reversal of existing taxable temporary differences and income that is expected to be generated by businesses that have long-term contracts or a history of generating taxable income.

The following table summarizes deferred tax assets and liabilities, as of the periods indicated (in millions):

December 31,		2018				2017
Differences between book and tax basis of property		$	(1,418	)		$	(1,424	)
Other taxable temporary differences		(243		)		(143		)
Total deferred tax liability		(1,661		)		(1,567		)
Operating loss carryforwards		1,066				1,439
Capital loss carryforwards		52				63
Bad debt and other book provisions		62				66
Tax credit carryforwards		55				51
Other deductible temporary differences		111				60
Total gross deferred tax asset		1,346				1,679
Less: valuation allowance		(868		)		(988		)
Total net deferred tax asset		478				691
Net deferred tax (liability)		$	(1,183	)		$	(876	)

The Company considers undistributed earnings of certain foreign subsidiaries to be indefinitely reinvested outside of the U.S. Except for the one-time transition tax in the U.S., no taxes have been recorded with respect to our indefinitely reinvested earnings in accordance with the relevant accounting guidance for income taxes. Should the earnings be remitted as dividends, the Company may be subject to additional foreign withholding and state income taxes. Under the TCJA, future distributions from foreign subsidiaries will generally be subject to a federal dividends received deduction in the U.S. As of December 31, 2018, the cumulative amount of U.S. GAAP foreign un-remitted earnings upon which additional income taxes have not been provided is approximately $4 billion. It is not practicable to estimate the amount of any additional taxes which may be payable on the undistributed earnings.

Income from operations in certain countries is subject to reduced tax rates as a result of satisfying specific commitments regarding employment and capital investment. The Company's income tax benefits related to the tax status of these operations are estimated to be $35 million, $26 million and $20 million for the years ended December 31, 2018, 2017 and 2016, respectively. The per share effect of these benefits after noncontrolling interests was $0.04, $0.03 and $0.02 for the years ended December 31, 2018, 2017 and 2016, respectively. Included in the Company's income tax benefits is the benefit related to our operations in Vietnam, which is estimated to be $19 million, $13 million and $15 million for the years ended December 31, 2018, 2017 and 2016, respectively. The per share effect of these benefits related to our operations in Vietnam after noncontrolling interest was $0.01, $0.01 and $0.01 for the years ended December 31, 2018, 2017 and 2016, respectively.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

The following table shows the income (loss) from continuing operations, before income taxes, net equity in earnings of affiliates and noncontrolling interests, for the periods indicated (in millions):

December 31,		2018				2017				2016
U.S.		$	(218	)		$	(511	)		$	(1,305	)
Non-U.S.		2,236				1,282				1,492
Total		$	2,018			$	771			$	187

Uncertain Tax Positions — Uncertain tax positions have been classified as noncurrent income tax liabilities unless they are expected to be paid within one year. The Company's policy for interest and penalties related to income tax exposures is to recognize interest and penalties as a component of the provision for income taxes in the Consolidated Statements of Operations. The following table shows the total amount of gross accrued income taxes related to interest and penalties included in the Consolidated Balance Sheets for the periods indicated (in millions):

December 31,		2018				2017
Interest related		$	4			$	7
Penalties related		—				—

The following table shows the expense/(benefit) related to interest and penalties on unrecognized tax benefits for the periods indicated (in millions):

December 31,		2018				2017				2016
Total expense (benefit) for interest related to unrecognized tax benefits		$	(3	)		$	1			$	2
Total expense for penalties related to unrecognized tax benefits		—				—				—

We are potentially subject to income tax audits in numerous jurisdictions in the U.S. and internationally until the applicable statute of limitations expires. Tax audits by their nature are often complex and can require several years to complete. The following is a summary of tax years potentially subject to examination in the significant tax and business jurisdictions in which we operate:

Jurisdiction		Tax Years Subject to Examination
Argentina		2012-2018
Brazil		2013-2018
Chile		2015-2018
Colombia		2016-2018
Dominican Republic		2016-2018
El Salvador		2016-2018
Netherlands		2014-2018
Panama		2015-2018
United Kingdom		2012-2018
United States (Federal)		2015-2018

As of December 31, 2018, 2017 and 2016, the total amount of unrecognized tax benefits was $463 million, $348 million and $352 million, respectively. The total amount of unrecognized tax benefits that would benefit the effective tax rate as of December 31, 2018, 2017 and 2016 is $446 million, $332 million and $332 million, respectively, of which $33 million, $29 million and $24 million, respectively, would be in the form of tax attributes that would warrant a full valuation allowance. Further, the total amount of unrecognized tax benefit that would benefit the effective tax rate as of 2018 would be reduced by approximately $161 million of tax expense related to remeasurement from 35% to 21%.

