UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________________________________

FORM 10-K  

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2020

-OR-

☐ TRANSITION REPORT FILED PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12291

THE AES CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	54-1163725
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4300 Wilson Boulevard
Arlington,	Virginia	22203
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (703) 522-1315

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share	AES	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☒    No  ☐

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ Non-accelerated filer ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐     No  ☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates on June 30, 2020, the last business day of the Registrant's most recently completed second fiscal quarter (based on the adjusted closing sale price of $14.16 of the Registrant's Common Stock, as reported by the New York Stock Exchange on such date) was approximately $9.42 billion.

The number of shares outstanding of Registrant's Common Stock, par value $0.01 per share, on February 22, 2021 was 665,479,845.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Proxy Statement for its 2021 annual meeting of stockholders are incorporated by reference in Parts II and III

The AES Corporation Fiscal Year 2020 Form 10-K

Table of Contents

Glossary of Terms	1
PART I	3
ITEM 1. BUSINESS	4
ITEM 1A. RISK FACTORS	54
ITEM 1B. UNRESOLVED STAFF COMMENTS	71
ITEM 2. PROPERTIES	71
ITEM 3. LEGAL PROCEEDINGS	71
ITEM 4. MINE SAFETY DISCLOSURES	74
PART II	75
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	75
ITEM 6. SELECTED FINANCIAL DATA	76
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	78
Executive Summary	78
Review of Consolidated Results of Operations	79
SBU Performance Analysis	87
Key Trends and Uncertainties	95
Capital Resources and Liquidity	101
Critical Accounting Policies and Estimates	111
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	115
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	118
Consolidated Balance Sheets	122
Consolidated Statements of Operations	123
Consolidated Statements of Comprehensive Income (Loss)	124
Consolidated Statements of Changes in Equity	125
Consolidated Statements of Cash Flows	126
Note 1 - General and Summary of Significant Accounting Policies	127
Note 2 - Inventory	139
Note 3 - Property, Plant and Equipment	139
Note 4 - Asset Retirement Obligations	140
Note 5 - Fair Value	141
Note 6 - Derivative Instruments and Hedging Activities	146
Note 7 - Financing Receivables	147
Note 8 - Investments in and Advances to Affiliates	148
Note 9 - Goodwill and Other Intangible Assets	150
Note 10 - Regulatory Assets and Liabilities	152
Note 11 - Debt	153
Note 12 - Commitments	157
Note 13 - Contingencies	157
Note 14 - Leases	159
Note 15 - Benefit Plans	161
Note 16 - Redeemable Stock of Subsidiaries	164
Note 17 - Equity	165
Note 18 - Segments and Geographic Information	167
Note 19 - Share-Based Compensation	169
Note 20 - Revenue	171
Note 21 - Other Income and Expense	172
Note 22 - Asset Impairment Expense	172
Note 23 - Income Taxes	174
Note 24 - Discontinued Operations	177
Note 25 - Held-for-Sale and Dispositions	177
Note 26 - Acquisitions	180
Note 27 - Earnings Per Share	180
Note 28 - Risks and Uncertainties	181
Note 29 - Related Party Transactions	183
Note 30 - Selected Quarterly Financial Data (Unaudited)	184
Note 31 - Subsequent Events	185
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	186
ITEM 9A. CONTROLS AND PROCEDURES	186
ITEM 9B. OTHER INFORMATION	188
PART III	189
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	189
ITEM 11. EXECUTIVE COMPENSATION	189
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	189
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE	190
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES	190
PART IV - ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE	191
SIGNATURES	194

1 | 2020 Annual Report

Glossary of Terms

The following is a list of frequently used terms and abbreviations that appear in the text of this report and have the definitions indicated below:

