Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The condensed consolidated financial statements included in Item 1.—Financial Statements of this Form 10-Q and the discussions contained herein should be read in conjunction with our 2021 Form 10-K.

Forward-Looking Information

The following discussion may contain forward-looking statements regarding us, our business, prospects and our results of operations, including our expectations regarding the impact of the COVID-19 pandemic on our business, that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. These statements include, but are not limited to, statements regarding management’s intents, beliefs, and current expectations and typically contain, but are not limited to, the terms “anticipate,” “potential,” “expect,” “forecast,” “target,” “will,” “would,” “intend,” “believe,” “project,” “estimate,” “plan,” and similar words. Forward-looking statements are not intended to be a guarantee of future results, but instead constitute current expectations based on reasonable assumptions. Factors that could cause or contribute to such differences include, but are not limited to, those described in Item 1A.—Risk Factors of this Form 10-Q, Item 1A.—Risk Factors and Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2021 Form 10-K and subsequent filings with the SEC.

Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise of the risks and factors that may affect our business.

Overview of Our Business

We are a diversified power generation and utility company organized into the following four market-oriented SBUs: US and Utilities (United States, Puerto Rico and El Salvador); South America (Chile, Colombia, Argentina and Brazil); MCAC (Mexico, Central America and the Caribbean); and Eurasia (Europe and Asia). For additional information regarding our business, see Item 1.—Business of our 2021 Form 10-K.

We have two lines of business: generation and utilities. Each of our SBUs participates in our first business line, generation, in which we own and/or operate power plants to generate and sell power to customers, such as utilities, industrial users, and other intermediaries. Our US and Utilities SBU participates in our second business line, utilities, in which we own and/or operate utilities to generate or purchase, distribute, transmit and sell electricity to end-user customers in the residential, commercial, industrial, and governmental sectors within a defined service area. In certain circumstances, our utilities also generate and sell electricity on the wholesale market.

Executive Summary

Compared with last year, second quarter diluted earnings per share from continuing operations decreased $0.30, from earnings of $0.03 to a loss of $0.27. This decrease is mainly driven by the prior year gains on remeasurement of our interest in sPower’s development platform and on the issuance of new shares by Fluence, which was accounted for as a partial disposition, and the prior year net gains from early contract terminations at Angamos; partially offset by lower impairments in the current year.

Adjusted EPS, a non-GAAP measure, increased $0.03 to $0.34, mainly due to a lower adjusted tax rate and higher contributions from our South America SBU due to increased ownership in AES Andes, partially offset by lower contributions from our US and Utilities SBU due to impacts of outages and timing of renewables projects coming online.

Compared with last year, diluted earnings per share from continuing operations for the six months ended June 30, 2022 increased $0.09, from a loss of $0.19 to a loss of $0.10. This increase is mainly driven by lower impairments in the current year, partially offset by the prior year gains on remeasurement of our interest in sPower’s development platform and on the issuance of new shares by Fluence, which was accounted for as a partial disposition, prior year net gains from early contract terminations at Angamos, lower capitalized interest at construction projects, and higher income tax expense.

Adjusted EPS, a non-GAAP measure, decreased $0.04 to $0.55, mainly due to the prior year impact of

33 | The AES Corporation | June 30, 2022 Form 10-Q

realized gains on de-designated interest rate swaps at the Parent Company and lower contributions from our US and Utilities SBU due to timing of renewables projects coming online, partially offset by higher contributions from our South America SBU due to increased ownership in AES Andes and a lower adjusted tax rate.

34 | The AES Corporation | June 30, 2022 Form 10-Q



(1) See Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—SBU Performance Analysis—Non-GAAP Measures for reconciliation and definition.
(2) GWh sold in 2021.

35 | The AES Corporation | June 30, 2022 Form 10-Q

Overview of Strategic Performance

AES is leading the industry's transition to clean energy by investing in clean power growth and innovative technology businesses. The Company is well-positioned to benefit from very favorable trends in clean power generation, distribution, and supporting technologies.

In year-to-date 2022, the Company signed or was awarded 1,618 MW of renewables and energy storage under long-term PPAs expected to come online in 2023 and 2024, primarily including 1,250 MW of solar and energy storage in the U.S.

◦In the second quarter of 2022, the Company signed 531 MW of renewables and energy storage under long-term PPAs.

In year-to-date 2022, the Company completed the construction or acquisition of 390 MW of solar projects in the U.S. and the Dominican Republic.
The Company’s backlog is now 10,468 MW expected to be completed through 2025, including:

◦3,792 MW under construction; and

◦6,676 MW of renewable energy projects signed under long-term PPAs, but not yet under construction.

In June 2022, the Company formed the U.S. Solar Buyer Consortium with three other leading solar companies to drive the expansion of the U.S. solar supply chain and support the growth of the American solar industry.
In year-to-date 2022, the Company signed agreements that will direct excess LNG from the Company's business in Panama to international customers.

36 | The AES Corporation | June 30, 2022 Form 10-Q

Review of Consolidated Results of Operations (Unaudited)


	Three Months Ended June 30,								Six Months Ended June 30,
(in millions, except per share amounts)	2022		2021		$ change		% change		2022		2021		$ change		% change
Revenue:
US and Utilities SBU	$	1,197	$	972	$	225	23	%	$	2,314	$	1,921	$	393	20	%
South America SBU	880		964		(84)		-9	%	1,690		1,848		(158)		-9	%
MCAC SBU	686		490		196		40	%	1,252		1,025		227		22	%
Eurasia SBU	318		277		41		15	%	686		547		139		25	%
Corporate and Other	36		37		(1)		-3	%	59		61		(2)		-3	%
Eliminations	(39)		(40)		1		3	%	(71)		(67)		(4)		-6	%
Total Revenue	3,078		2,700		378		14	%	5,930		5,335		595		11	%
Operating Margin:
US and Utilities SBU	124		165		(41)		-25	%	254		272		(18)		-7	%
South America SBU	192		345		(153)		-44	%	396		697		(301)		-43	%
MCAC SBU	150		121		29		24	%	232		243		(11)		-5	%
Eurasia SBU	55		53		2		4	%	142		112		30		27	%
Corporate and Other	38		44		(6)		-14	%	85		76		9		12	%
Eliminations	4		—		4		NM		(16)		(8)		(8)		-100	%
Total Operating Margin	563		728		(165)		-23	%	1,093		1,392		(299)		-21	%
General and administrative expenses	(46)		(45)		(1)		2	%	(98)		(91)		(7)		8	%
Interest expense	(279)		(237)		(42)		18	%	(537)		(427)		(110)		26	%
Interest income	95		73		22		30	%	170		141		29		21	%
Loss on extinguishment of debt	(1)		(18)		17		-94	%	(7)		(19)		12		-63	%
Other expense	(29)		(4)		(25)		NM		(41)		(20)		(21)		NM
Other income	70		183		(113)		-62	%	76		226		(150)		-66	%
Gain (loss) on disposal and sale of business interests	(2)		64		(66)		NM		(1)		59		(60)		NM

Asset impairment expense	(482)		(872)		390		-45	%	(483)		(1,345)		862		-64	%
Foreign currency transaction losses	(49)		(2)		(47)		NM		(68)		(37)		(31)		84	%

Income tax benefit (expense)	19		59		(40)		-68	%	(41)		51		(92)		NM
Net equity in earnings (losses) of affiliates	5		(10)		15		NM		(28)		(40)		12		-30	%
INCOME (LOSS) FROM CONTINUING OPERATIONS	(136)		(81)		(55)		68	%	35		(110)		145		NM

Gain from disposal of discontinued businesses	—		4		(4)		-100	%	—		4		(4)		-100	%
NET INCOME (LOSS)	(136)		(77)		(59)		77	%	35		(106)		141		NM
Less: Loss (income) from continuing operations attributable to noncontrolling interests and redeemable stock of subsidiaries	(43)		105		(148)		NM		(99)		(14)		(85)		NM


NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION	$	(179)	$	28	$	(207)	NM		$	(64)	$	(120)	$	56	-47	%
AMOUNTS ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS:
Income (loss) from continuing operations, net of tax	$	(179)	$	24	$	(203)	NM		$	(64)	$	(124)	$	60	-48	%
Income from discontinued operations, net of tax	—		4		(4)		-100	%	—		4		(4)		-100	%
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION	$	(179)	$	28	$	(207)	NM		$	(64)	$	(120)	$	56	-47	%
Net cash provided by operating activities	$	408	$	351	$	57	16	%	$	865	$	604	$	261	43	%

Components of Revenue, Cost of Sales, and Operating Margin — Revenue includes revenue earned from the sale of energy from our utilities and the production and sale of energy from our generation plants, which are classified as regulated and non-regulated*,* respectively, on the Condensed Consolidated Statements of Operations. Revenue also includes the gains or losses on derivatives associated with the sale of electricity.

Cost of sales includes costs incurred directly by the businesses in the ordinary course of business. Examples include electricity and fuel purchases, operations and maintenance costs, depreciation and amortization expenses, bad debt expense and recoveries, and general administrative and support costs (including employee-related costs directly associated with the operations of the business). Cost of sales also includes the gains or losses on derivatives (including embedded derivatives other than foreign currency embedded derivatives) associated with the purchase of electricity or fuel.

Operating margin is defined as revenue less cost of sales.

37 | The AES Corporation | June 30, 2022 Form 10-Q

Consolidated Revenue and Operating Margin

Three Months Ended June 30, 2022

Revenue

(in millions)

Consolidated Revenue — Revenue increased $378 million, or 14%, for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, driven by:

$225 million in US and Utilities mainly driven by higher prices at AES Indiana and AES Ohio due to increases in riders to collect fuel and purchased power costs from customers, as well as increased demand and favorable weather; higher pass-through energy prices in El Salvador; an increase at Southland due to unrealized losses in the prior year under the commercial hedging strategy; higher sales at AES Clean Energy due to the supply agreement with Google, the prior year acquisition of New York Wind, and the commencement of renewables projects; and an increase in unrealized commodity derivative gains at AES Clean Energy;
$196 million in MCAC driven by higher LNG prices and contract sales in the Dominican Republic and Panama; and by higher fuel prices in Mexico; and
$41 million in Eurasia mainly driven by higher energy prices and generation in Bulgaria; partially offset by unfavorable FX impact and by lower contract sales at Mong Duong due to a forced outage.

These favorable impacts were partially offset by a decrease of $84 million in South America primarily driven by revenue recognized at Angamos in the prior year for the early termination of contracts with Minera Escondida and Minera Spence; partially offset by higher generation and prices (Resolution 238/2022) in Argentina; higher spot sales and energy prices in Chile; and higher volume and generation at AES Brasil.

Operating Margin

(in millions)

Consolidated Operating Margin — Operating margin decreased $165 million, or 23%, for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, driven by:

$153 million in South America primarily driven by revenue recognized at Angamos in the prior year for the early termination of contracts with Minera Escondida and Minera Spence; and by unfavorable FX impact; partially offset by lower spot purchases in Chile; and by business interruption insurance proceeds received at TermoAndes; and
$41 million in US and Utilities mainly driven by impact of outages at AES Indiana and Southland Energy;

38 | The AES Corporation | June 30, 2022 Form 10-Q

and by an increase in costs associated with growing and accelerating the development pipeline at AES Clean Energy; partially offset at AES Clean Energy due to unrealized commodity derivative gains and higher sales due to the supply agreement with Google.