The total amount of unrecognized tax benefits anticipated to result in a net decrease to unrecognized tax benefits within 12 months of December 31, 2018 is estimated to be between $0 million and $10 million, primarily relating to statute of limitation lapses and tax exam settlements.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the periods indicated (in millions):

		2018				2017				2016
Balance at January 1		$	348			$	352			$	364
Additions for current year tax positions		2				—				2
Additions for tax positions of prior years		146				2				1
Reductions for tax positions of prior years		(26		)		(5		)		(1		)
Settlements		—				—				(13		)
Lapse of statute of limitations		(7		)		(1		)		(1		)
Balance at December 31		$	463			$	348			$	352

The Company and certain of its subsidiaries are currently under examination by the relevant taxing authorities for various tax years. The Company regularly assesses the potential outcome of these examinations in each of the taxing jurisdictions when determining the adequacy of the amount of unrecognized tax benefit recorded. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe we have appropriately accrued for our uncertain tax benefits. However, audit outcomes and the timing of audit settlements and future events that would impact our previously recorded unrecognized tax benefits and the range of anticipated increases or decreases in unrecognized tax benefits are subject to significant uncertainty. It is possible that the ultimate outcome of current or future examinations may exceed our provision for current unrecognized tax benefits in amounts that could be material, but cannot be estimated as of December 31, 2018. Our effective tax rate and net income in any given future period could therefore be materially impacted.

22**. DISCONTINUED OPERATIONS**

Due to a portfolio evaluation in the first half of 2016, management decided to pursue a strategic shift of its distribution companies in Brazil, Sul and Eletropaulo, to reduce the Company's exposure to the Brazilian distribution market. The disposals of Sul and Eletropaulo were completed in October 2016 and June 2018, respectively.

Eletropaulo — In November 2017, Eletropaulo converted its preferred shares into ordinary shares and transitioned the listing of those shares to the Novo Mercado, which is a listing segment of the Brazilian stock exchange with the highest standards of corporate governance. Upon conversion of the preferred shares into ordinary shares, AES no longer controlled Eletropaulo, but maintained significant influence over the business. As a result, the Company deconsolidated Eletropaulo. After deconsolidation, the Company's 17% ownership interest was reflected as an equity method investment. The Company recorded an after-tax loss on deconsolidation of $611 million, which primarily consisted of $455 million related to cumulative translation losses and $243 million related to pension losses reclassified from AOCL.

In December 2017, all the remaining criteria were met for Eletropaulo to qualify as a discontinued operation. Therefore, its results of operations and financial position were reported as such in the consolidated financial statements for all periods presented.

In June 2018, the Company completed the sale of its entire 17% ownership interest in Eletropaulo through a bidding process hosted by the Brazilian securities regulator, CVM. Gross proceeds of $340 million were received at our subsidiary in Brazil, subject to the payment of taxes. Upon disposal of Eletropaulo, the Company recorded a pre-tax gain on sale of $243 million (after-tax $199 million).

Excluding the gain on sale, Eletropaulo's pre-tax loss attributable to AES was immaterial for the year ended December 31, 2018. Eletropaulo's pre-tax loss attributable to AES, including the loss on deconsolidation, for the years ended December 31, 2017 and 2016 was $633 million and $192 million, respectively. Prior to its classification as discontinued operations, Eletropaulo was reported in the South America SBU reportable segment.

