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 2022 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 2022 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 SBUs, mainly organized by technology: Renewables (solar, wind, energy storage, hydro, biomass, and landfill gas), Utilities (AES Indiana, AES Ohio, and AES El Salvador), Energy Infrastructure (natural gas, LNG, coal, pet-coke, diesel, and oil), and New Energy Technologies (green hydrogen, Fluence, Uplight, and 5B). Our businesses in Chile, which have a mix of generation sources, including renewables, are also included within the Energy Infrastructure SBU, as the generation from all sources is pooled to service our existing PPAs. In our 2022 Form 10-K, the management reporting structure and the Company’s reportable segments were mainly organized by geographic regions. In March 2023, we announced internal management changes as a part of our ongoing strategy to align our business to meet our customers’ needs and deliver on our major strategic objectives. The results of our operations are now reported along our four newly formed technology-based SBUs. For additional information regarding our business, see Item 1.—Business of our 2022 Form 10-K.

We have two lines of business: generation and utilities. Our Renewables, Utilities and Energy Infrastructure SBUs participate 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 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. Our New Energy Technologies SBU includes investments in new and innovative technologies to support leading-edge greener energy solutions.

Executive Summary

Compared with last year, first quarter net income increased $18 million, from $171 million to $189 million. This increase is the result of favorable contributions at the Energy Infrastructure and New Energy Technologies SBUs, partially offset by lower contributions at the Utilities and Renewables SBUs.

Adjusted EBITDA, a non-GAAP measure, increased $7 million, from $621 million to $628 million, mainly due to favorable wind and hydrological conditions and additional capacity added to our portfolio at the Renewables SBU, favorable LNG transactions at the Energy Infrastructure SBU, and lower losses from affiliates at the New Energy Technologies SBU due to reduced shipping constraints and costs as well as a reduction of project delays; partially offset by unfavorable weather conditions impacting demand at the Utilities SBU.

28 | The AES Corporation | March 31, 2023 Form 10-Q

Compared with last year, first quarter diluted earnings per share from continuing operations increased $0.05, from $0.16 to $0.21. This increase is mainly driven by favorable LNG transactions at the Energy Infrastructure SBU, new businesses operating in our portfolio at the Renewables SBU, and lower losses of affiliates at the New Energy Technologies SBU, partially offset by lower margins due to unfavorable weather conditions at the Utilities SBU.

Adjusted EPS, a non-GAAP measure, increased $0.01 from $0.21 to $0.22, mainly driven by the drivers above adjusted for NCI, and a lower adjusted tax rate.

29 | The AES Corporation | March 31, 2023 Form 10-Q

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(1) Non-GAAP measure. 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 2022.

30 | The AES Corporation | March 31, 2023 Form 10-Q

Overview of Strategic Performance

AES is leading the industry's transition to clean energy by investing in renewables, utilities, and technology businesses.

  • As of the end of the first quarter of 2023, the Company’s backlog, which includes projects with signed contracts, but which are not yet operational, was 11,932 MW, including 5,627 MW under construction. This is compared to a 12,179 MW backlog as of year-end 2022.

  • In April 2023, AES Ohio signed a comprehensive settlement with the Public Utilities Commission of Ohio (“PUCO”) for its Electric Security Plan (“ESP4”), providing the regulatory foundation necessary to enable future growth. The settlement is expected to be approved by the PUCO in the third quarter of 2023.

  • In April 2023, the Company announced its next decarbonization milestone with the agreement to terminate the PPA for the 205 MW Warrior Run coal plant in Maryland, for a total consideration of $357 million, subject to approval by the Maryland Public Service Commission (“PSC”). AES will continue to operate the plant through at least May 2024, after which the Company sees interesting opportunities to repurpose the site for low carbon solutions that will continue to serve local communities.

  • In April 2023, the Company signed agreements for three-year extensions of 1.4 GW of gas generation at the Southland legacy units in Southern California. The extension will help meet the State of California's grid reliability needs while supporting its decarbonization goals.

Review of Consolidated Results of Operations (Unaudited)

Three Months Ended March 31,
(in millions, except per share amounts)20232022$ change% change
Revenue:
Renewables SBU$495$420$7518%
Utilities SBU97185911213%
Energy Infrastructure SBU1,7241,6071177%
New Energy Technologies SBU74—74NM
Corporate and Other2723417%
Eliminations(52)(57)59%
Total Revenue3,2392,85238714%
Operating Margin:
Renewables SBU88533566%
Utilities SBU105134(29)-22%
Energy Infrastructure SBU3753165919%
New Energy Technologies SBU(4)(2)(2)100%
Corporate and Other5748919%
Eliminations(27)(19)(8)-42%
Total Operating Margin5945306412%
General and administrative expenses(55)(52)(3)6%
Interest expense(330)(258)(72)28%
Interest income123754864%
Loss on extinguishment of debt(1)(6)5-83%
Other expense(14)(12)(2)17%
Other income106467%
Gain on disposal and sale of business interests—1(1)-100%
Asset impairment expense(20)(1)(19)NM
Foreign currency transaction losses(42)(19)(23)NM
Income tax expense(72)(60)(12)20%
Net equity in losses of affiliates(4)(33)29-88%
NET INCOME1891711811%
Less: Income from continuing operations attributable to noncontrolling interests and redeemable stock of subsidiaries(38)(56)18-32%
NET INCOME ATTRIBUTABLE TO THE AES CORPORATION$151$115$3631%
Net cash provided by operating activities$625$457$16837%

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.

31 | The AES Corporation | March 31, 2023 Form 10-Q

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.

Consolidated Revenue and Operating Margin

Three Months Ended March 31, 2023

Revenue

(in millions)

1148

Consolidated Revenue — Revenue increased $387 million, or 14%, for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, driven by:

  • $117 million at Energy Infrastructure driven by favorable LNG transactions, higher energy prices driven by higher fuel costs, and unrealized derivative gains; partially offset by lower generation and the impact of the depreciation of the Argentine peso;

  • $112 million at Utilities mainly driven by higher fuel and purchase rider revenues, higher TDSIC rider and transmission revenues, and higher wholesale revenue due to higher volumes; partially offset by lower retail volumes due to milder weather;

  • $75 million at Renewables mainly driven by new projects placed into service in 2023, better wind generation, unrealized commodity derivative gains, and higher spot sales; partially offset by the impact of the depreciation of the Colombian peso; and

  • $74 million at New Energy Technologies mainly driven by the sale of Fallbrook project in March 2023.