These unfavorable impacts were partially offset by an increase of $29 million in MCAC primarily driven by higher contract and spot sales due to higher prices in Panama and the Dominican Republic; and by an increase in unrealized commodity derivative gains in the Dominican Republic.

Six Months Ended June 30, 2022

Revenue

(in millions)

Consolidated Revenue — Revenue increased $595 million, or 11%, for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, driven by:

$393 million in US and Utilities mainly driven by higher prices at AES Indiana and AES Ohio due to increases in riders to collect fuel and purchased power costs from customers, as well as increased demand and favorable weather; higher pass-through energy prices in El Salvador; an increase at Southland due to unrealized losses in the prior year under the commercial hedging strategy; and higher sales at AES Clean Energy due to the supply agreement with Google, the prior year acquisition of New York Wind, and the commencement of renewables projects; partially offset by an increase in unrealized commodity derivative losses at AES Clean Energy;
$227 million in MCAC driven by higher LNG prices and sales in the Dominican Republic, higher fuel prices in Mexico, and higher spot sales and increased demand in Panama; partially offset by the impact from the sale of Itabo in April 2021; and
$139 million in Eurasia mainly driven by higher energy prices and generation in Bulgaria and recognition of construction revenue at Mong Duong due to a reduction in expected completion costs for ash pond 2; partially offset by unfavorable FX impact and by lower contract sales at Mong Duong due to a forced outage.

These favorable impacts were partially offset by a decrease of $158 million in South America primarily driven by revenue recognized at Angamos in the prior year for the early termination of contracts with Minera Escondida and Minera Spence; partially offset by higher generation and prices (Resolution 238/2022) in Argentina; higher energy prices in Chile and Colombia; and higher volume and generation at AES Brasil.

39 | The AES Corporation | June 30, 2022 Form 10-Q

Operating Margin

(in millions)

Consolidated Operating Margin — Operating margin decreased $299 million, or 21%, for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, driven by:

$301 million in South America primarily driven by revenue recognized at Angamos in the prior year for the early termination of contracts with Minera Escondida and Minera Spence; a prior period GSF settlement and higher fixed costs at Tietê; and unfavorable FX impact; partially offset by higher energy prices in Colombia; business interruption insurance proceeds received at TermoAndes; and lower depreciation of coal assets in Chile;
$18 million in US and Utilities mainly driven by unrealized commodity derivative losses and an increase in costs associated with growing and accelerating the development pipeline at AES Clean Energy; and by the impact from outages at AES Indiana, AES Hawaii, and Southland Energy; partially offset by an increase at Southland due to unrealized losses in the prior year under the commercial hedging strategy; higher volume at AES Indiana due to increased demand and favorable weather; and higher sales at AES Clean Energy due to the supply agreement with Google; and
$11 million in MCAC primarily driven by higher net energy spot purchases due to drier hydrology in Panama and the Dominican Republic; and by the impact from the sale of Itabo in April 2021; partially offset by higher contract sales in Panama and the Dominican Republic, primarily due to higher prices and increased demand; and by an increase in unrealized commodity derivative gains in the Dominican Republic.

These unfavorable impacts were partially offset by an increase of $30 million in Eurasia primarily driven by recognition of construction revenue at Mong Duong due to a reduction in expected completion costs for ash pond 2; and by higher electricity prices at Kavarna in Bulgaria.

See Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—SBU Performance Analysis of this Form 10-Q for additional discussion and analysis of operating results for each SBU.

Consolidated Results of Operations — Other

General and administrative expenses

General and administrative expenses increased $1 million, or 2%, to $46 million for the three months ended June 30, 2022, compared to $45 million for the three months ended June 30, 2021, with no material drivers.

General and administrative expenses increased $7 million, or 8%, to $98 million for the six months ended June 30, 2022, compared to $91 million for the six months ended June 30, 2021, primarily due to increased business development activity and people costs.

Interest expense

Interest expense increased $42 million, or 18%, to $279 million for the three months ended June 30, 2022, compared to $237 million for the three months ended June 30, 2021. This increase is primarily due to lower capitalized interest in construction projects in Chile, and increased borrowings at AES Brasil.

Interest expense increased $110 million, or 26%, to $537 million for the six months ended June 30, 2022, compared to $427 million for the six months ended June 30, 2021. This increase is primarily due to the prior year impact of realized gains on de-designated interest rate swaps, lower capitalized interest in construction projects in Chile, and increased borrowings at AES Brasil.

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Interest income

Interest income increased $22 million, or 30%, to $95 million for the three months ended June 30, 2022, compared to $73 million for the three months ended June 30, 2021, primarily due to an increase in short-term investments at AES Brasil and sales-type lease receivables at the Alamitos Energy Center.

Interest income increased $29 million, or 21%, to $170 million for the six months ended June 30, 2022, compared to $141 million for the six months ended June 30, 2021, primarily due to the drivers above.

Loss on extinguishment of debt

Loss on extinguishment of debt decreased $17 million, or 94%, to $1 million for the three months ended June 30, 2022, compared to $18 million for the three months ended June 30, 2021, primarily due to the prior year loss at Andres due to the refinancing in May 2021.

Loss on extinguishment of debt decreased $12 million, or 63%, to $7 million for the six months ended June 30, 2022, compared to $19 million for the six months ended June 30, 2021, primarily due to the driver above.

See Note 7—Debt included in Item 1.—Financial Statements of this Form 10-Q for further information.

Other income and expense

Other income decreased $113 million, or 62%, to $70 million for the three months ended June 30, 2022, compared to $183 million for the three months ended June 30, 2021, primarily due to the prior year gain on remeasurement of our equity interest in the sPower development platform to its acquisition-date fair value, recognized as part of the merger to form AES Clean Energy Development; partially offset by the current year gain on remeasurement of our existing investment in 5B, which is accounted for using the measurement alternative, and insurance proceeds primarily associated with property damage at TermoAndes.

Other income decreased $150 million, or 66%, to $76 million for the six months ended June 30, 2022, compared to $226 million for the six months ended June 30, 2021, primarily due to the drivers above.

Other expense increased $25 million to $29 million for the three months ended June 30, 2022, compared to $4 million for the three months ended June 30, 2021, primarily due to the recognition of an allowance on a sales-type lease receivable at AES Gilbert due to a fire incident in April 2022.

Other expense increased $21 million to $41 million for the six months ended June 30, 2022, compared to $20 million for the six months ended June 30, 2021, primarily due to the driver above.

See Note 14—Other Income and Expense, Note 6—Investments in and Advances to Affiliates, and Note 18—Acquisitions included in Item 1.—Financial Statements of this Form 10-Q for further information.

Gain (loss) on disposal and sale of business interests

Loss on disposal and sale of business interests was $2 million for the three months ended June 30, 2022 and $1 million for the six months ended June 30, 2022, with no material drivers.

Gain on disposal and sale of business interests was $64 million for the three months ended June 30, 2021 and $59 million for the six months ended June 30, 2021, primarily due to the issuance of new shares by Fluence, our equity method investment, to a new investor, which AES has accounted for as a gain on the partial disposition of its investment in Fluence.

Asset impairment expense

Asset impairment expense decreased $390 million, or 45%, to $482 million for the three months ended June 30, 2022, compared to $872 million for the three months ended June 30, 2021. This decrease was primarily due to two prior year impairments at AES Andes totaling $804 million associated with a commitment to accelerate the retirement of certain coal-fired plants in Chile and a $67 million impairment at the Mountain View I & II wind facilities related to a repowering project that will result in decommissioning the majority of the existing wind turbines in advance of their depreciable lives, partially offset by the $475 million current year impairment at Maritza due to the commitment to cease electricity generation using coal as a fuel source in Bulgaria beyond 2038.

Asset impairment expense decreased $862 million, or 64%, to $483 million for the six months ended June 30, 2022, compared to $1,345 million for the six months ended June 30, 2021. This decrease was primarily due to the prior year $804 million impairment at AES Andes, as well as a $475 million impairment at Puerto Rico associated with the economic costs and reputational risks of disposal of coal combustion residuals off island, and the $67 million impairment at the Mountain View I & II wind facilities, partially offset by the $475 million current year

41 | The AES Corporation | June 30, 2022 Form 10-Q

impairment at Maritza discussed above.

See Note 15—Asset Impairment Expense included in Item 1.—Financial Statements of this Form 10-Q for further information.

Foreign currency transaction losses


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2022		2021		2022		2021
Argentina	$	(42)	$	1	$	(55)	$	(40)


Chile	(1)		1		(11)		9
Brazil	(12)		(7)		(7)		(4)





Other	6		3		5		(2)
Total (1)	$	(49)	$	(2)	$	(68)	$	(37)

*(1)*Includes gains of $7 million and losses of $27 million on foreign currency derivative contracts for the three months ended June 30, 2022 and 2021, respectively, and losses of $49 million and $46 million on foreign currency derivative contracts for the six months ended June 30, 2022 and 2021, respectively.

The Company recognized net foreign currency transaction losses of $49 million for the three months ended June 30, 2022 primarily due to unrealized losses on foreign currency derivatives related to government receivables in Argentina, unrealized losses due to depreciating receivables denominated in the Argentine peso, and unrealized losses on debt denominated in the Brazilian real.

The Company recognized net foreign currency transaction losses of $68 million for the six months ended June 30, 2022, primarily due to unrealized losses on foreign currency derivatives related to government receivables in Argentina, unrealized losses due to depreciating receivables denominated in the Argentine peso, and unrealized derivative losses on foreign currency derivatives in South America due to the depreciating Colombian peso.

The Company recognized net foreign currency transaction losses of $2 million for the three months ended June 30, 2021, with no material drivers.

The Company recognized net foreign currency transaction losses of $37 million for the six months ended June 30, 2021, primarily due to to unrealized losses on foreign currency derivatives related to government receivables in Argentina, partially offset by unrealized derivative gains on foreign currency derivatives in South America due to the depreciating Colombian peso.

Income tax benefit (expense)

Income tax benefit was $19 million for the three months ended June 30, 2022, compared to income tax benefit of $59 million for the three months ended June 30, 2021. The Company’s effective tax rates were 12% and 45% for the three months ended June 30, 2022 and 2021, respectively. This net change in the effective tax rate was primarily due to the impact of the current year asset impairment of the Maritza coal-fired plant, partially offset by the current year impact of inflationary adjustments on net operating losses at certain Argentine renewables businesses. The prior year effective tax rate was impacted by the impairment of the coal-fired plants in Chile.

Income tax expense was $41 million for the six months ended June 30, 2022, compared to income tax benefit of $51 million for the six months ended June 30, 2021. The Company’s effective tax rates were 39% and 42% for the six months ended June 30, 2022 and 2021, respectively. This net decrease in the effective tax rate was primarily due to the impact of the current year asset impairment of the Maritza coal-fired plant, partially offset by the current year impact of inflationary adjustments on net operating losses at certain Argentine renewables businesses. The prior year effective tax rate was impacted by the aforementioned asset impairment of the coal-fired plants in Chile, as well as the asset impairment at Puerto Rico.

See Note 15—Asset Impairment Expense included in Item 1.—Financial Statements of this Form 10-Q for details of the Maritza, Chile, and Puerto Rico asset impairments.

Our effective tax rate reflects the tax effect of significant operations outside the U.S., which are generally taxed at rates different than the U.S. statutory rate of 21%. Furthermore, our foreign earnings may be subjected to incremental U.S. taxation under the GILTI rules. A future proportionate change in the composition of income before income taxes from foreign and domestic tax jurisdictions could impact our periodic effective tax rate.