Sul — The Company executed an agreement for the sale of Sul, a wholly-owned subsidiary, in June 2016. The results of operations and financial position of Sul are reported as discontinued operations in the consolidated financial statements for all periods presented. Upon meeting the held-for-sale criteria, the Company recognized an after-tax loss of $382 million comprised of a pre-tax impairment charge of $783 million, offset by a tax benefit of $266 million related to the impairment of the Sul long lived assets and a tax benefit of $135 million for deferred taxes related to the investment in Sul. Prior to the impairment charge, the carrying value of the Sul asset group of $1.6 billion was greater than its approximate fair value less costs to sell. However, the impairment charge was limited to the carrying value of the long lived assets of the Sul disposal group.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

On October 31, 2016, the Company completed the sale of Sul and received final proceeds less costs to sell of $484 million, excluding contingent consideration. Upon disposal of Sul, the Company incurred an additional after-tax loss on sale of $737 million. The cumulative impact to earnings of the impairment and loss on sale was $1.1 billion. This includes the reclassification of approximately $1 billion of cumulative translation losses resulting in a net reduction to the Company’s stockholders’ equity of $92 million.

Sul’s pre-tax loss attributable to AES for the year ended December 31, 2016 was $1.4 billion. Prior to its classification as discontinued operations, Sul was reported in the South America SBU reportable segment.

Borsod — In 2011, Borsod, which held two coal and biomass-fired generation plants in Hungary, filed for liquidation and was deconsolidated with its historical operating results reflected in discontinued operations under prior accounting guidance. In October 2018, the liquidation was completed and the Company recognized a deferred gain of $26 million, primarily comprised of a $20 million write-off of cumulative translation balances. Prior to its liquidation, Borsod was reported in the Eurasia SBU reportable segment.

The following table summarizes the carrying amounts of the major classes of assets and liabilities of discontinued operations at December 31, 2017:

(in millions)	December 31, 2017
Assets of discontinued operations and held-for-sale businesses:
Investments in and advances to affiliates (1)	$	86
Total assets of discontinued operations	86
Other assets of businesses classified as held-for-sale (2)	1,948
Total assets of discontinued operations and held-for-sale businesses	$	2,034
Liabilities of discontinued operations and held-for-sale businesses:
Other liabilities of businesses classified as held-for-sale (2)	1,033
Total liabilities of discontinued operations and held-for-sale businesses	$	1,033

---

(1)	Represents the Company's 17% ownership interest in Eletropaulo.

(2)	Masinloc, Eletrica Santiago, and the DPL peaker assets were classified as held-for-sale as of December 31, 2017. See Note 23—Held-for-Sale and Dispositions for further information.

Excluding the gain on sale of Eletropaulo and deferred gain on liquidation of Borsod, income from discontinued operations and cash flows from operating and investing activities of discontinued operations were immaterial for the year ended December 31, 2018.

The following table summarizes the major line items constituting losses from discontinued operations for the periods indicated (in millions):

December 31,	2017				2016
Income (loss) from discontinued operations, net of tax:
Revenue — regulated	$	3,320			$	4,036
Cost of sales	(3,151		)		(3,954		)
Other income and expense items that are not major (1)	(166		)		(160		)
Income (loss) from operations of discontinued businesses	3				(78		)
Loss from disposal and impairments of discontinued businesses	(611		)		(1,385		)
Income (loss) from discontinued operations	(608		)		(1,463		)
Less: Net income attributable to noncontrolling interests	(25		)		(142		)
Income (loss) from discontinued operations attributable to The AES Corporation	(633		)		(1,605		)
Income tax benefit (expense)	(21		)		495
Loss from discontinued operations, net of tax	$	(654	)		$	(1,110	)

---

(1)	Includes a loss contingency recognized by our equity method investment in discontinued operations.

The following table summarizes the operating and investing cash flows from discontinued operations for the periods indicated (in millions):

December 31,	2017				2016
Cash flows provided by operating activities of discontinued operations	$	164			$	529
Cash flows used in investing activities of discontinued operations	(288		)		(368		)

23**. HELD-FOR-SALE AND DISPOSITIONS**

Held-for-Sale

Shady Point — In December 2018, the Company entered into an agreement to sell Shady Point, a U.S. coal-fired generating facility, for $30 million, subject to customary purchase price adjustments. The sale is subject to regulatory approval and is expected to close during the second half of 2019. As of December 31, 2018, Shady Point was classified as held-for-sale, but did not meet the criteria to be reported as discontinued operations. Shady Point's carrying value as of December 31, 2018 was $30 million. Excluding impairment charges, pre-tax income attributable to AES was $19 million in each of the years ended December 31, 2018, 2017 and 2016. Shady Point is reported in the US and Utilities SBU reportable segment. See Note 20*—Asset Impairment Expense* for further information.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

Redondo Beach — In October 2018, the Company entered into an agreement to sell land held by AES Redondo Beach, a gas-fired generating facility in California. The sale is expected to close during the first half of 2019. As of December 31, 2018, the $24 million carrying value of the land held by Redondo Beach was classified as held-for-sale. Redondo Beach is reported in the US and Utilities SBU reportable segment.

