AES CORP
For the period ended Dec 31, 2023. Filed Feb 26, 2024.
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FY2023 · Filed Feb 26, 2024
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Part A— Report of Independent Registered Public Accounting Firm
Our auditors are Ernst & Young LLP, located in Tysons, Virginia. Their PCAOB ID number is 42.
Part B— Financial Statements and Supplementary Data
To the Stockholders and the Board of Directors of The AES Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The AES Corporation (the Company) as of December 31, 2023, and 2022, the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 26, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Long-lived Asset Impairments of Coal and Pet Coke-fired Generation Assets | |
| Description of the Matter | At December 31, 2023, the Company's net property, plant and equipment was $29,958 million. As discussed in Note 1 to the consolidated financial statements, when circumstances indicate that the carrying amount of long-lived assets in a held-for-use asset group may not be recoverable, the Company evaluates the assets for potential impairment. Events or changes in circumstances that may necessitate a recoverability evaluation include, but are not limited to, adverse changes in the regulatory environment, unfavorable changes in power prices or fuel costs, increased competition due to additional capacity in the grid, technological advancements, declining trends in demand, or an expectation it is more likely than not that the asset will be disposed of before the end of its previously estimated useful life. If the carrying amount of the assets exceeds the undiscounted cash flows, an impairment is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. As discussed in Note 22 to the consolidated financial statements, the Company recognized a total asset impairment expense of $471 million related to the Norgener, TEG, TEP, and Warrior Run asset groups, consisting of coal and pet coke generation plants included in the Energy Infrastructure SBU reportable segment in 2023.Auditing the Company's identification of impairment indicators was complex and highly judgmental because of the many geographic, regulatory, and economic environments in which the Company operates. Also, due to the wide variety of events or changes in circumstances that may indicate that an asset group is not recoverable, auditing the Company’s identification of impairment indicators involved a high degree of subjectivity, particularly given the Company’s decarbonization initiatives and shift towards clean energy platforms. In addition, auditing the Company’s impairment analyses for Norgener, TEG, TEP, and Warrior Run asset groups was complex due to the judgmental nature of the significant assumptions used to determine the fair value of the asset groups (e.g., the Company’s projections of revenue growth, discount rates, and consideration of the industry outlook and market conditions). |
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| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over the identification of impairment indicators and the fair value analysis of the Norgener, TEG, TEP, and Warrior Run asset groups. For example, we tested management’s monitoring controls over the evaluation of events or changes in circumstances that would require an asset to be tested for recoverability. We also tested management’s review controls of the valuation models used in the impairment analyses, the significant assumptions used to develop the estimates, and the completeness and accuracy of the data used in the valuations. To test the Company's identification of impairment indicators, our audit procedures included, among others, making inquiries of management, including personnel in operations, to understand changes in the businesses and management’s strategic plans, and evaluate whether management has considered any identified changes in their analysis. We evaluated the results of earnings and the projected cash flows for significant coal generation assets and assessed whether there has been a deterioration in earnings or projected losses that would represent an impairment indicator. We also evaluated conditions and trends in the industry for the underlying economies, including any sale or disposition activities, and evaluated any adverse changes in the regulatory environment or the geographic areas to test the completeness and accuracy of the company's evaluation of potential impairment indicators. We also evaluated the Company’s useful life estimates, in particular for the coal and pet coke-fired generation assets with impairment indicators, considering the existing Power Purchase Agreements (PPAs) and the market for the use of these assets subsequent to the expiration of existing PPAs, based on the regulatory and market conditions. |
| To test the impairment analyses for the Norgener, TEG, TEP, and Warrior Run asset groups, our audit procedures included, among others, assessing the appropriateness of valuation methodologies, testing the significant assumptions discussed above, and testing the completeness and accuracy of the underlying data used by the Company in its analyses. We compared the significant assumptions used by management to current industry and economic trends as well as historical results. We performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the asset groups that would result from changes in the assumptions. We also involved valuation specialists to assist in our evaluation of the overall valuation methodology and the discount rates used in the fair value estimates, as necessary. | |