Net equity in earnings (losses) of affiliates

Net equity in earnings of affiliates increased $15 million, to $5 million for the three months ended June 30, 2022, compared to losses of $10 million for the three months ended June 30, 2021. This increase was a result of a reduction in the AES share of losses at our equity method affiliates.

42 | The AES Corporation | June 30, 2022 Form 10-Q

Net equity in losses of affiliates decreased $12 million, or 30%, to $28 million for the six months ended June 30, 2022, compared to $40 million for the six months ended June 30, 2021. This decrease was primarily driven by an increase in earnings at sPower due to higher allocation of earnings driven by renewable projects that came online in 2021, partially offset by an increase in losses at Fluence due to shipping issues, cost overruns and delays at projects under construction, and an increase in costs, including share-based compensation, associated with the growing business.

See Note 6—Investments in and Advances to Affiliates included in Item 1.—Financial Statements of this Form 10-Q for further information.

Net income attributable to noncontrolling interests and redeemable stock of subsidiaries

Net income attributable to noncontrolling interests and redeemable stock of subsidiaries increased $148 million to $43 million for the three months ended June 30, 2022, compared to a loss of $105 million for the three months ended June 30, 2021. This increase was primarily due to:

Prior year long-lived asset impairment in Chile; and
Lower allocation of losses to tax equity partners at AES Renewable Holdings.

These increases were partially offset by:

Lower earnings from AES Andes due to increased ownership from 67% to 99% in the first quarter of 2022.

Net income attributable to noncontrolling interests and redeemable stock of subsidiaries increased $85 million to $99 million for the six months ended June 30, 2022, compared to $14 million for the six months ended June 30, 2021. This increase was primarily due to:

Prior year long-lived asset impairments in Chile; and
Lower allocation of losses to tax equity partners at AES Renewable Holdings.

These increases were partially offset by:

Prior year net gains from early contract terminations at Angamos;
Increased costs associated with growing and accelerating the development pipeline at AES Clean Energy Development; and
Lower earnings from AES Andes due to increased ownership from 67% to 99% in the first quarter of 2022.

Net income (loss) attributable to The AES Corporation

Net loss attributable to The AES Corporation decreased $207 million, to $179 million for the three months ended June 30, 2022, compared to income of $28 million for the three months ended June 30, 2021. This decrease was primarily due to:

Prior year gain on remeasurement of our equity interest in the sPower development platform to acquisition-date fair value;
Lower margins at our South America SBU due to prior year net gains from early contract terminations at Angamos;
Prior year gain due to the issuance of new shares by Fluence, which was accounted for as a partial disposition; and
Lower capitalized interest on construction projects in Chile.

These decreases were partially offset by:

Lower long-lived asset impairments in the current year.

Net loss attributable to The AES Corporation decreased $56 million, to $64 million for the six months ended June 30, 2022, compared to $120 million for the six months ended June 30, 2021. This decrease was primarily due to:

Lower long-lived asset impairments in the current year.

43 | The AES Corporation | June 30, 2022 Form 10-Q

This decrease was partially offset by:

Prior year gain on remeasurement of our equity interest in the sPower development platform to acquisition-date fair value;
Lower margins at our South America SBU due to prior year net gains from early contract terminations at Angamos;
Higher income tax expense;
Prior year gain due to the issuance of new shares by Fluence, which was accounted for as a partial disposition; and
Lower capitalized interest on construction projects in Chile.

SBU Performance Analysis

Non-GAAP Measures

Adjusted Operating Margin, Adjusted PTC, and Adjusted EPS are non-GAAP supplemental measures that are used by management and external users of our condensed consolidated financial statements such as investors, industry analysts, and lenders.

For the year ended December 31, 2021, the Company updated the definition of Adjusted EPS item (g) tax benefit or expense related to the enactment effects of 2017 U.S. tax law reform and related regulations and any subsequent period adjustments related to enactment effects to include the 2021 tax benefit on reversal of uncertain tax positions effectively settled upon the closure of the Company's 2017 U.S. tax return exam.

Effective January 1, 2021, the Company changed the definitions of Adjusted Operating Margin, Adjusted PTC, and Adjusted EPS to remove the adjustment for costs directly associated with a major restructuring program, including, but not limited to, workforce reduction efforts, relocations, and office consolidation. As this adjustment was specific to the major restructuring program announced by the Company in 2018, we believe removing this adjustment from our non-GAAP definitions provides simplification and clarity for our investors.

Adjusted Operating Margin

We define Adjusted Operating Margin as Operating Margin, adjusted for the impact of NCI, excluding (a) unrealized gains or losses related to derivative transactions; (b) benefits and costs associated with dispositions and acquisitions of business interests, including early plant closures; and (c) net gains at Angamos, one of our businesses in the South America SBU, associated with the early contract terminations with Minera Escondida and Minera Spence. The allocation of HLBV earnings to noncontrolling interests is not adjusted out of Adjusted Operating Margin. See Review of Consolidated Results of Operations for the definition of Operating Margin.

The GAAP measure most comparable to Adjusted Operating Margin is Operating Margin. We believe that Adjusted Operating Margin better reflects the underlying business performance of the Company. Factors in this determination include the impact of NCI, where AES consolidates the results of a subsidiary that is not wholly owned by the Company, as well as the variability due to unrealized gains or losses related to derivative transactions and strategic decisions to dispose of or acquire business interests. Adjusted Operating Margin should not be construed as an alternative to Operating Margin, which is determined in accordance with GAAP.


	Three Months Ended June 30,				Six Months Ended June 30,
Reconciliation of Adjusted Operating Margin (in millions)	2022		2021		2022		2021
Operating Margin	$	563	$	728	$	1,093	$	1,392
Noncontrolling interests adjustment (1)	(98)		(198)		(190)		(407)
Unrealized derivative (gains) losses	(31)		(13)		(34)		31
Disposition/acquisition losses	1		4		—		6
Net gains from early contract terminations at Angamos	—		(110)		—		(220)

Total Adjusted Operating Margin	$	435	$	411	$	869	$	802

(1)The allocation of HLBV earnings to noncontrolling interests is not adjusted out of Adjusted Operating Margin.

44 | The AES Corporation | June 30, 2022 Form 10-Q

Adjusted PTC

We define Adjusted PTC 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, and gains and losses recognized at commencement of sales-type leases; (d) losses due to impairments; (e) gains, losses and costs due to the early retirement of debt; and (f) net gains at Angamos, one of our businesses in the South America SBU, associated with the early contract terminations with Minera Escondida and Minera Spence. Adjusted PTC also includes net equity in earnings of affiliates on an after-tax basis adjusted for the same gains or losses excluded from consolidated entities.

Adjusted PTC reflects the impact of NCI and excludes the items specified in the definition above. In addition to the revenue and cost of sales reflected in Operating Margin, Adjusted PTC includes the other components of our income statement, such as general and administrative expenses in Corporate and Other, as well as business development costs, interest expense and interest income, other expense and other income, realized foreign currency transaction gains and losses, and net equity in earnings of affiliates.

The GAAP measure most comparable to Adjusted PTC is income from continuing operations attributable to The AES Corporation. We believe that Adjusted PTC better reflects the underlying business performance of the Company and is the most relevant measure considered in the Company’s internal evaluation of the financial performance of its segments. Factors in this determination include the variability due to unrealized gains or losses

45 | The AES Corporation | June 30, 2022 Form 10-Q

related to derivative transactions or equity securities remeasurement, unrealized foreign currency gains or losses, losses due to impairments, strategic decisions to dispose of or acquire business interests or retire debt, and the non-recurring nature of the impact of the early contract terminations at Angamos, which affect results in a given period or periods. In addition, earnings before tax represents the business performance of the Company before the application of statutory income tax rates and tax adjustments, including the effects of tax planning, corresponding to the various jurisdictions in which the Company operates. Given its large number of businesses and complexity, the Company concluded that Adjusted PTC is a more transparent measure that better assists investors in determining which businesses have the greatest impact on the Company’s results.

Adjusted PTC should not be construed as an alternative to income from continuing operations attributable to The AES Corporation, which is determined in accordance with GAAP.


	Three Months Ended June 30,				Six Months Ended June 30,
Reconciliation of Adjusted PTC (in millions)	2022		2021		2022		2021
Income (loss) from continuing operations, net of tax, attributable to The AES Corporation	$	(179)	$	24	$	(64)	$	(124)
Income tax expense (benefit) from continuing operations attributable to The AES Corporation	(29)		(24)		21		(60)
Pre-tax contribution	(208)		—		(43)		(184)
Unrealized derivative and equity securities losses (gains)	(35)		8		6		77
Unrealized foreign currency losses (gains)	39		(12)		20		(6)
Disposition/acquisition losses	23		(229)		32		(244)
Impairment losses	479		628		480		1,103
Loss on extinguishment of debt	6		18		16		24
Net gains from early contract terminations at Angamos	—		(110)		—		(220)

Total Adjusted PTC	$	304	$	303	$	511	$	550

46 | The AES Corporation | June 30, 2022 Form 10-Q

Adjusted EPS

We define Adjusted EPS as diluted earnings per share from continuing operations excluding gains or losses of both consolidated entities and entities accounted for under the equity method due to (a) unrealized gains or losses related to derivative transactions and equity securities; (b) unrealized foreign currency gains or losses; (c) gains, losses, benefits and costs associated with dispositions and acquisitions of business interests, including early plant closures, and the tax impact from the repatriation of sales proceeds, and gains and losses recognized at commencement of sales-type leases; (d) losses due to impairments; (e) gains, losses and costs due to the early retirement of debt; (f) net gains at Angamos, one of our businesses in the South America SBU, associated with the early contract terminations with Minera Escondida and Minera Spence; and (g) tax benefit or expense related to the enactment effects of 2017 U.S. tax law reform and related regulations and any subsequent period adjustments related to enactment effects, including the 2021 tax benefit on reversal of uncertain tax positions effectively settled upon the closure of the Company's U.S. tax return exam.

The GAAP measure most comparable to Adjusted EPS is diluted earnings per share from continuing operations. We believe that Adjusted EPS better reflects the underlying business performance of the Company and is considered in the Company’s internal evaluation of financial performance. Factors in this determination include the variability due to unrealized gains or losses related to derivative transactions or equity securities remeasurement, unrealized foreign currency gains or losses, losses due to impairments, strategic decisions to dispose of or acquire business interests or retire debt, the one-time impact of the 2017 U.S. tax law reform and subsequent period adjustments related to enactment effects, and the non-recurring nature of the impact of the early contract terminations at Angamos, which affect results in a given period or periods.

Adjusted EPS should not be construed as an alternative to diluted earnings per share from continuing operations, which is determined in accordance with GAAP.

The Company reported a loss from continuing operations of $0.27 and $0.10 for the three and six months ended June 30, 2022, respectively. For purposes of measuring diluted loss per share under GAAP, common stock equivalents were excluded from weighted average shares as their inclusion would be anti-dilutive. However, for purposes of computing Adjusted EPS, the Company has included the impact of dilutive common stock equivalents. The table below reconciles the weighted average shares used in GAAP diluted loss per share to the weighted average shares used in calculating the non-GAAP measure of Adjusted EPS.