Adjusted EPS	Adjusted Earnings Per Share, a non-GAAP measure
Adjusted PTC	Adjusted Pre-tax Contribution, a non-GAAP measure of operating performance
AES	The Parent Company and its subsidiaries and affiliates
AES Brasil	AES Tietê Energia S.A
AFUDC	Allowance for Funds Used During Construction
ANEEL	Brazilian National Electric Energy Agency
AOCL	Accumulated Other Comprehensive Loss
ARO	Asset Retirement Obligations
ASC	Accounting Standards Codification
ASEP	National Authority of Public Services in Panama
BACT	Best Available Control Technology
BESS	Battery energy storage system
BOT	Build, Operate and Transfer
CAA	U.S. Clean Air Act
CAMMESA	Wholesale Electric Market Administrator in Argentina
CCEE	Brazilian Chamber of Electric Energy Commercialization
CCGT	Combined Cycle Gas Turbine
CCR	Coal Combustion Residuals, which includes bottom ash, fly ash and air pollution control wastes generated at coal-fired generation plant sites
CDPQ	La Caisse de dépôt et placement du Quebéc
CECL	Current Expected Credit Loss
CEO	Chief Executive Officer
CFE	Federal Electricity Commission in Mexico
CFO	Chief Financial Officer
CO2	Carbon Dioxide
COD	Commercial Operation Date
CSAPR	U.S. Cross-State Air Pollution Rule
CTNG	Compañia Transmisora del Norte Grande
CWA	U.S. Clean Water Act
DG Comp	Directorate-General for Competition of the European Commission
DMR	Distribution Modernization Rider
DP&L	The Dayton Power & Light Company. DP&L is wholly-owned by DPL and also does business as AES Ohio
DPL	DPL Inc.
DPP	Dominican Power Partners
EPA	U.S. Environmental Protection Agency
EPC	Engineering, Procurement, and Construction
ERCOT	Electric Reliability Council of Texas
ESP	Electric Security Plan
EU	European Union
EURIBOR	Euro Inter Bank Offered Rate
EVN	Electricity of Vietnam
FERC	U.S. Federal Energy Regulatory Commission
FONINVEMEM	Fund for the Investment Needed to Increase the Supply of Electricity in the Wholesale Market in Argentina
FPA	U.S. Federal Power Act
FX	Foreign Exchange
GAAP	Generally Accepted Accounting Principles in the United States
GHG	Greenhouse Gas
GILTI	Global Intangible Low Taxed Income
GSF	Generation Scaling Factor
GW	Gigawatts
GWh	Gigawatt Hours
HLBV	Hypothetical Liquidation Book Value
IDEM	Indiana Department of Environmental Management
IPALCO	IPALCO Enterprises, Inc.
IPL	Indianapolis Power & Light Company, which also does business as AES Indiana
IPP	Independent Power Producers

2 | 2020 Annual Report

ISO	Independent System Operator
ITC	Investment Tax Credit
IURC	Indiana Utility Regulatory Commission
LIBOR	London Inter Bank Offered Rate
LNG	Liquefied Natural Gas
MISO	Midcontinent Independent System Operator, Inc.
MMBtu	Million British Thermal Units
MRE	Energy Reallocation Mechanism
MW	Megawatts
MWh	Megawatt Hours
NAAQS	U.S. National Ambient Air Quality Standards
NCI	Noncontrolling Interest
NEK	Natsionalna Elektricheska Kompania (state-owned electricity public supplier in Bulgaria)
NERC	North American Electric Reliability Corporation
NM	Not Meaningful
NOV	Notice of Violation
NOX	Nitrogen Dioxide
NPDES	National Pollutant Discharge Elimination System
NSPS	New Source Performance Standards
O&M	Operations and Maintenance
ONS	National System Operator in Brazil
OPGC	Odisha Power Generation Corporation, Ltd.
OTC Policy	Statewide Water Quality Control Policy on the Use of Coastal and Estuarine Waters for Power Plant Cooling
OVEC	Ohio Valley Electric Corporation, an electric generating company in which DP&L has a 4.9% interest
Parent Company	The AES Corporation
PCU	Performance Cash Units
Pet Coke	Petroleum Coke
PJM	PJM Interconnection, LLC
PPA	Power Purchase Agreement
PREPA	Puerto Rico Electric Power Authority
PSD	Prevention of Significant Deterioration
PSU	Performance Stock Unit
PUCO	The Public Utilities Commission of Ohio
PURPA	U.S. Public Utility Regulatory Policies Act
QF	Qualifying Facility
QIA	Qatar Investment Authority
RSU	Restricted Stock Unit
RTO	Regional Transmission Organization
SADI	Argentine Interconnected System
SBU	Strategic Business Unit
SEC	U.S. Securities and Exchange Commission
SEET	Significantly Excessive Earnings Test
SEN	Sistema Electrico Nacional in Chile
SIN	National Interconnected System in Colombia
SIP	State Implementation Plan
SO2	Sulfur Dioxide
SWRCB	California State Water Resources Board
TCJA	Tax Cuts and Jobs Act
TDSIC	Transmission, Distribution, and Storage System Improvement Charge
U.S.	United States
UK	United Kingdom
USD	United States Dollar
VAT	Value Added Tax
VIE	Variable Interest Entity
Vinacomin	Vietnam National Coal-Mineral Industries Holding Corporation Ltd.