Dispositions

CTNG — In December 2018, AES Gener completed the sale of CTNG, an entity that holds transmission lines in Chile, for $225 million, subject to customary post-closing adjustments, resulting in a pre-tax gain on sale of $129 million. The sale did not meet the criteria to be reported as discontinued operations. Prior to its sale, CTNG was reported in the South America SBU reportable segment.

Electrica Santiago — In May 2018, AES Gener completed the sale of Electrica Santiago for total consideration of $287 million, resulting in a pre-tax gain on sale of $69 million after post-closing adjustments. Electrica Santiago consisted of four gas and diesel-fired generation plants in Chile. The sale did not meet the criteria to be reported as discontinued operations. Prior to its sale, Electrica Santiago was reported in the South America SBU reportable segment.

Stuart and Killen — In May 2018, DPL retired the co-owned Stuart coal-fired and diesel-fired generating units, and the Killen coal-fired generating unit and combustion turbine. Prior to their retirement, Stuart and Killen were reported in the US and Utilities SBU reportable segment. See Note 20*—Asset Impairment Expense* for further information.

Masinloc — In March 2018, the Company completed the sale of its entire 51% equity interest in Masinloc for cash proceeds of $1.05 billion, resulting in a pre-tax gain on sale of $772 million after post-closing adjustments, subject to U.S. income tax. Masinloc consisted of a coal-fired generation plant in operation, a coal-fired generation plant under construction and an energy storage facility all located in the Philippines. The sale did not meet the criteria to be reported as discontinued operations. Prior to its sale, Masinloc was reported in the Eurasia SBU reportable segment.

In 2014, the Company completed the sale of 45% of its ownership interest in Masinloc for $436 million, including $23 million of consideration that was contingent upon the achievement of certain tax restructuring efficiencies. In December 2017, the related contingency expired and the $23 million of contingent consideration was recognized as a gain in Gain (loss) on disposal and sale of business interests in the Consolidated Statement of Operations.

DPL peaker assets — In March 2018, DPL completed the sale of six of its combustion turbine and diesel-fired generation facilities and related assets ("DPL peaker assets") for total proceeds of $239 million, inclusive of estimated working capital and subject to customary post-closing adjustments, resulting in a loss on sale of $2 million. The sale did not meet the criteria to be reported as discontinued operations. Prior to their sale, the DPL peaker assets were reported in the US and Utilities SBU reportable segment.

Beckjord facility — In February 2018, DPL transferred its interest in Beckjord, a coal-fired generation facility retired in 2014, including its obligations to remediate the facility and its site. The transfer resulted in cash expenditures of $15 million, inclusive of disposal charges, and a loss on disposal of $12 million. Prior to the transfer, Beckjord was reported in the US and Utilities SBU reportable segment.

Advancion Energy Storage — In January 2018, the Company deconsolidated the AES Advancion energy storage development business and contributed it to the Fluence joint venture, resulting in a gain on sale of $23 million. See Note 7*—Investments in and Advances to Affiliates* for further discussion. Prior to the transfer, the AES Advancion energy storage development business was reported as part of Corporate and Other.

Zimmer and Miami Fort — In December 2017, DPL and AES Ohio Generation completed the sale of Zimmer and Miami Fort, two coal-fired generating plants, for net proceeds of $70 million, resulting in a gain on sale of $13 million. The sale did not meet the criteria to be reported as discontinued operations. Prior to their sale, Zimmer and Miami Fort were reported in the US and Utilities SBU reportable segment.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