47 | The AES Corporation | June 30, 2022 Form 10-Q


Reconciliation of Denominator Used For Adjusted EPS	Three Months Ended June 30, 2022					Six Months Ended June 30, 2022
(in millions, except per share data)	Loss		Shares	$ per Share		Loss		Shares	$ per Share

GAAP DILUTED LOSS PER SHARE
Loss from continuing operations attributable to The AES Corporation common stockholders	$	(179)	668	$	(0.27)	$	(64)	668	$	(0.10)
EFFECT OF DILUTIVE SECURITIES

Stock options	—		1	—		—		1	—
Restricted stock units	—		2	—		—		2	—
Equity units	—		40	0.02		1		40	0.01
NON-GAAP DILUTED LOSS PER SHARE	$	(179)	711	$	(0.25)	$	(63)	711	$	(0.09)


	Three Months Ended June 30,						Six Months Ended June 30,
Reconciliation of Adjusted EPS	2022			2021			2022			2021
Diluted earnings (loss) per share from continuing operations	$	(0.25)		$	0.03		$	(0.09)		$	(0.19)
Unrealized derivative and equity securities losses (gains)	(0.05)		(1)	0.01			0.01			0.12		(2)
Unrealized foreign currency losses (gains)	0.05		(3)	(0.02)			0.03			(0.01)
Disposition/acquisition losses (gains)	0.03		(4)	(0.34)		(5)	0.04		(4)	(0.37)		(6)
Impairment losses	0.68		(7)	0.94		(8)	0.68		(7)	1.65		(9)
Loss on extinguishment of debt	0.01			0.03		(10)	0.02			0.04		(10)
Net gains from early contract terminations at Angamos	—			(0.16)		(11)	—			(0.33)		(11)


Less: Net income tax benefit	(0.13)		(12)	(0.18)		(13)	(0.14)		(12)	(0.32)		(14)
Adjusted EPS	$	0.34		$	0.31		$	0.55		$	0.59

(1)Amount primarily relates to the unrealized gain on remeasurement of our existing investment in 5B, accounted for using the measurement alternative, of $26 million, or $0.04 per share.

(2)Amount primarily relates to unrealized derivative losses in Argentina mainly associated with foreign currency derivatives on government receivables of $41 million, or $0.06 per share, and net unrealized derivative losses on power and commodities swaps at Southland of $32 million, or $0.05 per share.

(3)Amount primarily relates to unrealized FX losses in Brazil of $12 million, or $0.02 per share, mainly associated with debt denominated in Brazilian reais, and unrealized FX losses of $9 million, or $0.01 per share, mainly associated with the devaluation of long-term receivables denominated in Argentine pesos.

(4)Amount primarily relates to the recognition of an allowance on the AES Gilbert sales-type lease receivable as a cost of disposition of a business interest of $20 million, or $0.03 per share, for the three and six months ended June 30, 2022.

(5)Amount primarily relates to an adjustment on the gain on remeasurement of our equity interest in sPower to acquisition-date fair value of $176 million, or $0.26, and gain on Fluence issuance of shares of $61 million, or $0.09 per share.

(6)Amount primarily relates to the gain on remeasurement of our equity interest in sPower to acquisition-date fair value of $212 million, or $0.32, and gain on Fluence issuance of shares of $61 million, or $0.09 per share, partially offset by day-one loss recognized at commencement of a sales-type lease at AES Renewable Holdings of $13 million, or $0.02 per share.

(7)Amount primarily relates to asset impairment at Maritza of $475 million, or $0.67 per share, for the three and six months ended June 30, 2022.

(8)Amount primarily relates to asset impairments at AES Andes of $540 million, or $0.81 per share, at Mountain View of $67 million, or $0.10 per share, and at sPower of $20 million, or $0.03 per share.

(9)Amount primarily relates to asset impairments at AES Andes of $540 million, or $0.81 per share, at Puerto Rico of $475 million, or $0.71 per share, at Mountain View of $67 million, or $0.10 per share, and at sPower of $21 million, or $0.03 per share.

(10)Amount primarily relates to loss on early retirement of debt at Andres and Los Mina of $15 million, or $0.02 per share, for the three and six months ended June 30, 2021.

(11)Amount relates to net gains at Angamos associated with the early contract terminations with Minera Escondida and Minera Spence of $110 million, or $0.16 per share and $220 million, or $0.33 per share, for the three and six months ended June 30, 2021, respectively.

(12)Amount primarily relates to income tax benefits associated with the impairment at Maritza of $110 million, or $0.15 per share, partially offset by income tax expense associated with the unrealized gain on remeasurement of our existing investment in 5B of $6 million, or $0.01 per share for the three and six months ended June 30, 2022.

(13)Amount primarily relates to income tax benefits associated with the impairments at AES Andes of $195 million, or $0.29 per share and at Mountain View of $21 million, or $0.03 per share, partially offset by income tax expense related to net gains at Angamos associated with the early contract terminations with Minera Escondida and Minera Spence of $51 million, or $0.08 per share, income tax expense related to the gain on remeasurement of our equity interest in sPower to acquisition-date fair value of $39 million, or $0.06 per share, and income tax expense related to the gain on Fluence issuance of shares of $13 million, or $0.02 per share.

(14)Amount primarily relates to income tax benefits associated with the impairments at AES Andes of $195 million, or $0.29 per share, at at Puerto Rico of $114 million, or $0.17 per share, and at Mountain View of $21 million, or $0.03 per share, partially offset by income tax expense related to net gains at Angamos associated with the early contract terminations with Minera Escondida and Minera Spence of $79 million, or $0.12 per share, income tax expense related to the gain on remeasurement of our equity interest in sPower to acquisition-date fair value of $46 million, or $0.07 per share, and income tax expense related to the gain on Fluence issuance of shares of $13 million, or $0.02 per share.

48 | The AES Corporation | June 30, 2022 Form 10-Q

US and Utilities SBU

The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated:


	Three Months Ended June 30,								Six Months Ended June 30,
	2022		2021		$ Change		% Change		2022		2021		$ Change		% Change
Operating Margin	$	124	$	165	$	(41)	-25	%	$	254	$	272	$	(18)	-7	%
Adjusted Operating Margin (1)	79		122		(43)		-35	%	187		248		(61)		-25	%
Adjusted PTC (1)	70		128		(58)		-45	%	127		172		(45)		-26	%

Operating Margin for the three months ended June 30, 2022 decreased $41 million, or 25%, which was driven primarily by the following (in millions):


Decrease at Southland Energy primarily due to the impact of forced outages at the CCGT units	$	(27)
Decrease at AES Indiana driven by higher maintenance expenses due to timing of planned outages and plant-related projects and higher storm costs	(22)
Increase at AES Clean Energy driven by unrealized commodity derivative gains and higher revenue due to the Company’s agreement to supply Google’s data centers with 24/7 carbon-free energy, partially offset by increased costs associated with growing and accelerating the development pipeline	12

Other	(4)
Total US and Utilities SBU Operating Margin Decrease	$	(41)

Adjusted Operating Margin decreased $43 million primarily due to the drivers above, adjusted for NCI and unrealized gains on derivatives.

Adjusted PTC decreased $58 million, primarily associated with the decrease in Adjusted Operating Margin described above and lower contributions at our U.S. renewables businesses due to timing of renewable projects coming online.

Operating Margin for the six months ended June 30, 2022 decreased $18 million, or 7%, which was driven primarily by the following (in millions):


Decrease at AES Clean Energy driven by unrealized commodity derivative losses and increased costs associated with growing and accelerating the development pipeline, partially offset by higher revenue due to the Company’s agreement to supply Google’s data centers with 24/7 carbon-free energy	$	(20)
Decrease at Southland Energy primarily due to the impact of forced outages at the CCGT units	(20)
Decrease at AES Indiana driven by higher maintenance expenses due to timing of planned outages and plant-related projects and higher storm costs, partially offset by higher volumes from increased demand and favorable weather	(11)
Decrease in Puerto Rico mainly driven by higher coal and chemical consumption due to higher heat rate	(9)
Decrease at AES Hawaii primarily due to increased outages in the current year	(9)
Increase at Southland primarily driven by lower unrealized losses from commodity derivatives under the commercial hedging strategy and higher energy sales driven by energy price adjustments from market re-settlements in the prior year	53
Other	(2)
Total US and Utilities SBU Operating Margin Decrease	$	(18)

Adjusted Operating Margin decreased $61 million primarily due to the drivers above, adjusted for NCI and prior year unrealized losses on derivatives.

Adjusted PTC decreased $45 million, primarily associated with the decrease in Adjusted Operating Margin described above and lower contributions at our U.S. renewables businesses due to timing of renewable projects coming online.

49 | The AES Corporation | June 30, 2022 Form 10-Q

South America SBU

The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated:


	Three Months Ended June 30,								Six Months Ended June 30,
	2022		2021		$ Change		% Change		2022		2021		$ Change		% Change
Operating Margin	$	192	$	345	$	(153)	-44	%	$	396	$	697	$	(301)	-43	%
Adjusted Operating Margin (1)	159		113		46		41	%	329		225		104		46	%
Adjusted PTC (1)	145		96		49		51	%	273		184		89		48	%

(1) A non-GAAP financial measure, adjusted for the impact of NCI. See SBU Performance Analysis—Non-GAAP Measures for definition and Item 1.—Business included in our 2021 Form 10-K for the respective ownership interest for key businesses. In the first quarter of 2022, AES’ indirect beneficial interest in AES Andes increased from 67% to 99%. See Note 11—Equity included in Item 1.—Financial Statements of this Form 10-Q for further information.

Operating Margin for the three months ended June 30, 2022 decreased $153 million, or 44%, which was driven primarily by the following (in millions):


Lower revenue recognized on contract terminations at Angamos in Chile	$	(164)
Higher contract margin primarily associated with new generation and lower depreciation of coal assets, partially offset by lower availability of Ventanas and higher fixed costs in Chile	7




Other	4
Total South America SBU Operating Margin Decrease	$	(153)

After adjusting for the net gains on early contract terminations at Angamos in the prior year, Adjusted Operating Margin increased $46 million due to the increase in ownership in AES Andes from 67% to 99% in the first quarter of 2022.

Adjusted PTC increased $49 million, primarily associated with the increase in Adjusted Operating Margin described above and an insurance recovery at TermoAndes, partially offset by lower capitalized interest at construction projects.

Operating Margin for the six months ended June 30, 2022 decreased $301 million, or 43%, which was driven primarily by the following (in millions):


Lower revenue recognized on contract terminations at Angamos in Chile	$	(327)
Decrease in Brazil primarily driven by prior year GSF gain and higher fixed costs	(13)
Higher contract margin primarily associated with new generation and lower depreciation of coal assets, partially offset by lower availability of Ventanas and higher fixed costs in Chile	26
Increase in Colombia mainly related to increase in contract prices, partially offset by depreciation of the Colombian peso	9



Other	4
Total South America SBU Operating Margin Decrease	$	(301)

After adjusting for the net gains on early contract terminations at Angamos in the prior year, Adjusted Operating Margin increased $104 million due to the increase in ownership in AES Andes from 67% to 99% in the first quarter of 2022.

Adjusted PTC increased $89 million, primarily associated with the increase in Adjusted Operating Margin described above and an insurance recovery at TermoAndes, partially offset by lower capitalized interest at construction projects.