Operating Margin

(in millions)

2317

Consolidated Operating Margin — Operating margin increased $64 million, or 12%, for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, driven by:

  • $59 million at Energy Infrastructure primarily driven by favorable LNG transactions and an increase in

32 | The AES Corporation | March 31, 2023 Form 10-Q

unrealized derivative gains; partially offset by the impact of higher outages, lower contracted margin, and lower thermal dispatch, and a prior year one-time revenue recognition driven by a reduction in a project's expected completion costs; and

  • $35 million at Renewables mainly driven by better hydrology, new projects placed into service, and better wind generation; partially offset by higher fixed costs due to an accelerated growth plan and the impact of the depreciation of the Colombian peso.

These favorable impacts were partially offset by a decrease of $29 million at Utilities primarily driven by lower demand due to milder weather and higher fixed costs; partially offset by higher transmission revenues.

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 $3 million, or 6%, to $55 million for the three months ended March 31, 2023, compared to $52 million for the three months ended March 31, 2022, primarily due to increased business development activity.

Interest income

Interest income increased $48 million, or 64%, to $123 million for the three months ended March 31, 2023, compared to $75 million for the three months ended March 31, 2022, primarily due to higher average interest rates and short-term investments at the Renewables and Energy Infrastructure SBUs.

Interest expense

Interest expense increased $72 million, or 28%, to $330 million for the three months ended March 31, 2023, compared to $258 million for the three months ended March 31, 2022. This increase is primarily due to higher interest rates and new debt issued at the Renewables SBU to fund our renewable growth strategy.

Asset impairment expense

Asset impairment expense increased $19 million to $20 million for the three months ended March 31, 2023, compared to $1 million for the three months ended March 31, 2022. This increase was primarily due to the $14 million impairment of Amman East and IPP4 in Jordan due to the delay in closing the sale transaction.

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 March 31,
(in millions)20232022
Argentina$(33)$(13)
Chile(16)(10)
Brazil126
Other(5)(2)
Total (1)$(42)$(19)

(1)Includes losses of $8 million and $56 million on foreign currency derivative contracts for the three months ended March 31, 2023 and 2022, respectively.

The Company recognized net foreign currency transaction losses of $42 million for the three months ended March 31, 2023, primarily due to unrealized losses due to depreciating receivables denominated in the Argentine peso and unrealized losses related to an intercompany loan denominated in the Colombian peso.

The Company recognized net foreign currency transaction losses of $19 million for the three months ended March 31, 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 foreign currency derivatives due to the appreciating Colombian peso.

33 | The AES Corporation | March 31, 2023 Form 10-Q

Income tax expense

Income tax expense increased $12 million, or 20%, to $72 million for the three months ended March 31, 2023, compared to $60 million for the three months ended March 31, 2022. The Company’s effective tax rates were 27% and 23% for the three months ended March 31, 2023, and 2022, respectively. This net increase in the effective tax rate was due in part to the impacts of the decrease in net equity in losses at Fluence.

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 losses of affiliates

Net equity in losses of affiliates decreased $29 million, to $4 million for the three months ended March 31, 2023, compared to $33 million for the three months ended March 31, 2022. This decrease was driven by a decrease in losses at Fluence of $33 million primarily due to reduced shipping constraints and costs, as well as improvement in construction delays.

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 decreased $18 million, or 32%, to $38 million for the three months ended March 31, 2023, compared to $56 million for the three months ended March 31, 2022. This decrease was primarily due to:

  • Higher allocation of losses to tax equity investors and increased costs associated with the growing business at the Renewables SBU;

  • Prior year one-time revenue recognition driven by a reduction in a project's expected completion costs, and current year impairments in Jordan at the Energy Infrastructure SBU; and

  • Lower earnings due to unfavorable weather at the Utilities SBU.

This decrease was partially offset by:

  • Higher earnings due to better hydrology at the Renewables SBU; and

  • Favorable LNG transactions at the Energy Infrastructure SBU.

Net income attributable to The AES Corporation

Net income attributable to The AES Corporation increased $36 million, or 31%, to $151 million for the three months ended March 31, 2023, compared to $115 million for the three months ended March 31, 2022. This increase was primarily due to:

  • Favorable LNG transactions at the Energy Infrastructure SBU;

  • Increase in interest income due to higher average interest rates and short term investments at the Energy Infrastructure and Renewables SBUs; and

  • Lower losses from affiliates at the New Energy Technologies SBU.

This increase was partially offset by:

*•*Higher interest expense due to higher interest rates and new debt issued at the Renewables SBU; and

  • Unfavorable weather impact on demand at the Utilities SBU.

SBU Performance Analysis

Non-GAAP Measures

Adjusted Operating Margin, EBITDA, Adjusted EBITDA, Adjusted EBITDA with Tax Attributes, 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.

34 | The AES Corporation | March 31, 2023 Form 10-Q

During the first quarter of 2023, management began assessing operational performance and making resource allocation decisions using Adjusted EBITDA. Therefore, the Company uses Adjusted EBITDA as its primary segment performance measure. EBITDA, Adjusted EBITDA, and Adjusted EBITDA with Tax Attributes are new non-GAAP supplemental measures reported beginning in the first quarter of 2023.

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 Energy Infrastructure SBU, associated with the early contract terminations with Minera Escondida and Minera Spence. The allocation of earnings to tax equity investors 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 March 31,
Reconciliation of Adjusted Operating Margin (in millions)20232022
Operating Margin$594$530
Noncontrolling interests adjustment (1)(130)(92)
Unrealized derivative gains(43)(3)
Disposition/acquisition losses (gains)2(1)
Adjusted Operating Margin$423$434

(1)The allocation of earnings to tax equity investors is not adjusted out of Adjusted Operating Margin.

2712

35 | The AES Corporation | March 31, 2023 Form 10-Q

EBITDA, Adjusted EBITDA and Adjusted EBITDA with Tax Attributes

We define EBITDA as earnings before interest income and expense, taxes, depreciation, and amortization. We define Adjusted EBITDA as EBITDA excluding the impact of NCI and interest, taxes, depreciation, and amortization of our equity affiliates, adding back interest income recognized under service concession arrangements, and 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 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 Energy Infrastructure SBU, associated with the early contract terminations with Minera Escondida and Minera Spence.