| Accounting for the Bellefield and Rexford Renewable Acquisitions | |
| Description of the Matter | During 2023, the Company completed its acquisitions of the Bellefield solar and battery energy storage system (BESS) projects and the Rexford solar and BESS project for consideration of $358 million and $253 million, respectively, as disclosed in Note 25 to the consolidated financial statements. These transactions were accounted for as acquisitions of variable interest entities that did not meet the definition of a business.Auditing the Company's accounting for its significant renewables acquisitions was complex due to the significant judgment made by management to determine the fair values of significant assets acquired, including project development intangible assets and construction in progress assets. The significant assumptions used included the discount rates and revenue pricing curves used in the Company’s forecasted cash flows to determine the fair value of the acquired assets. In particular, the fair value estimate was sensitive to these significant assumptions, which are affected by expectations about future market conditions. |
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| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over the accounting for these acquisitions. For example, we tested controls over the recognition and measurement of the consideration transferred and valuation of assets acquired, including management’s review of the valuation models, the significant assumptions used to develop the estimates, and the completeness and accuracy of the data used in the valuations. To test the estimated fair value of the project development intangible assets and construction in progress, we performed audit procedures that included, among others, evaluating the Company's selection of the valuation methodology, evaluating the methods and significant assumptions used, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. For example, we compared the significant assumptions used by management to third-party industry and market data and to the Company’s budgets and forecasts. We also involved our internal valuation specialists to assist in our evaluation of the reasonableness of the Company’s valuation methodology, forecasted revenue assumptions, and the discount rates used in the valuations. |
| Allocation of Earnings to Noncontrolling Interests in Tax Equity Partnerships | |
| Description of the Matter | A significant number of renewable projects at AES Clean Energy have been financed with tax equity structures, where the tax equity investors receive a portion of the economic attributes of the facilities, including tax attributes, that vary over the life of the projects. When the allocation of earnings and losses, cash distributions, and tax benefits are not based on fixed ownership percentages, the Company uses the hypothetical liquidation at book value (HLBV) method to calculate the earnings attributable to noncontrolling interest for consolidated partnerships, when it is a reasonable approximation of the profit-sharing arrangement. As discussed in Note 17 to the consolidated financial statements, AES Clean Energy Development and AES Renewable Holdings sold noncontrolling interest to tax equity investors resulting in an increase of $1,163 million to noncontrolling interest in 2023. |
| Auditing the allocation of earnings to noncontrolling interest holders for tax equity partnerships was complex due to the evaluation of whether a newly established HLBV model used to allocate earnings appropriately reflects the unique substantive profit-sharing terms and features within each arrangement. A greater extent of audit effort and specialized skill and knowledge was required to evaluate compliance with the contractual provisions in each partnership agreement as well as the appropriateness of the investors’ capital account balances used in the HLBV models. | |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over the Company’s process for developing the HLBV model for new tax equity arrangements. For example, we tested management’s review of substantive profit-sharing terms and features to evaluate whether they are properly reflected in the HLBV model for new arrangements.To test the allocation of earnings to noncontrolling interest holders for new significant tax equity partnerships, we read the related partnership agreements to understand the substantive profit-sharing provisions. We evaluated the HLBV models for consistency with the contractual provisions in the related partnership agreements and tested the capital contributions made by the tax equity investors. We involved tax subject matter professionals to assist in evaluating the calculation of the investors’ capital accounts used in the HLBV models, including the proceeds attributable to the tax equity investor due to the recognition of investment tax credits and other adjustments as required by the U.S. Internal Revenue Code. Additionally, we tested the allocation of earnings by recalculating the hypothetical liquidation in the HLBV models based on the liquidation provisions of the related partnership agreements. |
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/s/ Ernst & Young LLP
We have served as the Company's auditor since 2008.
Tysons, Virginia
February 26, 2024
The text of this filing, as the company filed it with the SEC, without its images or exhibits. This is not investment advice.