MCAC SBU

The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated:


	Three Months Ended June 30,								Six Months Ended June 30,
	2022		2021		$ Change		% Change		2022		2021		$ Change		% Change
Operating Margin	$	150	$	121	$	29	24	%	$	232	$	243	$	(11)	-5	%
Adjusted Operating Margin (1)	116		94		22		23	%	182		178		4		2	%
Adjusted PTC (1)	87		71		16		23	%	124		132		(8)		-6	%

50 | The AES Corporation | June 30, 2022 Form 10-Q

Operating Margin for the three months ended June 30, 2022 increased $29 million, or 24%, which was driven primarily by the following (in millions):


Increase in Panama driven by higher prices due to an increase in the NYMEX Henry Hub index, and lower cost of sales resulting from favorable hydrology during Q2 2022	$	19
Increase in the Dominican Republic mainly driven by higher contract sales due to higher prices and unrealized gains on LNG derivatives, partially offset by higher fixed costs	11
Other	(1)
Total MCAC SBU Operating Margin Increase	$	29

Adjusted Operating Margin increased $22 million due to the drivers above, adjusted for NCI and unrealized gains on LNG derivatives.

Adjusted PTC increased $16 million, mainly driven by the increase in Adjusted Operating Margin described above, partially offset by a higher allocation of interest expense attributable to AES after Colon’s noncontrolling interest buyout in September 2021.

Operating Margin for the six months ended June 30, 2022 decreased $11 million, or 5%, which was driven primarily by the following (in millions):


Decrease in the Dominican Republic mainly driven by the sale of Itabo on April 8, 2021	$	(19)
Decrease in Mexico driven by lower availability in 2022	(5)
Decrease in Panama mainly driven by higher energy spot purchases due to drier hydrology during Q1 2022, partially offset by higher contract and spot sales at Colon mainly during Q2 2022	(3)
Increase in the Dominican Republic due to unrealized gains on LNG derivatives and higher contract sales due to higher demand and higher prices, partially offset by higher spot purchases and higher fixed costs	20
Other	(4)
Total MCAC SBU Operating Margin Decrease	$	(11)

Adjusted Operating Margin increased $4 million due to the drivers above, adjusted for NCI and unrealized gains on LNG derivatives.

Adjusted PTC decreased $8 million, mainly driven by higher allocation of interest expense attributable to AES after Colon’s noncontrolling interest buyout in September 2021, partially offset by the increase in Adjusted Operating Margin described above.

Eurasia SBU

The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated:


	Three Months Ended June 30,								Six Months Ended June 30,
	2022		2021		$ Change		% Change		2022		2021		$ Change		% Change
Operating Margin	$	55	$	53	$	2	4	%	$	142	$	112	$	30	27	%
Adjusted Operating Margin (1)	39		39		—		—	%	101		83		18		22	%
Adjusted PTC (1)	42		48		(6)		-13	%	107		99		8		8	%

Operating Margin for the three months ended June 30, 2022 increased $2 million, or 4%, with no material drivers.

Adjusted Operating Margin remained flat.

Adjusted PTC decreased $6 million, mainly driven by higher interest expense.

Operating Margin for the six months ended June 30, 2022 increased $30 million, or 27%, which was driven primarily by the following (in millions):


Construction revenue for Mong Duong driven by a reduction in expected completion costs for ash pond 2	$	19
Higher merchant prices captured by Kavarna	10
Other	1
Total Eurasia SBU Operating Margin Increase	$	30

Adjusted Operating Margin increased $18 million due to the drivers above, adjusted for NCI.

51 | The AES Corporation | June 30, 2022 Form 10-Q

Adjusted PTC increased $8 million, mainly driven by the increase in Adjusted Operating Margin described above, partially offset by higher interest expense.

Key Trends and Uncertainties

During the remainder of 2022 and beyond, we expect to face the following challenges at certain of our businesses. Management expects that improved operating performance at certain businesses, growth from new businesses, and global cost reduction initiatives may lessen or offset their impact. If these favorable effects do not occur, or if the challenges described below and elsewhere in this section impact us more significantly than we currently anticipate, or if volatile foreign currencies and commodities move more unfavorably, then these adverse factors (or other adverse factors unknown to us) may have a material impact on our operating margin, net income attributable to The AES Corporation, and cash flows. We continue to monitor our operations and address challenges as they arise. For the risk factors related to our business, see Item 1.—Business and Item 1A.—Risk Factors of our 2021 Form 10-K.

Operational

COVID-19 Pandemic — The COVID-19 pandemic has impacted global economic activity, including electricity and energy consumption, and caused significant volatility in financial markets. Throughout the COVID-19 pandemic we have conducted our essential operations without significant disruption. We derive approximately 85% of our total revenues from our regulated utilities and long-term sales and supply contracts or PPAs at our generation businesses, which contributes to a relatively stable revenue and cost structure at most of our businesses. In 2022, our operational locations continued to experience the impact of, and recovery from, the COVID-19 pandemic. Across our global portfolio, our utilities businesses have generally performed in line with our expectations consistent with a recovery from the COVID-19 pandemic. While we cannot predict the length and magnitude of the pandemic, including the impact of current or future variants, or how it could impact global economic conditions, a delayed recovery with respect to demand may adversely impact our financial results for 2022. Also see Item 1A.—Risk Factors of our 2021 Form 10-K.

We continue to monitor and manage our credit exposures in a prudent manner. Our credit exposures have continued in-line with historical levels and within the customary 45-60 day grace period. We have not experienced any material credit-related impacts from our PPA offtakers due to the COVID-19 pandemic.

Our supply chain management has remained robust during this challenging time and we continue to closely manage and monitor developments. We continue to experience certain minor delays in some of our development projects, primarily in permitting processes and the implementation of interconnections, due to governments and other authorities having limited capacity to perform their functions.

Trade Restrictions and Supply Chain — On March 29, 2022, the U.S. Department of Commerce (“Commerce”) announced the initiation of an investigation into whether imports into the U.S. of solar cells and panels imported from Cambodia, Malaysia, Thailand, and Vietnam are circumventing antidumping and countervailing duty orders on solar cells and panels from China. This investigation resulted in significant systemic disruptions to the import of solar cells and panels from Southeast Asia. On July 6, 2022, President Biden issued a Proclamation waiving any tariffs that result from this investigation for a 24-month period. Following President Biden’s proclamation, suppliers in Southeast Asia have begun importing cells and panels again to the U.S. We have contracted and substantially secured our expected requirements for solar panels for U.S. projects targeted to achieve commercial operations in 2022 and are working to secure our requirements for future years.

Additionally, certain suppliers could be blocked from importing solar cells and panels to the U.S. under the Uyghur Forced Labor Prevention Act (“UFLPA”). UFLPA seeks to block the import of products made with forced labor in certain areas of China. We are monitoring the impacts of the UFLPA on our solar cells and panels suppliers.

Further disruptions may impact our suppliers’ ability or willingness to meet their contractual agreements or to continue to supply cells or panels into the U.S. market on terms that we deem satisfactory.

The impact of any adverse Commerce determination, the impact of the UFLPA, future disruptions to the solar panel supply chain and their effect on AES’ U.S. solar project development and construction activities are uncertain. AES will continue to monitor developments and take prudent steps towards maintaining a robust supply chain for our renewables projects.

52 | The AES Corporation | June 30, 2022 Form 10-Q

Macroeconomic and Political

During the past few years, some countries where our subsidiaries conduct business have experienced macroeconomic and political changes. In the event these trends continue, there could be an adverse impact on our businesses.

Puerto Rico — As discussed in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Trends and Uncertainties of the 2021 Form 10-K, our subsidiaries in Puerto Rico have a long-term PPA with state-owned PREPA, which has been facing economic challenges that could result in a material adverse effect on our business in Puerto Rico. Despite the Title III protection, PREPA has been making substantially all of its payments to the generators in line with historical payment patterns.

AES Puerto Rico and AES Ilumina’s non-recourse debt of $177 million and $28 million, respectively, continue to be in technical default and are classified as current as of June 30, 2022 as a result of PREPA’s bankruptcy filing in July 2017. The Company is in compliance with its debt payment obligations as of June 30, 2022.

On April 12, 2022, a mediation team was appointed to prepare the plan to resolve the PREPA Title III case and related proceedings, which is expected to conclude by August 15, 2022.

Considering the information available as of the filing date, management believes the carrying amount of our long-lived assets in Puerto Rico of $85 million is recoverable as of June 30, 2022.

Reference Rate Reform — As discussed in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Trends and Uncertainties of the 2021 Form 10-K, in July 2017, the UK Financial Conduct Authority announced that it intends to phase out LIBOR by the end of 2021. In the U.S., the Alternative Reference Rate Committee at the Federal Reserve identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR; alternative reference rates in other key markets are under development. The ICE Benchmark Association ("IBA") has determined that it will cease publication of the one-month, three-month, six-month, and 12-month USD LIBOR rates by June 30, 2023. AES holds a substantial amount of debt and derivative contracts referencing LIBOR as an interest rate benchmark. In order to facilitate an organized transition from LIBOR to alternative benchmark rate(s), AES has established a process to measure and mitigate risks associated with the cessation of LIBOR. As part of this initiative, alternative benchmark rates have been, and continue to be, assessed, and implemented for newly executed agreements. Many of AES’ existing agreements include provisions designed to facilitate an orderly transition from LIBOR, and interest rate derivatives address the LIBOR transition through the adoption of the ISDA 2020 IBOR Fallbacks Protocol and subsequent amendments. To the extent that the terms of the credit agreements and derivative instruments do not align following the cessation of LIBOR rates, AES will seek to negotiate contract amendments with counterparties or additional derivatives contracts.

Global Tax — The macroeconomic and political environments in the U.S. and in some countries where our subsidiaries conduct business have changed during 2021 and 2022. This could result in significant impacts to tax law. For example, on July 1, 2022, the Chilean government proposed to reduce the corporate tax rate from 27% to 25%, limit net operating loss utilization per year, and introduce a disintegrated system whereby dividends may be subject to a 22% withholding tax, among other changes. The potential impact to the Company may be material.

Additionally, in the first quarter of 2022, the Biden Administration released its fiscal year 2023 budget, which includes proposed U.S. corporate and international tax reform proposals that would increase the U.S. corporate income tax rate and GILTI tax rate, replace BEAT with rules in line with OECD Pillar 2 Model Rules, eliminate tax preferences for fossil fuels, among others. Also in the first quarter of 2022, the European Commission published an amended draft Directive on Pillar 2 which includes numerous amendments compared to the version published in the fourth quarter of 2021. The potential timing for possible enactment and impact to the Company remains unknown, but may be material.

Inflation — In the markets in which we operate, there have been higher rates of inflation in recent months. While most of our contracts in our international businesses are indexed to inflation, in general, our U.S.-based generation contracts are not indexed to inflation. If inflation continues to increase in our markets, it may increase our expenses that we may not be able to pass through to customers. It may also increase the costs of some of our development projects that could negatively impact their competitiveness. Our utility businesses do allow for recovering of operations and maintenance costs through the regulatory process, which may have timing impacts on recovery.

53 | The AES Corporation | June 30, 2022 Form 10-Q

Alto Maipo

Alto Maipo is currently constructing a hydroelectric facility near Santiago, Chile which is approximately 99% complete and started generating energy in the fourth quarter of 2021 as part of the commissioning process. The Alto Maipo project (the “Project”) has experienced significant construction difficulties, which resulted in a substantial increase in project costs over the original budget and led to a series of negotiations that resulted in securing additional funding from creditors and additional equity injections from AES Andes. See Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Trends and Uncertainties of the 2021 Form 10-K for further information.