In addition to the revenue and cost of sales reflected in Operating Margin, Adjusted EBITDA includes the other components of our Consolidated Statement of Operations, such as general and administrative expenses in Corporate and Other as well as business development costs, other expense and other income, realized foreign currency transaction gains and losses, and net equity in earnings of affiliates.

We further define Adjusted EBITDA with Tax Attributes as Adjusted EBITDA, adding back the pre-tax effect of Production Tax Credits (“PTCs”), Investment Tax Credits (“ITCs”), and depreciation tax expense allocated to tax equity investors.

The GAAP measure most comparable to EBITDA, Adjusted EBITDA, and Adjusted EBITDA with Tax Attributes is Net income. We believe that EBITDA, Adjusted EBITDA, and Adjusted EBITDA with Tax Attributes better reflect the underlying business performance of the Company. Adjusted EBITDA is the most relevant measure considered in the Company’s internal evaluation of the financial performance of its segments. Factors in this determination include the variability due to unrealized gains or losses related to derivative transactions or equity securities remeasurement, unrealized foreign currency gains or losses, losses due to impairments, strategic decisions to dispose of or acquire business interests or retire debt, the non-recurring nature of the impact of the early contract terminations at Angamos, and the variability of allocations of earnings to tax equity investors, which affect results in a given period or periods. In addition, each of these metrics represent 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 overall complexity, the Company concluded that Adjusted EBITDA is a more transparent measure than Net income that better assists investors in determining which businesses have the greatest impact on the Company’s results.

EBITDA, Adjusted EBITDA, and Adjusted EBITDA with Tax Attributes should not be construed as alternatives to Net income, which is determined in accordance with GAAP.

Three Months Ended March 31,
Reconciliation of Adjusted EBITDA and Adjusted EBITDA with Tax Attributes (in millions)20232022
Net income$189$171
Income tax expense7260
Interest expense330258
Interest income(123)(75)
Depreciation and amortization273270
EBITDA$741$684
Less: Adjustment for noncontrolling interests and redeemable stock of subsidiaries (1)(170)(156)
Less: Income tax expense (benefit), interest expense (income) and depreciation and amortization from equity affiliates3934
Interest income recognized under service concession arrangements1819
Unrealized derivative and equity securities losses (gains)(39)42
Unrealized foreign currency losses (gains)32(18)
Disposition/acquisition losses (gains)(3)9
Impairment losses91
Loss on extinguishment of debt16
Adjusted EBITDA (1)$628$621
Tax attributes allocated to tax equity investors1313
Adjusted EBITDA with Tax Attributes (2)$641$634

36 | The AES Corporation | March 31, 2023 Form 10-Q

(1) The allocation of earnings to tax equity investors from both consolidated entities and equity affiliates is removed from Adjusted EBITDA.

(2) Adjusted EBITDA with Tax Attributes includes the impact of the share of the ITCs, PTCs, and depreciation expense allocated to tax equity investors under the HLBV accounting method and recognized as Net loss attributable to noncontrolling interests and redeemable stock of subsidiaries on the Condensed Consolidated Statements of Operations. All of the tax attributes are related to the Renewables SBU.

10445360499062

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 Energy Infrastructure 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 Consolidated Statement of Operations, 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 a relevant measure considered in the Company’s internal evaluation of the financial performance of its segments. Factors in this determination include the variability due to unrealized gains or losses related to derivative transactions or equity securities remeasurement, unrealized foreign currency gains or losses, losses due to impairments, strategic decisions to dispose of or acquire business interests or retire debt, and the non-recurring nature of the impact of the early contract terminations at Angamos, which affect results in a given period or periods. In addition, 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 than Income from continuing operations attributable to The AES Corporation 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.

37 | The AES Corporation | March 31, 2023 Form 10-Q

Three Months Ended March 31,
Reconciliation of Adjusted PTC (in millions)20232022
Income from continuing operations, net of tax, attributable to The AES Corporation$151$115
Income tax expense from continuing operations attributable to The AES Corporation5150
Pre-tax contribution202165
Unrealized derivative and equity securities losses (gains)(39)41
Unrealized foreign currency losses (gains)31(19)
Disposition/acquisition losses (gains)(3)9
Impairment losses91
Loss on extinguishment of debt410
Adjusted PTC$204$207

5666

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 Energy Infrastructure 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.

38 | The AES Corporation | March 31, 2023 Form 10-Q

Three Months Ended March 31,
Reconciliation of Adjusted EPS20232022
Diluted earnings per share from continuing operations$0.21$0.16
Unrealized derivative and equity securities losses (gains)(0.06)(1)0.06(2)
Unrealized foreign currency losses (gains)0.04(3)(0.02)(4)
Disposition/acquisition losses—0.01
Impairment losses0.01—
Loss on extinguishment of debt0.010.01
Less: Net income tax expense (benefit)0.01(0.01)
Adjusted EPS$0.22$0.21

(1)Amount primarily relates to unrealized derivative losses at Energy Infrastructure SBU of $48 million, or $0.07 per share.

(2)Amount primarily relates to unrealized commodity derivative losses at New York Wind of $20 million, or $0.03 per share, and unrealized foreign currency derivative losses in Brazil of $20 million, or $0.03 per share.

(3)Amount primarily relates to unrealized foreign currency losses mainly associated with the devaluation of long-term receivables denominated in Argentine pesos of $25 million, or $0.03 per share.

(4)Amount primarily relates to unrealized foreign currency gains in Brazil of $22 million, or $0.03 per share, mainly associated with debt denominated in Brazilian reais.

Renewables SBU

The following table summarizes Operating Margin, Adjusted Operating Margin, Adjusted EBITDA, and Adjusted EBITDA with Tax Attributes (in millions) for the periods indicated:

Three Months Ended March 31,
20232022$ Change% Change
Operating Margin$88$53$3566%
Adjusted Operating Margin (1)5151——%
Adjusted EBITDA (1)12411954%
Adjusted EBITDA with Tax Attributes (1)13713254%

(1) A non-GAAP financial measure. See SBU Performance Analysis—Non-GAAP Measures for definition.