3 | 2020 Annual Report

PART I

In this Annual Report the terms “AES,” “the Company,” “us,” or “we” refer to The AES Corporation and all of its subsidiaries and affiliates, collectively. The terms “The AES Corporation” and “Parent Company” refer only to the parent, publicly held holding company, The AES Corporation, excluding its subsidiaries and affiliates.

Forward-Looking Information and Risk Factor Summary

In this filing we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. Such statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe that these forward-looking statements and the underlying assumptions are reasonable, we cannot assure you that they will prove to be correct.

Forward-looking statements involve a number of risks and uncertainties, and there are factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements. Some of those factors (in addition to others described elsewhere in this report and in subsequent securities filings) include:

•the economic climate, particularly the state of the economy in the areas in which we operate and the state of the economy in China, which impacts demand for electricity in many of our key markets, including the fact that the global economy faces considerable uncertainty for the foreseeable future, which further increases many of the risks discussed in this Form 10-K;

•changes in inflation, demand for power, interest rates and foreign currency exchange rates, including our ability to hedge our interest rate and foreign currency risk;

•changes in the price of electricity at which our generation businesses sell into the wholesale market and our utility businesses purchase to distribute to their customers, and the success of our risk management practices, such as our ability to hedge our exposure to such market price risk;

•changes in the prices and availability of coal, gas and other fuels (including our ability to have fuel transported to our facilities) and the success of our risk management practices, such as our ability to hedge our exposure to such market price risk, and our ability to meet credit support requirements for fuel and power supply contracts;

•changes in and access to the financial markets, particularly changes affecting the availability and cost of capital in order to refinance existing debt and finance capital expenditures, acquisitions, investments and other corporate purposes;

•our ability to fulfill our obligations, manage liquidity and comply with covenants under our recourse and non-recourse debt, including our ability to manage our significant liquidity needs and to comply with covenants under our revolving credit facility and other existing financing obligations;

•our ability to receive funds from our subsidiaries by way of dividends, fees, interest, loans or otherwise;

•changes in our or any of our subsidiaries' corporate credit ratings or the ratings of our or any of our subsidiaries' debt securities or preferred stock, and changes in the rating agencies' ratings criteria;

•our ability to purchase and sell assets at attractive prices and on other attractive terms;

•our ability to compete in markets where we do business;

•our ability to operate power generation, distribution and transmission facilities, including managing availability, outages and equipment failures;

•our ability to manage our operational and maintenance costs and the performance and reliability of our generating plants, including our ability to reduce unscheduled down times;

•our ability to enter into long-term contracts, which limit volatility in our results of operations and cash flow, such as PPAs, fuel supply, and other agreements and to manage counterparty credit risks in these agreements;

•variations in weather, especially mild winters and cooler summers in the areas in which we operate, the occurrence of difficult hydrological conditions for our hydropower plants, as well as hurricanes and other storms and disasters, wildfires and low levels of wind or sunlight for our wind and solar facilities;

•pandemics, or the future outbreak of any other highly infectious or contagious disease, including the COVID-19 pandemic;

•the performance of our contracts by our contract counterparties, including suppliers or customers;

4 | 2020 Annual Report

•severe weather and natural disasters;

•our ability to raise sufficient capital to fund development projects or to successfully execute our development projects;

•the success of our initiatives in renewable energy projects and energy storage projects;

•the availability of government incentives or policies that support the development of renewable energy generation projects;

•our ability to keep up with advances in technology;

•changes in number of customers or in customer usage;

•the operations of our joint ventures and equity method investments that we do not control;

•our ability to achieve reasonable rate treatment in our utility businesses;

•changes in laws, rules and regulations affecting our international businesses, particularly in developing countries;

•changes in laws, rules and regulations affecting our utilities businesses, including, but not limited to, regulations which may affect competition, the ability to recover net utility assets and other potential stranded costs by our utilities;