On November 17, 2021, Alto Maipo SpA commenced a reorganization proceeding in accordance with Chapter 11 of the U.S. Bankruptcy Code, through a voluntary petition. Consequently, through Chapter 11 proceedings, The AES Corporation was no longer considered to have control over Alto Maipo and, therefore, derecognized Alto Maipo from its Consolidated Balance Sheets and recognized an after-tax loss of approximately $1.2 billion, net of noncontrolling interests, in the Consolidated Statement of Operations in the fourth quarter of 2021, associated with the loss of control attributable to the former controlling interest.

On May 26, 2022, Alto Maipo emerged from bankruptcy in accordance with Chapter 11 of the U.S. Bankruptcy Code. Alto Maipo, as restructured, is considered a VIE. As the Company lacks the power to make significant decisions, it does not meet the criteria to be considered the primary beneficiary of Alto Maipo and therefore will not consolidate the entity. The Company has elected the fair value option to account for its investment in Alto Maipo.

Decarbonization Initiatives

Our strategy involves shifting towards clean energy platforms, including renewable energy, energy storage, LNG, and modernized grids. It is designed to position us for continued growth while reducing our carbon intensity and in support of our mission of accelerating the future of energy, together. In February 2022, we announced our intent to exit coal generation by year-end 2025, subject to necessary approvals.

In addition, initiatives have been announced by regulators, including in Chile, Puerto Rico, and Hawaii, and offtakers in recent years, with the intention of reducing GHG emissions generated by the energy industry. In parallel, the shift towards renewables has caused certain customers to migrate to other low-carbon energy solutions and this trend may continue.

Although we cannot currently estimate the financial impact of these decarbonization initiatives, new legislative or regulatory programs further restricting carbon emissions or other initiatives to voluntarily exit coal generation could require material capital expenditures, result in a reduction of the estimated useful life of certain coal facilities, or have other material adverse effects on our financial results.

For further information about the risks associated with decarbonization initiatives, see Item 1A.—Risk Factors—Concerns about GHG emissions and the potential risks associated with climate change have led to increased regulation and other actions that could impact our businesses included in the 2021 Form 10-K.

Regulatory

AES Maritza PPA Review — DG Comp is conducting a preliminary review of whether AES Maritza’s PPA with NEK is compliant with the European Union's State Aid rules. No formal investigation has been launched by DG Comp to date. However, AES Maritza has been engaging in discussions with the DG Comp case team and the Government of Bulgaria (“GoB”) to attempt to reach a negotiated resolution of DG Comp’s review (“PPA Discussions”). The PPA Discussions are ongoing and the PPA continues to remain in place. However, there can be no assurance that, in the context of the PPA Discussions, the other parties will not seek a prompt termination of the PPA.

We do not believe termination of the PPA is justified. Nevertheless, the PPA Discussions will involve a range of potential outcomes, including but not limited to the termination of the PPA and payment of some level of compensation to AES Maritza. Any negotiated resolution would be subject to mutually acceptable terms, lender consent, and DG Comp approval. At this time, we cannot predict the outcome of the PPA Discussions or when those discussions will conclude. Nor can we predict how DG Comp might resolve its review if the PPA Discussions fail to result in an agreement concerning the agency’s review. AES Maritza believes that its PPA is legal and in compliance with all applicable laws, and it will take all actions necessary to protect its interests, whether through negotiated agreement or otherwise. However, there can be no assurance that this matter will be resolved favorably; if it is not,

54 | The AES Corporation | June 30, 2022 Form 10-Q

there could be a material adverse effect on the Company’s financial condition, results of operations, and cash flows. As of June 30, 2022, the carrying value of our long-lived assets at Maritza is $452 million.

AES Ohio Distribution Rate Case — On November 30, 2020, AES Ohio filed a new distribution rate case with the The Public Utilities Commission of Ohio (“PUCO”) that proposes a revenue increase of $120.8 million per year and incorporates the DIR investments that were planned and approved in the last rate case, but not yet included in distribution rates, other distribution investments since September 2015, and other investments and expenses. Certain parties that have intervened in the distribution rate case have argued that ESP 1 incorporates a distribution rate freeze. The rate case is pending a commission order and we are unable to predict the outcome at this time.

AES Indiana Integrated Resource Plan (“IRP”) — AES Indiana has begun holding public advisory meetings for its 2022 IRP. Changes to its generation portfolio are evaluated and decided through the IRP. AES Indiana issued an all-source Request for Proposal on April 14, 2022, in order to competitively procure replacement capacity; such need is being evaluated in AES Indiana's 2022 IRP.

Foreign Exchange Rates

We operate in multiple countries and as such are subject to volatility in exchange rates at varying degrees at the subsidiary level and between our functional currency, the USD, and currencies of the countries in which we operate. For additional information, refer to Item 3.—Quantitative and Qualitative Disclosures About Market Risk.

Impairments

Long-lived Assets — During the six months ended June 30, 2022, the Company recognized asset impairment expense of $483 million. See Note 15*—Asset Impairment Expense* included in Item 1.—Financial Statements of this Form 10-Q for further information. After recognizing this impairment expense, the carrying value of long-lived assets that were assessed for impairment totaled $454 million at June 30, 2022.

Events or changes in circumstances that may necessitate recoverability tests and potential impairments of long-lived assets or goodwill may include, but are not limited to, adverse changes in the regulatory environment, unfavorable changes in power prices or fuel costs, increased competition due to additional capacity in the grid, technological advancements, declining trends in demand, evolving industry expectations to transition away from fossil fuel sources for generation, or an expectation it is more likely than not the asset will be disposed of before the end of its estimated useful life.

Environmental

The Company is subject to numerous environmental laws and regulations in the jurisdictions in which it operates. The Company faces certain risks and uncertainties related to these environmental laws and regulations, including existing and potential GHG legislation or regulations, and actual or potential laws and regulations pertaining to water discharges, waste management (including disposal of coal combustion residuals) and certain air emissions, such as SO2, NOx, particulate matter, mercury, and other hazardous air pollutants. Such risks and uncertainties could result in increased capital expenditures or other compliance costs which could have a material adverse effect on certain of our U.S. or international subsidiaries and our consolidated results of operations. For further information about these risks, see Item 1A.—Risk Factors—Our operations are subject to significant government regulation and could be adversely affected by changes in the law or regulatory schemes; Several of our businesses are subject to potentially significant remediation expenses, enforcement initiatives, private party lawsuits and reputational risk associated with CCR; Our businesses are subject to stringent environmental laws, rules and regulations; and Concerns about GHG emissions and the potential risks associated with climate change have led to increased regulation and other actions that could impact our businesses included in the 2021 Form 10-K.

CSAPR — CSAPR addresses the “good neighbor” provision of the CAA, which prohibits sources within each state from emitting any air pollutant in an amount which will contribute significantly to any other state’s nonattainment, or interference with maintenance of, any NAAQS. The CSAPR required significant reductions in SO2 and NOx emissions from power plants in many states in which subsidiaries of the Company operate. The Company is required to comply with the CSAPR in certain states, including Indiana and Maryland. The CSAPR is implemented, in part, through a market-based program under which compliance may be achievable through the acquisition and use of emissions allowances created by the EPA. The Company complies with CSAPR through operation of existing controls and purchases of allowances on the open market, as needed.

In October 2016, the EPA published a final rule to update the CSAPR to address the 2008 ozone NAAQS

55 | The AES Corporation | June 30, 2022 Form 10-Q

(“CSAPR Update Rule”). The CSAPR Update Rule found that NOx ozone season emissions in 22 states (including Indiana, Maryland, Ohio, and Pennsylvania) affected the ability of downwind states to attain and maintain the 2008 ozone NAAQS, and, accordingly, the EPA issued federal implementation plans that both updated existing CSAPR NOx ozone season emission budgets for electric generating units within these states and implemented these budgets through modifications to the CSAPR NOx ozone season allowance trading program. Implementation started in the 2017 ozone season (May-September 2017). Affected facilities receive fewer ozone season NOx allowances in 2017 and later, possibly resulting in the need to purchase additional allowances. Additionally, on September 13, 2019, the D.C. Circuit remanded a portion of October 2016 CSAPR Update Rule to the EPA. On April 30, 2021, the EPA published a final rule to address the 2020 D.C. Circuit decision. The EPA is issuing new or amended federal implementation plans for 12 states, including Indiana, Maryland, Ohio, and Pennsylvania, with revised CSAPR NOx ozone season emission budgets for electric generating units within these states via a new CSAPR NOx Ozone Season Group 3 Trading Program. Implementation began during the 2021 ozone season (May-September 2021) with an effective date of June 29, 2021. AES Indiana facilities and AES Warrior Run in Maryland will receive fewer ozone season NOx allowances for future NOx Ozone Seasons beginning in 2021 and later, possibly resulting in the need to purchase additional allowances. In addition, subject sources in these states were required to surrender an equivalent number of previously allocated 2021-2024 Group 2 allowances by deadlines in 2021. This requirement applies inclusive of assets and allowances that have since been sold and/or retired, including former AES assets in Ohio and Pennsylvania. While AES no longer operates electric generating units subject to the revised CSAPR Update Rule in Ohio or Pennsylvania, certain prior AES sources in these states were required to surrender an equivalent number of previously allocated 2021-2024 Group 2 allowances and on July 14, 2021 the required allowances were recalled by the EPA, fulfilling this obligation.

On April 6, 2022, the EPA published a proposed Federal Implementation Plan to address air quality impacts with respect to the 2015 Ozone NAAQS. The rule would establish a revised CSAPR NOx Ozone Season Group 3 trading program of 25 states, including Indiana and Maryland. In addition to other requirements, if finalized, electric generating units (“EGUs”) in these states would begin receiving fewer allowances as soon as 2023, possibly resulting in the need to purchase additional allowances.

While the Company's additional CSAPR compliance costs to date have been immaterial, the future availability of and cost to purchase allowances to meet the emission reduction requirements is uncertain at this time, but it could be material.

Climate Change Regulation — On July 8, 2019, the EPA published the final Affordable Clean Energy (“ACE”) Rule, along with associated revisions to implementing regulations, in addition to final revocation of the CPP. The ACE Rule determines that heat rate improvement measures are the Best System of Emissions Reductions for existing coal-fired electric generating units. The final ACE Rule established CO2 emission rules for existing power plants under CAA Section 111(d) and replaced the EPA's 2015 Clean Power Plan Rule (“CPP”), which among other things, had called on states to mandate that power companies shift electricity generation to lower or zero carbon fuel sources. In the final ACE rule, the EPA determined that heat rate improvement measures are the Best System of Emissions Reductions for existing coal-fired electric generating units. AES Indiana Petersburg and AES Warrior Run have coal-fired electric generating units that could have been impacted by this regulation. On January 19, 2021, the D.C. Circuit vacated and remanded to the EPA the ACE Rule, although the parties had an opportunity to request a rehearing at the D.C. Circuit or seek a review of the decision by the U.S. Supreme Court. On March 5, 2021, the D.C. Circuit issued the partial mandate effectuating the vacatur of the ACE Rule. In effect, the CPP did not take effect while the EPA is addressing the remand of the ACE rule by promulgating a new Section 111(d) rule to regulate greenhouse gases from existing electric generating units. On October 29, 2021, the U.S. Supreme Court granted petitions to review the decision by the D.C. Circuit to vacate the ACE Rule. On June 30, 2022, the Supreme Court reversed the judgment of the D.C. Circuit Court and remanded for further proceedings consistent with its opinion. The opinion held that the “generation shifting” approach in the CPP exceeded the authority granted to EPA by Congress under Section 111(d) of the CAA. The impact of the results of further proceedings and potential future greenhouse gas emissions regulations remains uncertain.