Operating Margin for the three months ended March 31, 2023 increased $35 million driven primarily by better hydrology, new businesses operating in our portfolio, and higher wind availability, resulting in higher renewable energy generation. This increase was partially offset by higher fixed costs due to an accelerated growth plan, the impact of the depreciation of the Colombian peso, and the cap on renewable energy prices implemented in Europe due to regulation 2022/1854.

Adjusted Operating Margin for the three months ended March 31, 2023 remained flat primarily due to the drivers above, adjusted for NCI and unrealized derivatives.

Adjusted EBITDA for the three months ended March 31, 2023 increased $5 million primarily due to the drivers mentioned above for Adjusted Operating Margin, adjusted for depreciation expense.

Adjusted EBITDA with Tax Attributes for the three months ended March 31, 2023 increased $5 million primarily due to the increase in Adjusted EBITDA. During the three months ended March 31, 2023 and 2022, we realized $13 million from Tax Attributes earned by our U.S. renewables business.

Utilities SBU

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

Three Months Ended March 31,
20232022$ Change% Change
Operating Margin$105$134$(29)-22%
Adjusted Operating Margin (1)82104(22)-21%
Adjusted EBITDA (1)162184(22)-12%
Adjusted PTC (1) (2)3869(31)-45%

(1) A non-GAAP financial measure. See SBU Performance Analysis—Non-GAAP Measures for definition.

(2) Adjusted PTC remains a key metric used by management for analyzing our businesses in the utilities industry.

39 | The AES Corporation | March 31, 2023 Form 10-Q

Operating Margin for the three months ended March 31, 2023 decreased $29 million mainly driven by the impact of milder weather and higher fixed costs due to increased property taxes and maintenance expenses, partially offset by an increase in TDSIC rider revenues.

Adjusted Operating Margin for the three months ended March 31, 2023 decreased $22 million primarily due to the drivers above, adjusted for NCI.

Adjusted EBITDA for the three months ended March 31, 2023 decreased $22 million, in line with the decrease in Adjusted Operating Margin.

Adjusted PTC for the three months ended March 31, 2023 decreased $31 million due to the drivers above and higher interest expense due to new debt transactions.

Energy Infrastructure SBU

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

Three Months Ended March 31,
20232022$ Change% Change
Operating Margin$375$316$5919%
Adjusted Operating Margin (1)262251114%
Adjusted EBITDA (1)36335493%

(1) A non-GAAP financial measure. See SBU Performance Analysis—Non-GAAP Measures for definition.

Operating Margin for the three months ended March 31, 2023 increased $59 million driven primarily by favorable LNG transactions and unrealized gains resulting from gas and power swaps derivatives as part of our commercial hedging strategy.

These gains were partially offset by the impact of higher outages, lower contract margins mainly driven by lower commodity prices index, higher cost of sales, and lower thermal dispatch substituted with renewable sources. Additionally, the prior year's one-time revenue recognition, driven by a reduction in a project's expected completion costs, also affected the year-over-year comparison of Operating Margin.

Adjusted Operating Margin for the three months ended March 31, 2023 increased $11 million due to the drivers above, adjusted for NCI and unrealized gains on derivatives.

Adjusted EBITDA for the three months ended March 31, 2023 increased $9 million in line with the increase in Adjusted Operating Margin.

New Energy Technologies SBU

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

Three Months Ended March 31,
20232022$ Change% Change
Operating Margin$(4)$(2)$(2)-100%
Adjusted Operating Margin (1)(4)(2)(2)-100%
Adjusted EBITDA (1)(26)(35)926%

(1) A non-GAAP financial measure. See SBU Performance Analysis—Non-GAAP Measures for definition.

Operating Margin and Adjusted Operating Margin for the three months ended March 31, 2023 decreased $2 million, with no material drivers.

Adjusted EBITDA for the three months ended March 31, 2023 increased $9 million primarily driven by lower losses at Fluence, whose results are reported as Net equity in losses of affiliates on our Condensed Consolidated Statements of Operations, due to reduced shipping constraints and costs, as well as improvement in construction delays.

Key Trends and Uncertainties

During 2023 and beyond, we expect to face the following challenges at certain of our businesses. Management expects that improved operating performance at certain businesses, growth from new businesses,

40 | The AES Corporation | March 31, 2023 Form 10-Q

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 2022 Form 10-K.

Operational

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 June 6, 2022, President Biden issued a Proclamation waiving any tariffs that result from this investigation for a 24-month period. Since President Biden’s Proclamation, suppliers in Southeast Asia have imported cells and panels again to the U.S.

On December 2, 2022, Commerce issued country-wide affirmative preliminary determinations that circumvention had occurred in each of the four Southeast Asian countries. Commerce also evaluated numerous individual companies and issued preliminary determinations that circumvention had occurred with respect to many but not all of these companies. Additionally, Commerce issued a preliminary determination that circumvention would not be deemed to occur for any solar cells and panels imported from the four countries if the wafers were manufactured outside of China or if no more than two out of six specifically identified components were produced in China. These preliminary determinations could be modified and final determinations from Commerce are currently expected in August 2023. We have contracted and secured our expected requirements for solar panels for U.S. projects targeted to achieve commercial operations in 2023.

Additionally, the Uyghur Forced Labor Prevention Act (“UFLPA”) seeks to block the import of products made with forced labor in certain areas of China and may lead to certain suppliers being blocked from importing solar cells and panels to the U.S. While this has impacted the U.S. market, AES has managed this issue without significant impact to our projects. Further disruptions may impact our suppliers’ ability or willingness to meet their contractual agreements or to continue to supply cells or panels into the U.S. market on terms that we deem satisfactory.

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

COVID-19 Pandemic — The COVID-19 pandemic has impacted global economic activity, including electricity and energy consumption, and caused significant volatility in financial markets intermittently in the last three years. Throughout the COVID-19 pandemic we have conducted our essential operations without significant disruption. We derive approximately 80% of our total revenues from our regulated utilities and long-term sales and supply contracts or PPAs at our generation businesses, which contributes to a relatively stable revenue and cost structure at most of our businesses. In 2022, our operational locations continued to experience the impact of, and recovery from, the COVID-19 pandemic. Across our global portfolio, our utilities businesses have generally performed in line with our expectations consistent with a recovery from the COVID-19 pandemic. Also see Item 1A.—Risk Factors of our 2022 Form 10-K.

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.