Kazakhstan Hydroelectric — Affiliates of the Company (the “Affiliates”) previously operated Shulbinsk HPP and Ust-Kamenogorsk HPP (the “HPPs”), two hydroelectric plants in Kazakhstan, under a concession agreement with the Republic of Kazakhstan (“RoK”). In April 2017, the RoK initiated the process to transfer these plants back to the RoK. The RoK indicated that arbitration would be necessary to determine the correct Return Share Transfer Payment ("RST") and, rather than paying the Affiliates, deposited the RST into an escrow account. In exchange, the Affiliates transferred 100% of the shares in the HPPs to the RoK, under protest and with a full reservation of rights. The Company recorded a loss on disposal of $33 million in the fourth quarter of 2017. In February 2018, the Affiliates initiated the arbitration process in international court to recover at least $75 million of the RST placed in escrow, based on the September 30, 2017 RST calculation. As of December 31, 2018, the arbitration proceedings are ongoing, and additional losses are not considered probable at this time. However, additional losses may be incurred if some or all of the disputed consideration is not paid by the RoK via a mutually acceptable settlement, or upon any unfavorable decision rendered by the arbiter. The transfer did not meet the criteria to be reported as discontinued operations. Prior to their transfer, the Kazakhstan HPPs were reported in the Eurasia SBU reportable segment. See Note 20—Asset Impairment Expense for further information.

Kazakhstan CHPs — In April 2017, the Company completed the sale of Ust-Kamenogorsk CHP and Sogrinsk CHP, its combined heating and power coal plants in Kazakhstan, for net proceeds of $24 million. The Company recognized a pre-tax loss on sale of $49 million, primarily related to cumulative translation losses. The sale did not meet the criteria to be reported as discontinued operations. Prior to their sale, the Kazakhstan CHP plants were reported in the Eurasia SBU reportable segment. See Note 20—Asset Impairment Expense for further information.

UK Wind — During 2016, the Company determined it no longer had control of its wind development projects in the United Kingdom (“UK Wind”) as the Company no longer held seats on the board of directors. In accordance with accounting guidance, UK Wind was deconsolidated and a loss on deconsolidation of $20 million was recorded to Gain (loss) on disposal and sale of business interests in the Consolidated Statement of Operations to write off the Company’s noncontrolling interest in the project. The UK Wind projects were reported in the Eurasia SBU reportable segment.

DPLER — In January 2016, the Company completed the sale of DPLER, a competitive retail marketer selling electricity to customers in Ohio, and recognized a gain on sale of $49 million. Proceeds of $76 million were received in December 2015. DPLER did not meet the criteria to be reported as a discontinued operation. DPLER's results were therefore reflected within continuing operations in the Consolidated Statements of Operations. Prior to its sale, DPLER was reported in the US and Utilities SBU reportable segment.

Kelanitissa — In January 2016, the Company completed the sale of its interest in Kelanitissa, a diesel-fired generation plant in Sri Lanka, for $18 million, resulting in a loss on sale of $5 million. The sale did not meet the criteria to be reported as discontinued operations. Kelanitissa's results were therefore reflected within continuing operations in the Consolidated Statements of Operations. Prior to its sale, Kelanitissa was reported in the Eurasia SBU reportable segment.

Jordan — In February 2016, the Company completed the sale of 40% of its interest in a wholly-owned subsidiary in Jordan that owns a controlling interest in the Jordan IPP4 gas-fired plant for $21 million. The transaction was accounted for as a sale of in-substance real estate and a pre-tax gain of $4 million, net of transaction costs, was recognized in net income. The cash proceeds from the sale are reflected in Proceeds from the sale of business interests, net of cash and restricted cash sold on the Consolidated Statement of Cash Flows for the period ended December 31, 2016. After completion of the sale, the Company has a 36% economic interest in Jordan IPP4 and continues to manage and operate the plant. As the Company maintained control after the sale, Jordan IPP4 continues to be consolidated by the Company within the Eurasia SBU reportable segment.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

Excluding any impairment charge or gain/loss on sale, pre-tax income (loss) attributable to AES of disposed businesses was as follows (in millions):

Year Ended December 31,	2018				2017				2016
Masinloc	$	9			$	103			$	103
Stuart and Killen (1)(2)	77				17				—
DPL peaker assets	7				17				20
Zimmer and Miami Fort	—				26				(14		)
Kazakhstan Hydroelectric	—				33				34
Kazakhstan CHPs	—				13				12
Other	14				9				11
Total	$	107			$	218			$	166

---

(1)	The Company entered into contracts to buy back all open capacity years for Stuart and Killen at prices lower than the PJM capacity revenue prices. As such, the Company continues to earn capacity margin.

(2)	Reductions in the asset retirement obligations for ash ponds and landfills at Stuart and Killen in 2018 resulted in a $32 million reduction to cost of sales. See Note 3—Property, Plant and Equipment for further information.