•changes in law resulting from new local, state, federal or international energy legislation and changes in political or regulatory oversight or incentives affecting our wind business and solar projects, our other renewables projects and our initiatives in GHG reductions and energy storage, including government policies or tax incentives;

•changes in environmental laws, including requirements for reduced emissions, GHG legislation, regulation, and/or treaties and CCR regulation and remediation;

•changes in tax laws, including U.S. tax reform, and challenges to our tax positions;

•the effects of litigation and government and regulatory investigations;

•the performance of our acquisitions;

•our ability to maintain adequate insurance;

•decreases in the value of pension plan assets, increases in pension plan expenses, and our ability to fund defined benefit pension and other postretirement plans at our subsidiaries;

•losses on the sale or write-down of assets due to impairment events or changes in management intent with regard to either holding or selling certain assets;

•changes in accounting standards, corporate governance and securities law requirements;

•our ability to maintain effective internal controls over financial reporting;

•our ability to attract and retain talented directors, management and other personnel;

•cyber-attacks and information security breaches; and

•data privacy.

These factors, in addition to others described elsewhere in this Form 10-K, including those described under Item 1A.—Risk Factors and in subsequent securities filings, should not be construed as a comprehensive listing of factors that could cause results to vary from our forward-looking information.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. If one or more forward-looking statements are updated, no inference should be drawn that additional updates will be made with respect to those or other forward-looking statements.

ITEM 1. BUSINESS

Item 1.—Business is an outline of our strategy and our businesses by SBU, including key financial drivers. Additional items that may have an impact on our businesses are discussed in Item 1A.—Risk Factors and Item 3.—Legal Proceedings.

5 | 2020 Annual Report

Executive Summary

Incorporated in 1981, AES is a global energy company accelerating the future of energy. Together with our many stakeholders, we are improving lives by delivering the greener, smarter energy solutions the world needs. Our diverse workforce is committed to continuous innovation and operational excellence, while partnering with our customers on their strategic energy transitions and continuing to meet their energy needs today.

Our Strategy

AES is leading the energy transition by investing in sustainable growth and innovative solutions to deliver superior results. We are taking advantage of favorable trends in clean power generation, transmission and distribution, and LNG infrastructure.

Through our presence in key growth markets, we are well-positioned to benefit from the global transition toward a more sustainable power generation mix. Our robust backlog of projects under construction or under signed PPAs continues to increase, driven by our focus on select markets where we can take advantage of our global scale and synergies with our existing businesses. In 2020, we signed long-term PPAs for 3 GW, representing 10% of our existing capacity, and in line with our expectation of signing 2 to 3 GW of new PPAs annually.

We are enhancing some of our current contracts by extending existing PPAs and adding renewable energy. We call this approach Green Blend and Extend. With this strategy, we leverage our existing platforms, contracts and relationships to grow our business, while meeting our customers' energy needs on a reliable and sustainable basis. We are negotiating new long-term renewable PPAs with existing customers, which preserves the value of thermal contracts and creates incremental value with long-term contracted renewables. Customers receive carbon-free energy at less than the marginal cost of thermal power, enabling them to meet their sustainability goals and affordable energy needs. We are executing on this strategy in Chile and Mexico and see significant potential additional opportunities in those markets, as well as in the United States.

We recently merged all of our renewables businesses in the U.S. into one team: AES Clean Energy, representing one of the top renewables growth platforms in the U.S. AES Clean Energy offers its customers an expanded portfolio of innovative solutions based on cutting-edge technologies that are designed to accelerate their energy futures.

We are facilitating access to reliable and affordable cleaner energy through our LNG import terminals, allowing

6 | 2020 Annual Report

the displacement of the use of heavy fuel oil and diesel. We have two LNG regasification terminals in Central America and the Caribbean, with a total of 150 TBTU of LNG storage capacity. These terminals were built to supply not only the gas for our co-located combined cycle plants, but also to meet the growing demand for natural gas in the region. In order to meet this demand, we are expanding our capacity in the Dominican Republic by adding a second storage tank with 50 TBTU of additional capacity and we recently completed construction of a pipeline that will transport natural gas from our LNG terminal to several power plants in the country.

We are replicating our success with LNG infrastructure in the Dominican Republic and Panama by developing a similar project, on a larger scale, in Vietnam. This project will have 480 TBTU of LNG storage capacity co-located with 2.2 GW of combined cycle plants. The project will have substantial excess LNG capacity to help meet demand for natural gas in Vietnam and the power plants will have 20-year contracts with the Government of Vietnam.