Inflation Reduction Act and U.S. Renewable Energy Tax Credits — The Inflation Reduction Act (the “IRA”) was signed into law in the United States in 2022. The IRA includes provisions that are expected to benefit the U.S. clean energy industry, including increases, extensions and/or new tax credits for onshore and offshore wind, solar, storage and hydrogen projects. We expect that the extension of the current solar investment tax credits (“ITCs”), as well as higher credits available for projects that satisfy wage and apprenticeship requirements, will increase demand for our renewables products.

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Our U.S. renewables business has a 51 GW pipeline that we intend to utilize to continue to grow our business, and these changes in tax policy are supportive of this strategy. We account for U.S. renewables projects according to U.S. GAAP, which, when partnering with tax-equity investors to monetize tax benefits, utilizes the HLBV method. This method recognizes the tax-credit value that is transferred to tax equity partners at the time of its creation, which for projects utilizing the investment tax credit is in the quarter the project begins commercial operation. For projects utilizing the production tax credit, this value is recognized over 10 years as the facility produces energy. In 2022, we realized $267 million of earnings from Tax Attributes. In 2023, we expect an increase in Tax Attributes earned by our U.S. renewables business in line with the growth of that business. Based on construction schedules, a significant portion of these earnings will be realized in the fourth quarter.

The implementation of the IRA is expected to require substantial guidance from the U.S. Department of Treasury and other government agencies. While that guidance is pending, there will be uncertainty with respect to the implementation of certain provisions of the IRA.

Global Tax — The macroeconomic and political environments in the U.S. and in some countries where our subsidiaries conduct business have changed during 2022 and 2023. This could result in significant impacts to tax law.

In the U.S., the IRA includes a 15% corporate alternative minimum tax based on adjusted financial statement income. We currently do not expect to be subject to the corporate alternative minimum tax in 2023. Additional guidance is expected to be issued in 2023.

In the fourth quarter of 2022, the European Commission adopted an amended Directive on Pillar 2 establishing a global minimum tax at a 15% rate. The adoption requires EU Member States to transpose the Directive into their respective national laws by December 31, 2023 for the rules to come into effect as of January 1, 2024. We will continue to monitor the issuance of draft legislation in Bulgaria and other relevant EU Member States. The impact to the Company remains unknown but may be material.

Inflation — In the markets in which we operate, there have been higher rates of inflation recently. While most of our contracts in our international businesses are indexed to inflation, in general, 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.

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 2022 Form 10-K, in July 2017, the United Kingdom Financial Conduct Authority announced that it intends to phase out LIBOR. 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 negotiates contract amendments with counterparties or additional derivatives contracts.

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 2022 Form 10-K, our subsidiaries in Puerto Rico have long-term PPAs with state-owned PREPA, which has been facing economic challenges that could result in a material adverse effect on our business 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.

The Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) was enacted to create a structure for exercising federal oversight over the fiscal affairs of U.S. territories and created procedures for adjusting debt accumulated by the Puerto Rico government and, potentially, other territories (“Title III”). PROMESA also expedites the approval of key energy projects and other critical projects in Puerto Rico.

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PROMESA allowed for the establishment of an Oversight Board with broad powers of budgetary and financial control over Puerto Rico. The Oversight Board filed for bankruptcy on behalf of PREPA under Title III in July 2017. As a result of the bankruptcy filing, AES Puerto Rico and AES Ilumina’s non-recourse debt of $143 million and $26 million, respectively, continue to be in technical default and are classified as current as of March 31, 2023. The Company is in compliance with its debt payment obligations as of March 31, 2023.

On April 12, 2022, a mediation team was appointed to prepare the plan to resolve the PREPA Title III case and related proceedings. A disclosure statement hearing was held on April 28, 2023; the PREPA disclosure statement was approved and mediation was extended through July 28, 2023.

An indicator of impairment was identified at AES Puerto Rico related to the negative response from PREPA on March 6, 2023 for proposed Power Purchase and Operating Agreement (“PPOA”) amendments to maintain liquidity in the face of increased operational costs for the business. AES Puerto Rico notified its noteholders on March 17, 2023, as the business anticipates that it will not have sufficient funds to pay principal and interest obligations on its Series A Bond Loans due and payable on June 1, 2023. The AES Puerto Rico asset group passed the recoverability test, and thus no impairment was recorded.

Considering the information available as of the filing date, management believes the carrying amount of our long-lived assets at AES Puerto Rico of $62 million is recoverable as of March 31, 2023. However, it is reasonably possible that the estimate of undiscounted cash flows may change in the near term resulting in the need to write down our long-lived assets in Puerto Rico to fair value.

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 Bulgaria, and offtakers in recent years, with the intention of reducing GHG emissions generated by the energy industry. In parallel, the shift towards renewables has caused certain customers to migrate to other low-carbon energy solutions and this trend may continue.

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

For further information about the risks associated with decarbonization initiatives, see Item 1A.—Risk Factors—Concerns about GHG emissions and the potential risks associated with climate change have led to increased regulation and other actions that could impact our businesses included in the 2022 Form 10-K.

AES Warrior Run PPA Termination — On March 23, 2023, the Company entered into an agreement to terminate the PPA for its 205 MW Warrior Run coal-fired power plant. The offtaker, Potomac Edison, agreed to terminate the PPA for a total consideration of $357 million, subject to regulatory approval by the Maryland Public Service Commission. If the agreement is approved, the Company will continue to operate the Warrior Run coal-fired plant through at least May 2024. The previous expiration for the Warrior Run PPA was 2030.

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 the DG Comp’s review (“PPA Discussions”). The PPA Discussions are ongoing and the PPA continues to remain in place. However, there can be no assurance that, in the context of the PPA Discussions, the other parties will not seek a prompt termination of the PPA.

We do not believe termination of the PPA is justified. Nevertheless, the PPA Discussions 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

43 | The AES Corporation | March 31, 2023 Form 10-Q

discussions will conclude. Nor can we predict how DG Comp might resolve its review if the PPA Discussions fail to result in an agreement concerning the agency’s review. AES Maritza believes that its PPA is legal and in compliance with all applicable laws, and it will take all actions necessary to protect its interests, whether through negotiated agreement or otherwise. However, there can be no assurance that this matter will be resolved favorably; if it is not, there could be a material adverse effect on the Company’s financial condition, results of operations, and cash flows. As of March 31, 2023, the carrying value of our long-lived assets at Maritza is $469 million.