24**. ACQUISITIONS**

Distributed Energy — In December 2018, Distributed Energy acquired the outstanding noncontrolling interest in a partnership holding various solar projects from its tax equity partner for $23 million of consideration in a non-cash transaction through the assumption of debt, increasing the Company's ownership to 100%. The partnership was previously classified as an equity method investment. The transaction was accounted for as an asset acquisition, therefore the Company remeasured the equity investment at fair value and recognized a loss of $5 million in Other expense in the Consolidated Statement of Operations. The fair value of the investment, along with the consideration transferred, plus transaction costs, were allocated to the individual assets acquired and liabilities assumed based on their relative fair values. Distributed Energy is reported in the US and Utilities SBU reportable segment.

In September 2016, Distributed Energy acquired the equity interest of various projects held by multiple partnerships for approximately $43 million. These partnerships were previously classified as equity method investments. In accordance with the accounting guidance for business combinations, the Company recorded the opening balance sheets of the acquired businesses based on the purchase price allocation as of the acquisition date.

Oahu — In November 2018, AES Oahu amended a 2017 agreement to acquire 100% of Na Pua Makani Power Partners, a partnership designed to develop and hold a wind project in Hawaii. The fair value of the initial consideration was $53 million, of which $48 million was contingent on meeting predefined development milestones. The transaction was accounted for as an acquisition of a variable interest entity that did not meet the definition of a business, therefore the assets acquired and liabilities assumed were recorded at their fair values, which equaled the fair value of the consideration. As a result of the amendment, the Company paid $11 million in 2018 and the contingent consideration was reduced to $5 million, resulting in a $32 million gain on remeasurement of contingent consideration recorded in Other income in the Consolidated Statement of Operations. AES Oahu is reported in the US and Utilities SBU reportable segment.

Guaimbê Solar Complex — In September 2018, AES Tietê completed the acquisition of the Guaimbê Solar Complex (“Guaimbê”) from Cobra do Brasil for $152 million, subject to post-closing adjustments, comprised of the exchange of $119 million of non-convertible debentures in project financing and additional cash consideration of $33 million. The transaction was accounted for as an asset acquisition, therefore the consideration transferred, plus transaction costs, were allocated to the individual assets acquired and liabilities assumed based on their relative fair values. Any differences arising from post-closing adjustments will be allocated accordingly. Guaimbê is reported in the South America SBU reportable segment.

Alto Sertão II — In August 2017, the Company completed the acquisition of the Alto Sertão II Wind Complex (“Alto Sertão II”) from Renova Energia S.A. for $179 million, plus the assumption of $346 million of non-recourse debt. At closing, the Company made a cash payment of $143 million, which excluded holdbacks related to indemnifications. In September 2018, an additional $12 million was paid to settle a portion of the remaining indemnification liability. In the first quarter of 2018, the Company finalized the purchase price allocation related to the acquisition of Alto Sertão II. There were no significant adjustments made to the preliminary purchase price

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

allocation recorded in the third quarter of 2017 when the acquisition was completed. The assets acquired and liabilities assumed at the acquisition date were recorded at fair value, including a contingent liability for earn-out payments of $18 million, based on the final purchase price allocation at March 31, 2018. Subsequent changes to the fair value of the earn-out payments will be reflected in earnings. Alto Sertão II is reported in the South America SBU reportable segment.

25**. EARNINGS PER SHARE**

Basic and diluted earnings per share are based on the weighted-average number of shares of common stock and potential common stock outstanding during the period. Potential common stock, for purposes of determining diluted earnings per share, includes the effects of dilutive RSUs, stock options and convertible securities. The effect of such potential common stock is computed using the treasury stock method or the if-converted method, as applicable.

The following table is a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation for income from continuing operations for the years ended December 31, 2018, 2017 and 2016, where income represents the numerator and weighted-average shares represent the denominator.

Year Ended December 31,	2018											2017											2016
(in millions, except per share data)	Income				Shares			$ per Share				Loss				Shares			$ per Share				Loss				Shares			$ per Share
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) from continuing operations attributable to The AES Corporation common stockholders (1)	$	985			662			$	1.49			$	(507	)		660			$	(0.77	)		$	(25	)		660			$	(0.04	)
EFFECT OF DILUTIVE SECURITIES
Restricted stock units	—				3			(0.01		)		—				—			—				—				—			—
DILUTED EARNINGS (LOSS) PER SHARE	$	985			665			$	1.48			$	(507	)		660			$	(0.77	)		$	(25	)		660			$	(0.04	)

---

(1)	Loss from continuing operations, net of tax, of $20 million less the $5 million adjustment to retained earnings to record the DP&L redeemable preferred stock at its redemption value as of December 31, 2016.