At our utilities, we are accelerating growth through grid modernization and infrastructure investments to replace outdated networks. In 2020, Indianapolis Power & Light's seven-year $1.2 billion TDSIC plan was approved by the Indiana Utility Regulatory Commission. We see similar growth opportunities at Dayton Power & Light in Ohio, including DP&L's pending Smart Grid Plan.

We are developing and deploying innovative solutions such as battery-based energy storage, digital customer interfaces and energy management. These solutions are scalable and capital light, allowing us to work with our customers to deliver results that meet their requirements.

As a result of executing on our strategy, we have reduced our coal-fired generation to 25% of our total generation volume as of year-end 2020 (based on the portfolio as of year-end, adjusted for any announced asset sales and retirements at that time). We remain on track to further reduce our coal generation to below 10% by year-end 2030.

Strategic Highlights

In 2020, we achieved significant milestones on our strategic objectives, including:

Sustainable Growth

•We completed construction of 2,318 MW of new projects, including:

◦1,299 MW Southland Repowering; and

◦1,019 MW of solar, wind and energy storage globally

•We signed 3,017 MW of renewables and energy storage under long-term PPAs, including:

◦1,180 MW of energy storage, solar and solar plus storage and hydro in the US and El Salvador;

◦1,171 MW of wind and solar at AES Gener in Chile and Colombia;

◦346 MW of wind at AES Brasil;

◦211 MW of wind and solar in Panama and the Dominican Republic; and

◦109 MW of wind in Mexico

•As of December 31, 2020, our backlog of 6,909 MW includes:

◦1,850 MW under construction and coming on-line through 2022; and

◦5,059 MW of renewables signed under long-term PPAs

•The Company has reduced its coal-fired generation to 25% of total generation volume (proforma for asset sales and retirements announced in 2020) and is on track to further reduce its coal-fired generation to less than 10% by year-end 2030

Innovative Solutions

•Our joint venture with Siemens, Fluence, is the global leader in the fast-growing energy storage market, which is expected to increase by 15 to 20 GW annually

◦Fluence has been awarded or delivered 2.4 GW of projects, including 785 MW awarded in 2020

◦In December 2020, the Qatar Investment Authority ("QIA") agreed to invest $125 million in Fluence through a private placement transaction, valuing Fluence at more than $1 billion

7 | 2020 Annual Report

Superior Results

•Following our efforts to strengthen our balance sheet, our Parent Company credit rating was upgraded to investment grade (BBB-) by S&P

Overview

Generation

We currently own and/or operate a generation portfolio of 30,308 MW, including generation from our integrated utility, IPL. Our generation fleet is diversified by fuel type. See discussion below under Fuel Costs.

Performance drivers of our generation businesses include types of electricity sales agreements, plant reliability and flexibility, availability of generation capacity to meet contracted sales, fuel costs, seasonality, weather variations and economic activity, fixed-cost management, and competition.

Contract Sales — Most of our generation businesses sell electricity under medium- or long-term contracts ("contract sales") or under short-term agreements in competitive markets ("short-term sales"). Our medium-term contract sales have terms of two to five years, while our long-term contracts have terms of more than five years.

Contracts requiring fuel to generate energy, such as natural gas or coal, are structured to recover variable costs, including fuel and variable O&M costs, either through direct or indexation-based contractual pass-throughs or tolling arrangements. When the contract does not include a fuel pass-through, we typically hedge fuel costs or enter into fuel supply agreements for a similar contract period (see discussion below under Fuel Costs). These contracts also help us to fund a significant portion of the total capital cost of the project through long-term non-recourse project-level financing.

Certain contracts include capacity payments that cover projected fixed costs of the plant, including fixed O&M expenses, debt service, and a return on capital invested. In addition, most of our contracts require that the majority of the capacity payments be denominated in the currency matching our fixed costs.

Contracts that do not have significant fuel cost or do not contain a capacity payment are structured based on long-term spot prices with some negotiated pass-through costs, allowing us to recover expected fixed and variable costs as well as provide a return on investment.