AES Ohio Distribution Rate Case — On December 14, 2022, the PUCO issued an order on AES Ohio’s application to increase its base rates for electric distribution service to address, in part, increased costs of materials and labor and substantial investments to improve distribution structures. Among other matters, the order establishes a revenue increase of $76 million for AES Ohio’s base rates for electric distribution service. This increase will go into effect when AES Ohio has a new electric security plan in place, which is expected in 2023.

AES Ohio Electric Security Plan — On September 26, 2022, AES Ohio filed its latest Electric Security Plan (ESP 4) with the PUCO, which is a comprehensive plan to enhance and upgrade its network and improve service reliability, provide greater safeguards for price stability, and continue investments in local economic development. ESP 4 also seeks to recover outstanding regulatory assets not currently in rates. AES Ohio did not propose that the Rate Stabilization Charge continue under ESP 4.

On April 10, 2023, AES Ohio entered into a Stipulation and Recommendation with various intervening parties with respect to ESP 4. The settlement is subject to, and conditioned upon, approval by the PUCO. The settlement would provide for a three-year ESP without a rate stability charge, and, in addition to other items, provides for:

  • A Distribution Investment Rider allowing the timely recovery of distribution investments by AES Ohio based on a 9.999% return on equity, subject to revenue caps;

  • The recovery of $66 million related to past expenditures by AES Ohio plus future carrying costs and the recovery of incremental vegetation management expenses up to certain annual limits during the term of ESP 4; and

  • Funding of programs for assistance to low-income customers and for economic development.

Upon approval of the settlement, the distribution rates that were approved by the PUCO in December 2022 will become effective. An evidentiary hearing began on May 2, 2023, and AES Ohio expects an order by the PUCO in the third quarter of 2023.

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.

The overall economic climate in Argentina has deteriorated, resulting in volatility and increased the risk that a further significant devaluation of the Argentine peso against the USD, similar to the devaluations experienced by the country in 2018 and 2019, may occur. A continued trend of peso devaluation could result in increased inflation, a deterioration of the country’s risk profile, and other adverse macroeconomic effects that could significantly impact our results of operations. For additional information, refer to Item 3.—Quantitative and Qualitative Disclosures About Market Risk.

Impairments

Long-lived Assets and Current Assets Held-for-Sale — During the three months ended March 31, 2023, the Company recognized asset impairment expense of $20 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 and current assets held-for-sale that were assessed for impairment totaled $614 million at March 31, 2023.

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

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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 2022 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 (“CSAPR Update Rule”). The CSAPR Update Rule found that NOx ozone season emissions in 22 states (including Indiana and Maryland) 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. Following legal challenges to the CSAPR Update Rule, on April 30, 2021, the EPA issued the Revised CSAPR Update Rule. The Revised CSAPR Update Rule required affected EGUs within certain states (including Indiana and Maryland) to participate in a new trading program, the CSAPR NOx Ozone Season Group 3 trading program. These affected EGUs received fewer NOx Ozone Season allowances beginning in 2021.

On March 15, 2023, the EPA released a pre-publication version of a final Federal Implementation Plan to address air quality impacts with respect to the 2015 Ozone NAAQS. The rule establishes a revised CSAPR NOx Ozone Season Group 3 trading program for 22 states, including Indiana and Maryland, and is expected to become effective during 2023. The FIP also includes enhancements to the revised Group 3 trading program, which include a dynamic budget setting process beginning in 2026, annual recalibration of the allowance bank to reflect changes to affected sources, a daily backstop emissions rate limit for certain coal-fired electric generating units beginning as early as 2024, and a secondary emissions limit prohibiting certain emissions associated with state assurance levels. It is too early to determine the impact of this final rule, but it may result in the need to purchase additional allowances or make operational adjustments.

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.

Mercury and Air Toxics Standard — In April 2012, the EPA’s rule to establish maximum achievable control technology standards for hazardous air pollutants regulated under the CAA emitted from coal and oil-fired electric utilities, known as “MATS”, became effective and AES facilities implemented measures to comply, as applicable. In June 2015, the U.S. Supreme Court remanded MATS to the D.C. Circuit due to the EPA’s failure to consider costs before deciding to regulate power plants under Section 112 of the CAA and subsequently remanded MATS to the EPA without vacatur. On May 22, 2020, the EPA published a final finding that it is not “appropriate and necessary” to regulate hazardous air pollutant emissions from coal- and oil-fired electric generating units (EGUs) (reversing its prior 2016 finding), but that the EPA would not remove the source category from the CAA Section 112(c) list of source categories and would not change the MATS requirements. On March 6, 2023, the EPA

45 | The AES Corporation | March 31, 2023 Form 10-Q

published a final rule to revoke its May 2020 finding and reaffirm its 2016 finding that it is appropriate and necessary to regulate these emissions. On April 5, 2023, the EPA released a pre-publication version of a proposed rule to lower certain emissions limits and revise certain other aspects of MATS. We are still reviewing the proposal.

Further rulemakings and/or proceedings are possible; however, in the meantime, MATS remains in effect. We currently cannot predict the outcome of the regulatory or judicial process, or its impact, if any, on our MATS compliance planning or ultimate costs.

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 a 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 the EPA by Congress under Section 111(d) of the CAA. As a result of the June 30, 2022 Supreme Court decision, on October 27, 2022, the D.C. Circuit recalled its March 5, 2021 partial mandate and issued a new partial mandate, holding pending challenges to the ACE Rule in abeyance while the EPA develops a replacement rule. As of April 2023, the EPA is preparing to propose rules limiting GHG emissions at new and existing coal and gas power plants. Because the details of the proposed rule are not yet public, and any final rule will likely be subject to legal challenges, we cannot currently predict the impact of any such rule, but it could be material. 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 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 11, 2022, the EPA released the first in a series of proposed determinations regarding CCR Part A Rule demonstrations and 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. 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 or interpretations of 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.