The calculation of diluted earnings per share excluded stock awards and convertible debentures which would be anti-dilutive. The calculation of diluted earnings per share excluded 2 million, 7 million and 8 million stock awards outstanding for the years ended December 31, 2018, 2017 and 2016, respectively, that could potentially dilute basic earnings per share in the future. Additionally, for the year ended December 31, 2016, all 15 million convertible debentures were excluded from the earnings per share calculation. The Company redeemed all of its existing convertible debentures in June 2017.

For the years ended December 31, 2017 and 2016, respectively, the calculation of diluted earnings per share also excluded 4 million and 5 million outstanding restricted stock units that could potentially dilute earnings per share in the future because their impact would be anti-dilutive given the loss from continuing operations. Had the Company generated income, 2 million potential shares of common stock related to the restricted stock units would have been included in diluted average shares outstanding for each period.

26**. RISKS AND UNCERTAINTIES**

AES is a diversified power generation and utility company organized into four market-oriented SBUs. See additional discussion of the Company's principal markets in Note 15—Segment 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 and solar.

Operating and Economic Risks — The Company operates in several developing economies where macroeconomic conditions are usually more volatile than developed economies. Deteriorating market conditions often 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. 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 a below-investment grade rating from Standard & Poor's of BB+, Fitch of BB+, and Moody's of Ba1. This could affect the Company's ability to finance new and/or existing development

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

projects at competitive interest rates. As of December 31, 2018, the Company had $1.2 billion of unrestricted cash and cash equivalents.

During 2018, 68% 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 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;

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

•	potentially adverse tax consequences of operating in multiple jurisdictions.

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

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

•	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.

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 U.S. dollar and the following currencies could create significant fluctuations in earnings and cash flows: the Argentine peso, the Brazilian real, the Dominican Republic peso, the Euro, the Chilean peso, the Colombian peso, and the Philippine 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 2018, 2017 or 2016.

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.

27**. RELATED PARTY TRANSACTIONS**

Certain of our businesses in Panama and the Dominican Republic are partially owned by governments either directly or through state-owned institutions. In the ordinary course of business, these businesses enter into energy purchase and sale transactions, and transmission agreements with other state-owned institutions which are controlled by such governments. At two of our generation businesses in Mexico, the offtakers exercise significant influence, but not control, through representation on these businesses' Boards of Directors. These offtakers are also required to hold a nominal ownership interest in such businesses. In Chile, we provide capacity and energy under contractual arrangements to our investment which is accounted for under the equity method of accounting. Additionally, the Company provides certain support and management services to several of its affiliates under various agreements.

The Company's Consolidated Statements of Operations included the following transactions with related parties for the periods indicated (in millions):

Years Ended December 31,	2018				2017				2016
Revenue—Non-Regulated	$	1,533			$	1,297			$	1,100
Cost of Sales—Non-Regulated	342				220				210
Interest income	14				8				4
Interest expense	54				36				39

The following table summarizes the balances receivable from and payable to related parties included in the Company's Consolidated Balance Sheets as of the periods indicated (in millions):

December 31,	2018				2017
Receivables from related parties	$	371			$	250
Accounts and notes payable to related parties	754				727

The Company entered into an equity transaction with our related party, Linda Group, see Note 14—Equity for further information.

28**. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)**

Quarterly Financial Data — The following tables summarize the unaudited quarterly Condensed Consolidated Statements of Operations for the Company for 2018 and 2017 (amounts in millions, except per share data). Amounts have been restated to reflect discontinued operations in all periods presented and reflect all adjustments necessary in the opinion of management for a fair statement of the results for interim periods.

THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2018, 2017, AND 2016

Quarter Ended 2018	Mar 31				Jun 30				Sep 30				Dec 31
Revenue	$	2,740			$	2,537			$	2,837			$	2,622
Operating margin	656				600				671				646
Income from continuing operations, net of tax (1)	778				224				192				155
Income (loss) from discontinued operations, net of tax (2)	(1		)		192				(1		)		26
Net income	$	777			$	416			$	191			$	181
Net income attributable to The AES Corporation	$	684			$	290			$	101			$	128
Basic earnings per share:
Income from continuing operations attributable to The AES Corporation common stockholders, net of tax	$	1.04			$	0.15			$	0.15			$	0.15
Income from discontinued operations attributable to The AES Corporation common stockholders, net of tax	—				0.29				—				0.04
Net income attributable to The AES Corporation common stockholders	$	1.04			$	0.44			$	0.15			$	0.19
Diluted earnings per share:
Income from continuing operations attributable to The AES Corporation common stockholders, net of tax	$	1.03			$	0.15			$	0.15			$	0.15
Income from discontinued operations attributable to The AES Corporation common stockholders, net of tax	—				0.29				—				0.04
Net income attributable to The AES Corporation common stockholders	$	1.03			$	0.44			$	0.15			$	0.19
Dividends declared per common share	$	0.13			$	—			$	0.13			$	0.27

Quarter Ended 2017	Mar 31				Jun 30				Sep 30				Dec 31
Revenue	$	2,581			$	2,613			$	2,693			$	2,643
Operating margin	557				623				640				645
Income (loss) from continuing operations, net of tax (3)	97				142				235				(622		)
Income (loss) from discontinued operations, net of tax (4)	1				8				26				(664		)
Net income (loss)	$	98			$	150			$	261			$	(1,286	)
Net income (loss) attributable to The AES Corporation	$	(24	)		$	53			$	152			$	(1,342	)
Basic earnings (loss) per share:
Income (loss) from continuing operations attributable to The AES Corporation common stockholders, net of tax	$	(0.04	)		$	0.08			$	0.22			$	(1.03	)
Income (loss) from discontinued operations attributable to The AES Corporation common stockholders, net of tax	—				—				0.01				(1.00		)
Net income (loss) attributable to The AES Corporation common stockholders	$	(0.04	)		$	0.08			$	0.23			$	(2.03	)
Diluted earnings per share:
Income (loss) from continuing operations attributable to The AES Corporation common stockholders, net of tax	$	(0.04	)		$	0.08			$	0.22			$	(1.03	)
Income (loss) from discontinued operations attributable to The AES Corporation common stockholders, net of tax	—				—				0.01				(1.00		)
Net income (loss) attributable to The AES Corporation common stockholders	$	(0.04	)		$	0.08			$	0.23			$	(2.03	)
Dividends declared per common share	$	0.12			$	—			$	0.12			$	0.25

---

(1)

Includes pre-tax gains on sales of business interests of $788 million, $89 million and $128 million, in the first, second and fourth quarters of 2018, respectively, and pre-tax losses of $21 million in the third quarter of 2018 (See Note 23—Held-for-Sale and Dispositions), pre-tax impairment expense of $92 million, $74 million and $42 million, in the second, third and fourth quarters of 2018, respectively (See Note 20—Asset Impairment Expense), other-than-temporary impairment of Guacolda of $144 million in the fourth quarter of 2018 (See Note 7—Investments in and Advances to Affiliates), SAB 118 charges to finalize the provisional estimate of one-time transition tax on foreign earnings of $33 million and $161 million in the third and fourth quarters of 2018, respectively, and a SAB 118 income tax benefit to finalize the provisional estimate of remeasurement of deferred tax assets and liabilities to the lower corporate tax rate of $77 million in the fourth quarter of 2018 (See Note 21—Income Taxes).

(2)	Includes gain on sale of Eletropaulo of $199 million in the second quarter of 2018 (See Note 22—Discontinued Operations).

(3)

Includes provisional tax expense related to a one-time transition tax on foreign earnings of $675 million and the remeasurement of deferred tax assets and liabilities to the lower corporate tax rate of $39 million in the fourth quarter of 2017 (See Note 21—Income Taxes), pre-tax impairment expense of $168 million, $90 million and $277 million, in the first, second and fourth quarters of 2017, respectively (See Note 20—Asset Impairment Expense), and pre-tax losses on sales of business interests of $48 million in second quarter of 2017 (See Note 23—Held-for-Sale and Dispositions).

(4)	Includes loss on deconsolidation of Eletropaulo of $611 million in the fourth quarter of 2017 (See Note 22—Discontinued Operations).