Waste Management — On October 19, 2015, an EPA rule regulating CCR under the Resource Conservation and Recovery Act as nonhazardous solid waste became effective. The rule established nationally applicable minimum criteria for the disposal of CCR in new and currently operating landfills and surface impoundments, including location restrictions, design and operating criteria, groundwater monitoring, corrective action and closure requirements, and post-closure care. The primary enforcement mechanisms under this regulation would be actions commenced by the states and private lawsuits. On December 16, 2016, the Water Infrastructure Improvements for the Nation Act ("WIN Act") was signed into law. This includes provisions to implement the CCR rule through a state permitting program, or if the state chooses not to participate, a possible

56 | The AES Corporation | June 30, 2022 Form 10-Q

federal permit program. If this rule is finalized before Indiana or Puerto Rico establishes a state-level CCR permit program, AES CCR units in those locations could eventually be required to apply for a federal CCR permit from the EPA. The EPA has indicated that it will implement a phased approach to amending the CCR Rule, which is ongoing. On August 28, 2020, the EPA published final amendments to the CCR Rule titled "A Holistic Approach to Closure Part A: Deadline to Initiate Closure," that, among other amendments, required certain CCR units to cease waste receipt and initiate closure by April 11, 2021. The CCR Part A Rule also allowed for extensions of the April 11, 2021 deadline if the EPA determines certain criteria are met. Facilities seeking such an extension were required to submit a demonstration to the EPA by November 30, 2020. On January 25, 2022, the EPA released proposed determinations regarding nine CCR Part A Rule demonstrations. On the same day, the EPA issued four compliance-related letters notifying certain other facilities of their compliance obligations under the federal CCR regulations. The determinations and letters include interpretations regarding implementation of the CCR Rule. On April 8, 2022, petitions for review were filed challenging these EPA actions. The petitions are consolidated in Electric Energy, Inc. v. EPA. On July 12, 2022, EPA released prepublication determinations regarding two CCR Part A Rule demonstrations. It is too early to determine the direct or indirect impact of these letters or any determinations that may be made.

The CCR rule, current or proposed amendments to the CCR rule, the results of groundwater monitoring data, or the outcome of CCR-related litigation could have a material impact on our business, financial condition, and results of operations. AES Indiana would seek recovery of any resulting expenditures; however, there is no guarantee we would be successful in this regard.

Capital Resources and Liquidity

Overview

As of June 30, 2022, the Company had unrestricted cash and cash equivalents of $1.1 billion, of which $29 million was held at the Parent Company and qualified holding companies. The Company had $595 million in short-term investments, held primarily at subsidiaries, and restricted cash and debt service reserves of $576 million. The Company also had non-recourse and recourse aggregate principal amounts of debt outstanding of $17 billion and $4.2 billion, respectively. Of the $2.2 billion of our current non-recourse debt, $2 billion was presented as such because it is due in the next twelve months and $212 million relates to debt considered in default due to covenant violations. None of the defaults are payment defaults but are instead technical defaults triggered by failure to comply with covenants or other requirements contained in the non-recourse debt documents, of which $205 million is due to the bankruptcy of the offtaker.

We expect current maturities of non-recourse debt to be repaid from net cash provided by operating activities of the subsidiary to which the debt relates, through opportunistic refinancing activity, or some combination thereof. We have no recourse debt which matures within the next twelve months. From time to time, we may elect to repurchase our outstanding debt through cash purchases, privately negotiated transactions, or otherwise when management believes that such securities are attractively priced. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, and other factors. The amounts involved in any such repurchases may be material.

We rely mainly on long-term debt obligations to fund our construction activities. We have, to the extent available at acceptable terms, utilized non-recourse debt to fund a significant portion of the capital expenditures and investments required to construct and acquire our electric power plants, distribution companies, and related assets. Our non-recourse financing is designed to limit cross-default risk to the Parent Company or other subsidiaries and affiliates. Our non-recourse long-term debt is a combination of fixed and variable interest rate instruments. Debt is typically denominated in the currency that matches the currency of the revenue expected to be generated from the benefiting project, thereby reducing currency risk. In certain cases, the currency is matched through the use of derivative instruments. The majority of our non-recourse debt is funded by international commercial banks, with debt capacity supplemented by multilaterals and local regional banks.

Given our long-term debt obligations, the Company is subject to interest rate risk on debt balances that accrue interest at variable rates. When possible, the Company will borrow funds at fixed interest rates or hedge its variable rate debt to fix its interest costs on such obligations. In addition, the Company has historically tried to maintain at least 70% of its consolidated long-term obligations at fixed interest rates, including fixing the interest rate through the use of interest rate swaps. These efforts apply to the notional amount of the swaps compared to the amount of related underlying debt. Presently, the Parent Company’s only material unhedged exposure to variable interest rate debt relates to drawings of $810 million under its revolving credit facility. On a consolidated basis, of the Company’s

57 | The AES Corporation | June 30, 2022 Form 10-Q

$21.5 billion of total gross debt outstanding as of June 30, 2022, approximately $3.1 billion bore interest at variable rates that were not subject to a derivative instrument which fixed the interest rate. Brazil holds $1.5 billion of our floating rate non-recourse exposure as variable rate instruments act as a natural hedge against inflation in Brazil.

In addition to utilizing non-recourse debt at a subsidiary level when available, the Parent Company provides a portion, or in certain instances all, of the remaining long-term financing or credit required to fund development, construction, or acquisition of a particular project. These investments have generally taken the form of equity investments or intercompany loans, which are subordinated to the project’s non-recourse loans. We generally obtain the funds for these investments from our cash flows from operations, proceeds from the sales of assets and/or the proceeds from our issuances of debt, common stock and other securities. Similarly, in certain of our businesses, the Parent Company may provide financial guarantees or other credit support for the benefit of counterparties who have entered into contracts for the purchase or sale of electricity, equipment, or other services with our subsidiaries or lenders. In such circumstances, if a business defaults on its payment or supply obligation, the Parent Company will be responsible for the business’ obligations up to the amount provided for in the relevant guarantee or other credit support. As of June 30, 2022, the Parent Company had provided outstanding financial and performance-related guarantees or other credit support commitments to or for the benefit of our businesses, which were limited by the terms of the agreements, of approximately $2.3 billion in aggregate (excluding those collateralized by letters of credit and other obligations discussed below).

As the Parent Company has only recently been upgraded to investment grade by all three rating agencies, some counterparties may be unwilling to accept our general unsecured commitments to provide credit support. Accordingly, with respect to both new and existing commitments, the Parent Company may be required to provide some other form of assurance, such as a letter of credit, to backstop or replace our credit support. The Parent Company may not be able to provide adequate assurances to such counterparties. To the extent we are required and able to provide letters of credit or other collateral to such counterparties, this will reduce the amount of credit available to us to meet our other liquidity needs. As of June 30, 2022, we had $155 million in letters of credit outstanding provided under our unsecured credit facility and $26 million in letters of credit outstanding provided under our revolving credit facility. These letters of credit operate to guarantee performance relating to certain project development and construction activities and business operations. During the quarter ended June 30, 2022, the Company paid letter of credit fees ranging from 1% to 3% per annum on the outstanding amounts.

We expect to continue to seek, where possible, non-recourse debt financing in connection with the assets or businesses that we or our affiliates may develop, construct, or acquire. However, depending on local and global market conditions and the unique characteristics of individual businesses, non-recourse debt may not be available on economically attractive terms or at all. If we decide not to provide any additional funding or credit support to a subsidiary project that is under construction or has near-term debt payment obligations and that subsidiary is unable to obtain additional non-recourse debt, such subsidiary may become insolvent, and we may lose our investment in that subsidiary. Additionally, if any of our subsidiaries lose a significant customer, the subsidiary may need to withdraw from a project or restructure the non-recourse debt financing. If we or the subsidiary choose not to proceed with a project or are unable to successfully complete a restructuring of the non-recourse debt, we may lose our investment in that subsidiary.

Many of our subsidiaries depend on timely and continued access to capital markets to manage their liquidity needs. The inability to raise capital on favorable terms, to refinance existing indebtedness, or to fund operations and other commitments during times of political or economic uncertainty may have material adverse effects on the financial condition and results of operations of those subsidiaries. In addition, changes in the timing of tariff increases or delays in the regulatory determinations under the relevant concessions could affect the cash flows and results of operations of our businesses.

Long-Term Receivables

As of June 30, 2022, the Company had approximately $47 million of gross accounts receivable classified as Other noncurrent assets. These noncurrent receivables mostly consist of accounts receivable in Argentina and Chile that, pursuant to amended agreements or government resolutions, have collection periods that extend beyond June 30, 2023, or one year from the latest balance sheet date. The majority of Argentine receivables have been converted into long-term financing for the construction of power plants. Noncurrent receivables in Chile pertain primarily to revenues recognized on regulated energy contracts that were impacted by the Stabilization Fund created by the Chilean government. A portion relates to the extension of existing PPAs with the addition of renewable energy. See Note 5*—Financing Receivables* in Item 1.—Financial Statements of this Form 10-Q and Item 1.—Business—South America SBU—Argentina—Regulatory Framework and Market Structure included in our 2021 Form 10-K for further information.

58 | The AES Corporation | June 30, 2022 Form 10-Q

As of June 30, 2022, the Company had approximately $1.2 billion of loans receivable primarily related to a facility constructed under a build, operate, and transfer contract in Vietnam. This loan receivable represents contract consideration related to the construction of the facility, which was substantially completed in 2015, and will be collected over the 25-year term of the plant’s PPA. In December 2020, Mong Duong met the held-for-sale criteria and the loan receivable balance, net of CECL reserve, was reclassified to held-for-sale assets. As of June 30, 2022, $95 million of the loan receivable balance was classified as Current held-for-sale assets and $1.1 billion was classified as Noncurrent held-for-sale assets on the Condensed Consolidated Balance Sheets. See Note 13*—Revenue* in Item 1.—Financial Statements of this Form 10-Q for further information.

Cash Sources and Uses

The primary sources of cash for the Company in the six months ended June 30, 2022 were debt financings, cash flows from operating activities, and sales of short-term investments. The primary uses of cash in the six months ended June 30, 2022 were repayments of debt, capital expenditures, purchases of short-term investments, and acquisitions of noncontrolling interests.

The primary sources of cash for the Company in the six months ended June 30, 2021 were were debt financings, proceeds from the issuance of Equity Units, cash flows from operating activities, and sales of short-term investments. The primary uses of cash in the six months ended June 30, 2021 were repayments of debt, capital expenditures, and purchases of short-term investments.