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Water Discharges — In June 2015, the EPA and the U.S. Army Corps of Engineers ("the agencies") published a rule defining federal jurisdiction over waters of the U.S., known as the "Waters of the U.S." (WOTUS) rule. This rule, which initially became effective in August 2015, could expand or otherwise change the number and types of waters or features subject to CWA permitting. However, after repealing the 2015 WOTUS rule on October 22, 2019, the agencies, on April 21, 2020, issued the final “Navigable Waters Protection” (NWP) rule which again revised the definition of waters of the U.S. On August 30, 2021, the U.S. District Court for the District of Arizona issued an order vacating and remanding the NWP Rule. The agencies again interpreted waters of the U.S. consistent with the pre-2015 regulatory regime. On January 18, 2023, the agencies published a final rule to define the scope of waters regulated under the CWA. The rule restored regulations defining WOTUS that were in place prior to 2015, with updates intended to be consistent with relevant Supreme Court decisions. On April 12, 2023, the U.S. District Court for the District of North Dakota granted a motion which enjoined the agencies from implementing the 2023 final rule interpretation of the scope of waters of the U.S. As a result, the pre-2015 regulatory regime will apply in a group of states until further action is taken.

A U.S. Supreme Court decision related to waters fo the U.S. also remains pending. On January 24, 2022, the U.S. Supreme Court granted certiorari on a wetlands case (Sackett v. EPA) on the limited question of: “Whether the Ninth Circuit set forth the proper test for determining whether wetlands are ‘waters of the United States’ under the Clean Water Act.” The Ninth Circuit employed Justice Kennedy’s “significant nexus” test from the 2006 Rapanos v. United States decision; the plurality opinion in Rapanos required a water body to have a "continuous surface connection" with a water of the United States in order to be considered a wetland covered by the CWA. In Sackett v. EPA, the Court may finally provide clarity on which test from the 2006 Rapanos decision controls. It is too early to determine whether the newly promulgated NWP rule or any outcome of litigation may have a material impact on our business, financial condition, or results of operations.

In November 2015, the EPA published its final ELG rule to reduce toxic pollutants discharged into waters of the U.S. by steam-electric power plants through technology applications. These effluent limitations for existing and new sources include dry handling of fly ash, closed-loop or dry handling of bottom ash, and more stringent effluent limitations for flue gas desulfurization wastewater. AES Indiana Petersburg has installed a dry bottom ash handling system in response to the CCR rule and wastewater treatment systems in response to the NPDES permits in advance of the ELG compliance date. Other U.S. businesses already include dry handling of fly ash and bottom ash and do not generate flue gas desulfurization wastewater. Following the 2019 U.S. Court of Appeals vacature and remand of portions of the 2015 ELG rule related to leachate and legacy water, on March 8, 2023, EPA released a pre-publication proposed rule revising the 2020 Reconsideration Rule. The proposed rule would establish new best available technology economically achievable effluent limits for flue gas desulfurization wastewater, bottom ash treatment water, and combustion residual leachate. We are still reviewing the proposal and it is too early to determine whether any outcome of litigation or current or future revisions to the ELG rule might have a material impact on our business, financial condition, and results of operations.

Capital Resources and Liquidity

Overview

As of March 31, 2023, the Company had unrestricted cash and cash equivalents of $1.4 billion, of which $117 million was held at the Parent Company and qualified holding companies. The Company had $822 million in short-term investments, held primarily at subsidiaries, and restricted cash and debt service reserves of $636 million. The Company also had non-recourse and recourse aggregate principal amounts of debt outstanding of $20.1 billion and $4.6 billion, respectively. Of the $1.7 billion of our current non-recourse debt, $1.6 billion was presented as such because it is due in the next twelve months and $176 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 $169 million is due to the bankruptcy of the offtaker. As of March 31, 2023, the Company also had $645 million outstanding related to supplier financing arrangements, which are classified as Accrued and other liabilities.

We expect current maturities of non-recourse debt, recourse debt, and amounts due under supplier financing arrangements to be repaid from net cash provided by operating activities of the subsidiary to which the liability relates, through opportunistic refinancing activity, or some combination thereof. We have $500 million in recourse debt which matures within the next twelve months, as well as amounts due under supplier financing arrangements, of which $473 million has a Parent Company guarantee. From time to time, we may elect to repurchase our outstanding debt through cash purchases, privately negotiated transactions, or otherwise when management believes that such securities are attractively priced. Such repurchases, if any, will depend on prevailing market

47 | The AES Corporation | March 31, 2023 Form 10-Q

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 $160 million under its revolving credit facility and $700 million in senior unsecured term loans. Additionally, commercial paper issuances are short term in nature and subject the Parent Company to interest rate risk at the time of refinancing the paper. On a consolidated basis, of the Company’s $25 billion of total gross debt outstanding as of March 31, 2023, approximately $7.9 billion bore interest at variable rates that were not subject to a derivative instrument which fixed the interest rate. Brazil holds $2.4 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 March 31, 2023, 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 $2.6 billion in aggregate (excluding those collateralized by letters of credit and other obligations discussed below).

Some counterparties may be unwilling to accept our general unsecured commitments to provide credit support. Accordingly, with respect to both new and existing commitments, the Parent Company may be required to provide some other form of assurance, such as a letter of credit, to backstop or replace our credit support. The Parent Company may not be able to provide adequate assurances to such counterparties. To the extent we are required and able to provide letters of credit or other collateral to such counterparties, this will reduce the amount of credit available to us to meet our other liquidity needs. As of March 31, 2023, we had $123 million in letters of credit under bilateral agreements, $109 million in letters of credit outstanding provided under our unsecured credit facilities, and $20 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 March 31, 2023, 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

48 | The AES Corporation | March 31, 2023 Form 10-Q

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 March 31, 2023, the Company had approximately $191 million of gross accounts receivable classified as Other noncurrent assets. These noncurrent receivables mostly consist of accounts receivable in Chile that, pursuant to amended agreements or government resolutions, have collection periods that extend beyond March 31, 2024, or one year from the latest balance sheet date. Noncurrent receivables in Chile pertain primarily to revenues recognized on regulated energy contracts that were impacted by the Stabilization Funds created by the Chilean government. See Note 5*—Financing Receivables* in Item 1.—Financial Statements of this Form 10-Q and Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operation—Key Trends and Uncertainties—Macroeconomic and Political—Chile included in our 2022 Form 10-K for further information.

As of March 31, 2023, the Company had approximately $1.1 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. As of March 31, 2023, the loan receivable of $1 billion, net of CECL reserve of $27 million, was classified as a Loan receivable 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 three months ended March 31, 2023 were debt financings, cash flows from operating activities, purchases under supplier financing arrangements, and sales of short-term investments. The primary uses of cash in the three months ended March 31, 2023 were repayments of debt, capital expenditures, repayments of obligations under supplier financing arrangements, and purchases of short-term investments.