These contracts are intended to reduce exposure to the volatility of fuel and electricity prices by linking the business's revenues and costs. We generally structure our business to eliminate or reduce foreign exchange risk by matching the currency of revenue and expenses, including fixed costs and debt. Our project debt may consist of both fixed and floating rate debt for which we typically hedge a significant portion of our exposure. Some of our contracted businesses also receive a regulated market-based capacity payment, which is discussed in more detail in the Short-Term Sales section below.

Thus, these contracts, or other related commercial arrangements, significantly mitigate our exposure to changes in power and, as applicable, fuel prices, currency fluctuations and changes in interest rates. In addition, these contracts generally provide for a recovery of our fixed operating expenses and a return on our investment, as long as we operate the plant to the reliability and efficiency standards required in the contract.

Short-Term Sales — Our other generation businesses sell power and ancillary services under short-term contracts with average terms of less than two years, including spot sales, directly in the short-term market or at regulated prices. The short-term markets are typically administered by a system operator to coordinate dispatch. Short-term markets generally operate on merit order dispatch, where the least expensive generation facilities, based upon variable cost or bid price, are dispatched first and the most expensive facilities are dispatched last. The short-term price is typically set at the marginal cost of energy or bid price (the cost of the last plant required to meet system demand). As a result, the cash flows and earnings associated with these businesses are more sensitive to fluctuations in the market price for electricity. In addition, many of these wholesale markets include markets for ancillary services to support the reliable operation of the transmission system. Across our portfolio, we provide a wide array of ancillary services, including voltage support, frequency regulation and spinning reserves.

Many of the short-term markets in which we operate include regulated capacity markets. These capacity markets are intended to provide additional revenue based upon availability without reliance on the energy margin from the merit order dispatch. Capacity markets are typically priced based on the cost of a new entrant and the system capacity relative to the desired level of reserve margin (generation available in excess of peak demand).

8 | 2020 Annual Report

Our generating facilities selling in the short-term markets typically receive capacity payments based on their availability in the market.

Plant Reliability and Flexibility — Our contract and short-term sales provide incentives to our generation plants to optimally manage availability, operating efficiency and flexibility. Capacity payments under contract sales are frequently tied to meeting minimum standards. In short-term sales, our plants must be reliable and flexible to capture peak market prices and to maximize market-based revenues. In addition, our flexibility allows us to capture ancillary service revenue while meeting local market needs.

Fuel Costs — For our thermal generation plants, fuel is a significant component of our total cost of generation. For contract sales, we often enter into fuel supply agreements to match the contract period, or we may financially hedge our fuel costs. Some of our contracts include indexation for fuels. In those cases, we seek to match our fuel supply agreements to the indexation. For certain projects, we have tolling arrangements where the power offtaker is responsible for the supply and cost of fuel to our plants.

In short-term sales, we sell power at market prices that are generally reflective of the market cost of fuel at the time, and thus procure fuel supply on a short-term basis, generally designed to match up with our market sales profile. Since fuel price is often the primary determinant for power prices, the economics of projects with short-term sales are often subject to volatility of relative fuel prices. For further information regarding commodity price risk please see Item 7A.—Quantitative and Qualitative Disclosures about Market Risk in this Form 10-K.

37% of the capacity of our generation plants are fueled by renewables, including hydro, solar, wind, energy storage, biomass and landfill gas, which do not have significant fuel costs.

33% of the capacity of our generation plants are fueled by natural gas. Generally, we use gas from local suppliers in each market. A few exceptions to this are AES Gener in Chile, where we purchase imported gas from third parties, and our plants in the Dominican Republic and Panama, where we import LNG to utilize in the local market.

27% of the capacity of our generation fleet is coal-fired. In the U.S., most of our coal-fired plants are supplied from domestic coal. At our non-U.S. generation plants, and at our plants in Hawaii and Puerto Rico, we source coal internationally. Across our fleet, we utilize our global sourcing program to maximize the purchasing power of our fuel procurement.

3% of the capacity of our generation fleet utilizes pet coke, diesel or oil for fuel. We source oil and diesel locally at prices linked to international markets. We largely source pet coke from Mexico and the U.S.

Seasonality, Weather Variations and Economic Activity — Our generation businesses are affected by seasonal weather patterns and, therefore, operating margin is not generated evenly throughout the year. Additionally, weather variations, including temperature, solar and wind resources, and hydrological conditions, may also have an impact on generation output at our renewable generation facilities. In competitive markets for power, local economic activity can also have an impact on power demand and short-term prices for power.