A summary of cash-based activities are as follows (in millions):


	Six Months Ended June 30,
Cash Sources:	2022		2021
Issuance of non-recourse debt	$	3,132	$	700
Borrowings under the revolving credit facilities	3,100		998
Net cash provided by operating activities	865		604
Sale of short-term investments	345		316
Sales to noncontrolling interests	229		20
Issuance of preferred shares in subsidiaries	60		151
Contributions from noncontrolling interests	28		95

Issuance of preferred stock	—		1,015



Other	34		207
Total Cash Sources	$	7,793	$	4,106

Cash Uses:
Repayments under the revolving credit facilities	$	(2,269)	$	(932)
Capital expenditures	(1,659)		(999)
Repayments of non-recourse debt	(1,469)		(939)
Purchase of short-term investments	(694)		(258)
Acquisitions of noncontrolling interests	(540)		(17)
Purchase of emissions allowances	(293)		(88)
Dividends paid on AES common stock	(211)		(200)
Contributions and loans to equity affiliates	(169)		(173)
Acquisitions of business interests, net of cash and restricted cash sold	(107)		(81)
Distributions to noncontrolling interests	(93)		(129)

Other	(122)		(91)
Total Cash Uses	$	(7,626)	$	(3,907)
Net increase in Cash, Cash Equivalents, and Restricted Cash	$	167	$	199

Consolidated Cash Flows

The following table reflects the changes in operating, investing, and financing cash flows for the comparative six month period (in millions):


	Six Months Ended June 30,
Cash flows provided by (used in):	2022		2021		$ Change
Operating activities	$	865	$	604	$	261
Investing activities	(2,583)		(1,145)		(1,438)
Financing activities	1,924		682		1,242

59 | The AES Corporation | June 30, 2022 Form 10-Q

Operating Activities

Net cash provided by operating activities increased $261 million for the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

Operating Cash Flows (1)

(in millions)

(1)Amounts included in the chart above include the results of discontinued operations, where applicable.

(2)The change in adjusted net income is defined as the variance in net income, net of the total adjustments to net income as shown on the Condensed Consolidated Statements of Cash Flows in Item 1—Financial Statements of this Form 10-Q.

(3)The change in working capital is defined as the variance in total changes in operating assets and liabilities as shown on the Condensed Consolidated Statements of Cash Flows in Item 1—Financial Statements of this Form 10-Q.

Adjusted net income decreased $425 million primarily due to lower margins at our South America SBU and an increase in interest expense, partially offset by higher margins at our Eurasia SBU.
Working capital requirements decreased $686 million, primarily due to the GSF liability payment at Tietê in the prior year, deferred income at Angamos in the prior year due to revenue recognized for the early contract terminations with Minera Escondida and Minera Spence, and the change in income tax liabilities, partially offset by an increase in inventory, primarily fuel and other raw materials, at AES Andes.

Investing Activities

Net cash used in investing activities increased $1.4 billion for the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

Investing Cash Flows

(in millions)

Cash used for short-term investing activities increased $407 million, primarily at AES Brasil as a result of higher net short-term investment purchases in 2022.
Purchases of emissions allowances increased $205 million, primarily in Bulgaria as a result of increased demand and higher CO2 prices.
Capital expenditures increased $660 million, discussed further below.

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Capital Expenditures

(in millions)

Growth expenditures increased $612 million, primarily driven by an increase in renewable projects at AES Clean Energy and AES Brasil, and by higher TDSIC plan and renewable project investments at AES Indiana, partially offset by the timing of payments for the construction of the Alamitos Energy Center at Southland Energy in the prior year.
Maintenance expenditures increased $49 million, primarily due to the timing of payments and increased expenditures at AES Indiana and AES Ohio.
Environmental expenditures decreased $1 million, with no material drivers.

Financing Activities

Net cash provided by financing activities increased $1.2 billion for the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

Financing Cash Flows

(in millions)

See Notes 7—Debt and 11—Equity in Item 1—Financial Statements of this Form 10-Q for more information regarding significant debt and equity transactions.

The $1.9 billion impact from non-recourse debt transactions is primarily due to an increase in net borrowings in the Netherlands and Panama, the United Kingdom, AES Clean Energy, IPALCO, AES Ohio, AES Brasil, and AES Andes, and by a decrease in net repayments in the Dominican Republic.
The $515 million impact from Parent Company revolver transactions is primarily due to higher net borrowings in the current year.

*•*The $250 million impact from from non-recourse revolver transactions is primarily due to higher net borrowings in the Dominican Republic and at AES Clean Energy, partially offset by higher net repayments at AES Ohio.

*•*The $209 million impact from sales to noncontrolling interests is primarily due to proceeds received from the sales of ownership interests in Andes Solar 2a and Los Olmos as part of the Chile Renovables renewable partnership, and at AES Clean Energy from the sales of ownership in project companies to tax equity partners.

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The $1 billion impact from issuance of preferred stock is due to the issuance of Equity Units at the Parent Company in the prior year.

*•*The $523 million impact from acquisitions of noncontrolling interests is mainly due to the acquisition of an additional 32% ownership interest in AES Andes.

Parent Company Liquidity

The following discussion is included as a useful measure of the liquidity available to The AES Corporation, or the Parent Company, given the non-recourse nature of most of our indebtedness. Parent Company Liquidity, as outlined below, is a non-GAAP measure and should not be construed as an alternative to Cash and cash equivalents, which is determined in accordance with GAAP. Parent Company Liquidity may differ from similarly titled measures used by other companies. The principal sources of liquidity at the Parent Company level are dividends and other distributions from our subsidiaries, including refinancing proceeds, proceeds from debt and equity financings at the Parent Company level, including availability under our revolving credit facility, and proceeds from asset sales. Cash requirements at the Parent Company level are primarily to fund interest and principal repayments of debt, construction commitments, other equity commitments, acquisitions, taxes, Parent Company overhead and development costs, and dividends on common stock.

The Company defines Parent Company Liquidity as cash available to the Parent Company, including cash at qualified holding companies, plus available borrowings under our existing credit facility. The cash held at qualified holding companies represents cash sent to subsidiaries of the Company domiciled outside of the U.S. Such subsidiaries have no contractual restrictions on their ability to send cash to the Parent Company. Parent Company Liquidity is reconciled to its most directly comparable GAAP financial measure, Cash and cash equivalents, at the periods indicated as follows (in millions):


	June 30, 2022		December 31, 2021
Consolidated cash and cash equivalents	$	1,075	$	943
Less: Cash and cash equivalents at subsidiaries	(1,046)		(902)
Parent Company and qualified holding companies’ cash and cash equivalents	29		41
Commitments under the Parent Company credit facility	1,250		1,250
Less: Letters of credit under the credit facility	(26)		(48)
Less: Borrowings under the credit facility	(810)		(365)
Borrowings available under the Parent Company credit facility	414		837
Total Parent Company Liquidity	$	443	$	878

The Company utilizes its Parent Company credit facility for short term cash needs to bridge the timing of distributions from its subsidiaries throughout the year.

The Parent Company paid dividends of $0.1580 per outstanding share to its common stockholders during the first and second quarters of 2022 for dividends declared in December 2021 and February 2022, respectively. While we intend to continue payment of dividends, and believe we will have sufficient liquidity to do so, we can provide no assurance that we will continue to pay dividends, or if continued, the amount of such dividends.

Recourse Debt

Our total recourse debt was $4.2 billion and $3.8 billion as of June 30, 2022 and December 31, 2021, respectively. See Note 7—Debt in Item 1.—Financial Statements of this Form 10-Q and Note 11—Debt in Item 8.—Financial Statements and Supplementary Data of our 2021 Form 10-K for additional detail.

We believe that our sources of liquidity will be adequate to meet our needs for the foreseeable future. This belief is based on a number of material assumptions, including, without limitation, assumptions about our ability to access the capital markets, the operating and financial performance of our subsidiaries, currency exchange rates, power market pool prices, and the ability of our subsidiaries to pay dividends. In addition, our subsidiaries’ ability to declare and pay cash dividends to us (at the Parent Company level) is subject to certain limitations contained in loans, governmental provisions and other agreements. We can provide no assurance that these sources will be available when needed or that the actual cash requirements will not be greater than anticipated. We have met our interim needs for shorter-term and working capital financing at the Parent Company level with our revolving credit facility. See Item 1A.—Risk Factors—The AES Corporation’s ability to make payments on its outstanding indebtedness is dependent upon the receipt of funds from our subsidiaries of the Company’s 2021 Form 10-K for additional information.

Various debt instruments at the Parent Company level, including our revolving credit facility, contain certain restrictive covenants. The covenants provide for, among other items, limitations on other indebtedness, liens, investments and guarantees; limitations on dividends, stock repurchases and other equity transactions; restrictions

62 | The AES Corporation | June 30, 2022 Form 10-Q

and limitations on mergers and acquisitions, sales of assets, leases, transactions with affiliates and off-balance sheet and derivative arrangements; maintenance of certain financial ratios; and financial and other reporting requirements. As of June 30, 2022, we were in compliance with these covenants at the Parent Company level.

Non-Recourse Debt

While the lenders under our non-recourse debt financings generally do not have direct recourse to the Parent Company, defaults thereunder can still have important consequences for our results of operations and liquidity, including, without limitation:

reducing our cash flows as the subsidiary will typically be prohibited from distributing cash to the Parent Company during the time period of any default;
triggering our obligation to make payments under any financial guarantee, letter of credit, or other credit support we have provided to or on behalf of such subsidiary;
causing us to record a loss in the event the lender forecloses on the assets; and
triggering defaults in our outstanding debt at the Parent Company.

For example, our revolving credit facility and outstanding debt securities at the Parent Company include events of default for certain bankruptcy-related events involving material subsidiaries. In addition, our revolving credit agreement at the Parent Company includes events of default related to payment defaults and accelerations of outstanding debt of material subsidiaries.

Some of our subsidiaries are currently in default with respect to all or a portion of their outstanding indebtedness. The total non-recourse debt classified as current in the accompanying Condensed Consolidated Balance Sheets amounts to $2.2 billion. The portion of current debt related to such defaults was $212 million at June 30, 2022, all of which was non-recourse debt related to three subsidiaries — AES Puerto Rico, AES Ilumina, and AES Jordan Solar. An additional $75 million of debt in default exists at the subsidiary AES Jordan PSC which was classified as a current held-for-sale liability at June 30, 2022. None of the defaults are payment defaults, but are instead technical defaults triggered by failure to comply with other covenants or other conditions contained in the non-recourse debt documents, of which $205 million is due to the bankruptcy of the offtaker. See Note 7—Debt in Item 1.—Financial Statements of this Form 10-Q for additional detail.

None of the subsidiaries that are currently in default are subsidiaries that met the applicable definition of materiality under the Parent Company’s debt agreements as of June 30, 2022, in order for such defaults to trigger an event of default or permit acceleration under the Parent Company’s indebtedness. However, as a result of additional dispositions of assets, other significant reductions in asset carrying values or other matters in the future that may impact our financial position and results of operations or the financial position of the individual subsidiary, it is possible that one or more of these subsidiaries could fall within the definition of a “material subsidiary” and thereby trigger an event of default and possible acceleration of the indebtedness under the Parent Company’s outstanding debt securities. A material subsidiary is defined in the Parent Company’s revolving credit facility as any business that contributed 20% or more of the Parent Company’s total cash distributions from businesses for the four most recently ended fiscal quarters. As of June 30, 2022, none of the defaults listed above, individually or in the aggregate, results in or is at risk of triggering a cross-default under the recourse debt of the Parent Company.

Critical Accounting Policies and Estimates

The condensed consolidated financial statements of AES are prepared in conformity with U.S. GAAP, which requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented.

The Company’s significant accounting policies are described in Note 1 — General and Summary of Significant Accounting Policies of our 2021 Form 10-K. The Company’s critical accounting estimates are described in Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2021 Form 10-K. An accounting estimate is considered critical if the estimate requires management to make an assumption about matters that were highly uncertain at the time the estimate was made, different estimates reasonably could have been used, or if changes in the estimate that would have a material impact on the Company’s financial condition or results of operations are reasonably likely to occur from period to period. Management believes that the accounting estimates employed are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The Company has reviewed and determined that these remain as critical accounting policies as of and for the six months ended June 30, 2022.

63 | The AES Corporation | June 30, 2022 Form 10-Q

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