The primary sources of cash for the Company in the three months ended March 31, 2022 were were debt financings, cash flows from operating activities, and sales of short-term investments. The primary uses of cash in the three months ended March 31, 2022 were repayments of debt, capital expenditures, acquisitions of noncontrolling interests, and purchases of short-term investments.

49 | The AES Corporation | March 31, 2023 Form 10-Q

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

Three Months Ended March 31,
Cash Sources:20232022
Borrowings under the revolving credit facilities and commercial paper program$2,335$1,193
Issuance of non-recourse debt6901,710
Net cash provided by operating activities625457
Purchases under supplier financing arrangements52993
Issuance of recourse debt500—
Sale of short-term investments356197
Proceeds from the sale of business interests, net of cash and restricted cash sold981
Other21142
Total Cash Sources$5,154$3,793
Cash Uses:
Repayments under the revolving credit facilities and commercial paper program$(1,625)$(715)
Capital expenditures(1,551)(766)
Repayments of non-recourse debt(660)(788)
Repayments of obligations under supplier financing arrangements(587)(50)
Purchase of short-term investments(418)(345)
Dividends paid on AES common stock(111)(105)
Purchase of emissions allowances(78)(136)
Contributions and loans to equity affiliates(20)(93)
Acquisitions of noncontrolling interests—(535)
Other(114)(182)
Total Cash Uses$(5,164)$(3,715)
Net increase (decrease) in Cash, Cash Equivalents, and Restricted Cash$(10)$78

Consolidated Cash Flows

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

Three Months Ended March 31,
Cash flows provided by (used in):20232022$ Change
Operating activities$625$457$168
Investing activities(1,624)(1,153)(471)
Financing activities1,016818198

Operating Activities

Net cash provided by operating activities increased $168 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

Operating Cash Flows

(in millions)

144

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

(2)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.

50 | The AES Corporation | March 31, 2023 Form 10-Q

  • Adjusted net income decreased $29 million primarily due to lower margins at our Utilities SBU and an increase in interest expense; partially offset by higher margins at our Energy Infrastructure and Renewables SBUs.

  • Working capital requirements decreased $197 million, primarily due to a decrease in inventory resulting from lower coal and LNG purchases and the sale of Fallbrook energy storage project; and a decrease in other assets driven by a decrease in financing receivables related to the Stabilization Funds in Chile and decrease in long-term deferred fuel costs; partially offset by higher payments to suppliers in 2023 and an increase in other liabilities.

Investing Activities

Net cash used in investing activities increased $471 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

Investing Cash Flows

(in millions)

144

  • Proceeds from sale of business interests increased $97 million, primarily due to the selldown of sPower OpCo B.

  • Cash used for short-term investing activities decreased $86 million, primarily as a result of higher short-term investment sales in 2023 to fund the capital expenditures of our renewable projects.

  • Capital expenditures increased $785 million, discussed further below.

Capital Expenditures

(in millions)

518

(1)Growth expenditures generally include expenditures related to development projects in construction, expenditures that increase capacity of a facility beyond the original design, and investments in general load growth or system modernization.

(2)Maintenance expenditures generally include expenditures that are necessary to maintain regular operations or net maximum capacity of a facility.

  • Growth expenditures increased $723 million, primarily driven by an increase in renewable projects.

  • Maintenance expenditures increased $62 million, primarily due to higher transmission and distribution and renewable project investments at our Utilities SBU.

51 | The AES Corporation | March 31, 2023 Form 10-Q

Financing Activities

Net cash provided by financing activities increased $198 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

Financing Cash Flows

(in millions)

148

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 $892 million impact from non-recourse debt transactions is mainly due to higher net repayments and lower net borrowings at Corporate and the Energy Infrastructure SBU, respectively.

  • The $535 million impact from acquisitions of noncontrolling interests is mainly due to the acquisition of an additional 32% ownership interest in AES Andes in 2022.

  • The $529 million impact from recourse debt is primarily due to the issuance of a bridge loan at AES Clean Energy, which is fully guaranteed by the Parent Company, for general corporate purposes.

  • The $297 million impact from non-recourse revolvers is primarily due to an increase in borrowings at our Renewables SBU to fund capital expenditures of renewable projects, partially offset by a decrease in borrowings at our Utilities SBU.

*•*The $101 million impact from supplier financing arrangements is primarily due to higher net repayments at our Energy Infrastructure and Renewables SBUs.

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 commercial paper program, 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 and commercial paper program. 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):

52 | The AES Corporation | March 31, 2023 Form 10-Q

March 31, 2023December 31, 2022
Consolidated cash and cash equivalents$1,441$1,374
Less: Cash and cash equivalents at subsidiaries(1,324)(1,350)
Parent Company and qualified holding companies’ cash and cash equivalents11724
Commitments under the Parent Company credit facility1,5001,500
Less: Letters of credit under the credit facility(20)(34)
Less: Borrowings under the credit facility(160)(325)
Less: Borrowings under the commercial paper program(350)—
Borrowings available under the Parent Company credit facility9701,141
Total Parent Company Liquidity$1,087$1,165

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

The Parent Company paid dividends of $0.1659 per outstanding share to its common stockholders during the first quarter of 2023 for dividends declared in December 2022. While we intend to continue payment of dividends, and believe we will have sufficient liquidity to do so, we can provide no assurance that we will continue to pay dividends, or if continued, the amount of such dividends.

Recourse Debt

Our total recourse debt was $4.6 billion and $3.9 billion as of March 31, 2023 and December 31, 2022, 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 2022 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 and commercial paper program. 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 2022 Form 10-K for additional information.

Various debt instruments at the Parent Company level, including our revolving credit facility and commercial paper program, 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 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 March 31, 2023, 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.

53 | The AES Corporation | March 31, 2023 Form 10-Q

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 $1.7 billion. The portion of current debt related to such defaults was $176 million at March 31, 2023, all of which was non-recourse debt related to three subsidiaries — AES Puerto Rico, AES Ilumina, and AES Jordan Solar. None of the defaults are payment defaults, but are instead technical defaults triggered by failure to comply with other covenants or other conditions contained in the non-recourse debt documents, of which $169 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 March 31, 2023, 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 March 31, 2023, 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 2022 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 2022 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 three months ended March 31, 2023.

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