Fixed-Cost Management — In our businesses with long-term contracts, the majority of the fixed O&M costs are recovered through the capacity payment. However, for all generation businesses, managing fixed costs and reducing them over time is a driver of business performance.

Competition — For our businesses with medium- or long-term contracts, there is limited competition during the term of the contract. For short-term sales, plant dispatch and the price of electricity are determined by market competition and local dispatch and reliability rules.

Utilities

AES' six utility businesses distribute power to 2.5 million people in two countries. AES' two utilities in the U.S. also include generation capacity totaling 3,973 MW. Our utility businesses consist of IPL and DP&L in the U.S. and four utilities in El Salvador.

IPL, our fully integrated utility, and DP&L, our transmission and distribution regulated utility, operate as the sole distributors of electricity within their respective jurisdictions. IPL owns and operates all of the facilities necessary to generate, transmit and distribute electricity. DP&L owns and operates all of the facilities necessary to transmit and distribute electricity. At our distribution business in El Salvador, we face limited competition due to significant barriers to enter the market. According to El Salvador's regulation, large regulated customers have the option of becoming unregulated users and requesting service directly from generation or commercialization agents.

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In general, our utilities sell electricity directly to end-users, such as homes and businesses, and bill customers directly. Key performance drivers for utilities include the regulated rate of return and tariff, seasonality, weather variations, economic activity and reliability of service. Revenue from utilities is classified as regulated on the Consolidated Statements of Operations.

Regulated Rate of Return and Tariff — In exchange for the right to sell or distribute electricity in a service territory, our utility businesses are subject to government regulation. This regulation sets the framework for the prices ("tariffs") that our utilities are allowed to charge customers for electricity and establishes service standards that we are required to meet.

Our utilities are generally permitted to earn a regulated rate of return on assets, determined by the regulator based on the utility's allowed regulatory asset base, capital structure and cost of capital. The asset base on which the utility is permitted a return is determined by the regulator, within the framework of applicable local laws, and is based on the amount of assets that are considered used and useful in serving customers. Both the allowed return and the asset base are important components of the utility's earning power. The allowed rate of return and operating expenses deemed reasonable by the regulator are recovered through the regulated tariff that the utility charges to its customers.

The tariff may be reviewed and reset by the regulator from time to time depending on local regulations, or the utility may seek a change in its tariffs. The tariff is generally based upon usage level and may include a pass-through of costs that are not controlled by the utility, such as the costs of fuel (in the case of integrated utilities) and/or the costs of purchased energy, to the customer. Components of the tariff that are directly passed through to the customer are usually adjusted through a summary regulatory process or an existing formula-based mechanism. In some regulatory regimes, customers with demand above an established level are unregulated and can choose to contract directly with the utility or with other retail energy suppliers and pay non-bypassable fees, which are fees to the distribution company for use of its distribution system.

The regulated tariff generally recognizes that our utility businesses should recover certain operating and fixed costs, as well as manage uncollectible amounts, quality of service and technical and non-technical losses. Utilities, therefore, need to manage costs to the levels reflected in the tariff, or risk non-recovery of costs or diminished returns.

Seasonality, Weather Variations, and Economic Activity — Our utility businesses are generally affected by seasonal weather patterns and, therefore, operating margin is not generated evenly throughout the year. Additionally, weather variations may also have an impact based on the number of customers, temperature variances from normal conditions, and customers' historic usage levels and patterns. Retail sales, after adjustments for weather variations, are also affected by changes in local economic activity, energy efficiency and distributed generation initiatives, as well as the number of retail customers.

Reliability of Service — Our utility businesses must meet certain reliability standards, such as duration and frequency of outages. Those standards may be explicit, with defined performance incentives or penalties, or implicit, where the utility must operate to meet customer and/or regulator expectations.

Development and Construction

We develop and construct new generation facilities. For our utility business, new plants may be built or existing plants retrofitted in response to customer needs or to comply with regulatory developments. The projects are developed subject to regulatory approval that permits recovery of our capital cost and a return on our investment. For our generation businesses, our priority for development is in key growth markets, where we can leverage our global scale and synergies with our existing businesses by adding renewable energy. We make the decision to invest in new projects by evaluating the strategic fit, project returns and financial profile against a fair risk-adjusted return for the investment and against alternative uses of capital, including corporate debt repayment.

In some cases, we enter into long-term contracts for output from new facilities prior to commencing construction. To limit required equity contributions from The AES Corporation, we also seek non-recourse project debt financing and other sources of capital, including partners, when it is commercially attractive. We typically contract with a third party to manage construction, although our construction management team supervises the construction work and tracks progress against the project's budget and the required safety, efficiency and productivity standards.

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Segments

The segment reporting structure uses the Company's management reporting structure as its foundation to reflect how the Company manages the business internally. It is organized by geographic regions, which provides a socio-political-economic understanding of our business.

We are organized into four market-oriented SBUs: US and Utilities (United States, Puerto Rico and El Salvador); South America (Chile, Colombia, Argentina and Brazil); MCAC (Mexico, Central America and the Caribbean); and Eurasia (Europe and Asia) — which are led by our SBU Presidents. We have two lines of business: generation and utilities. Each of our SBUs participates in our first business line, generation, in which we own and/or operate power plants to generate and sell power to customers, such as utilities, industrial users, and other intermediaries. Our US and Utilities SBU participates in our second business line, utilities, in which we own and/or operate utilities to generate or purchase, distribute, transmit and sell electricity to end-user customers in the residential, commercial, industrial and governmental sectors within a defined service area. In certain circumstances, our utilities also generate and sell electricity on the wholesale market.

We measure the operating performance of our SBUs using Adjusted PTC, a non-GAAP measure. The Adjusted PTC by SBU for the year ended December 31, 2020 is shown below. The percentages for Adjusted PTC are the contribution by each SBU to the gross metric, i.e., the total Adjusted PTC by SBU, before deductions for Corporate. See Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations—SBU Performance Analysis of this Form 10-K for reconciliation and definitions of Adjusted PTC.

For financial reporting purposes, the Company's corporate activities and certain other investments are reported within "Corporate and Other" because they do not require separate disclosure. See Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 18—Segment and Geographic Information included in Item 8.—Financial Statements and Supplementary Data of this Form 10-K for further discussion of the Company's segment structure.

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(1) Non-GAAP measure. See Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—SBU Performance Analysis—Non-GAAP Measures for reconciliation and definition.

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US and Utilities SBU

Our US and Utilities SBU has 37 generation facilities, two utilities in the United States, and four utilities in El Salvador.

Generation — Operating installed capacity of our US and Utilities SBU totals 11,754 MW. IPALCO (IPL's parent), DP&L, and DPL Inc. (DP&L's parent) are all SEC registrants, and as such, follow the public filing requirements of the Securities Exchange Act of 1934. The following table lists our US and Utilities SBU generation facilities:

Business	Location	Fuel	Gross MW	AES Equity Interest		Year Acquired or Began Operation	Contract Expiration Date	Customer(s)
Bosforo (1)	El Salvador	Solar	100	50	%	2018-2019	2043-2044	CAESS, EEO, CLESA, DEUSEM
AES Nejapa	El Salvador	Landfill Gas	6	100	%	2011	2035	CAESS
Opico	El Salvador	Solar	4	100	%	2020	2040	CLESA
Moncagua	El Salvador	Solar	3	100	%	2015	2035	EEO
El Salvador Subtotal			113
Southland—Alamitos	US-CA	Gas	1,200	100	%	1998	2023	Various
AES Clean Energy (sPower OpCo A (1))	US-Various	Solar	1,101	26	%	2017-2019	2028-2046	Various
Southland—Redondo Beach	US-CA	Gas	876	100	%	1998	2021	Various
Southland Energy—Alamitos (2)	US-CA	Gas	650	65	%	2020	2040	Southern California Edison
Southland Energy—Huntington Beach(2)	US-CA	Gas	649	65	%	2020	2040	Southern California Edison
AES Puerto Rico	US-PR	Coal	524	100	%	2002	2027	Puerto Rico Electric Power Authority
AES Clean Energy (AES Distributed Energy) (3)	US-Various	Solar	283	100	%	2015-2020	2029-2042	Utility, Municipality, Education, Non-Profit
		Energy Storage	39
Southland—Huntington Beach	US-CA	Gas	236	100	%	1998	2023	Various
Buffalo Gap II (3)	US-TX	Wind	228	100	%	2007
Hawaii (4)	US-HI	Coal	206	100	%