AES CORP

During 2025 and beyond, we expect to face the following challenges at certain of our businesses. Management expects that improved operating performance at certain businesses, growth from new businesses, and global cost reduction initiatives may lessen or offset their impact. If these favorable effects do not occur, or if the challenges described below and elsewhere in this section impact us more significantly than we currently anticipate, or if volatile foreign currencies and commodities move more unfavorably, then these adverse factors (or other adverse factors unknown to us) may have a material impact on our operating margin, net income attributable to The AES Corporation and cash flows. We continue to monitor our operations and address challenges as they arise. For the risk factors related to our business, see Item 1.—Business and Item 1A.—Risk Factors of this Form 10-K.

Operational

Trade Restrictions and Supply Chain— In recent years, the U.S. Department of Commerce (“Commerce”) has initiated investigations into whether imports into the U.S. of solar cells and panels from Cambodia, Malaysia, Thailand, and Vietnam (“Southeast Asia”) are circumventing antidumping and countervailing duty (“AD/CVD”) orders on solar cells and panels from China. One such investigation initiated in April of 2022 resulted in a final determination by Commerce that circumvention would be deemed to occur under certain circumstances, resulting in the imposition AD and CVD duties on the imported cells and panels. Such determination and related matters remain the subject of ongoing litigation. Separate AD/CVD investigations initiated by Commerce in May 2024 resulted in preliminary determinations by Commerce that Southeast Asia countries were also dumping and receiving subsidies and therefore Commerce established CVD and AD rates on solar manufacturers. The U.S. International Trade Commission (the “ITC”) is also investigating this matter. If the Commerce and ITC investigations result in Commerce issuing AD/CVD orders, the orders are likely to be imposed in June 2025.

Separately, the United States maintains a global tariff (currently 14.25% ad valorem) on solar cells and modules pursuant to the Section 201 Safeguard Action on crystalline silicon photovoltaic products, which became effective in February 2018. On June 21, 2024, President Biden issued Proclamation 10779, revoking the exclusion of bifacial panels from safeguard relief previously proclaimed in Proclamation 10339, and reinstating the tariff on bifacial panels under the Section 201 Safeguard Action, subject to certain qualifications. These global tariffs are expected to expire in February 2026.

The United States also maintains a Section 301 tariff on certain Chinese made lithium-ion batteries and related components utilized for energy storage systems, with such tariff currently set at 7.5% and increasing to 25% effective January 1, 2026. There is also an ongoing AD/CVD investigation with respect to exports by China of natural and synthetic graphite used to make lithium-ion battery anode material. Any determinations or orders arising from such investigation could result in price increases.

Additionally, the Uyghur Forced Labor Prevention Act (“UFLPA”) seeks to block the import of products made with forced labor in certain areas of China, at any point in the supply chain, 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 Trump Administration has threatened or imposed tariffs on a wide range of countries and sectors. On February 10, 2025, President Trump signed Executive Orders modifying existing Section 232 tariffs on steel and aluminum imports to expand their scope of applicability and imposing 25% tariffs on both products. At this time, we do not expect the modifications to tariffs on steel and aluminum to have a material impact on our business. On February 13, 2025, the Trump Administration announced a plan to counter non-reciprocal trading arrangements with all U.S. trading partners by determining the equivalent of a reciprocal tariff with respect to each foreign trade partner. On February 1, 2025, President Trump issued an executive order declaring a national emergency under the International Emergency Economic Powers Act (IEEPA) and imposing a 10% additional tariff on imports from China and on March 4, 2025, this tariff was increased to 20%. We expect that additional tariffs on imports from China will increase overall costs for materials and parts that are imported to build and maintain renewable energy plants for the U.S. industry. However, AES has already shifted its supply chain outside of China for the vast majority of final products used to build and maintain renewable energy plants in the United States and we expect limited impact to 2025 and 2026 projects due to the recently announced tariffs on China. Any additional U.S. tariffs on imports from other countries or higher tariffs could negatively impact our business.

The impact of new tariffs, including reciprocal tariffs, or Commerce investigations, the impact of any additional adverse Commerce determinations or other tariff disputes or litigation, the impact of the UFLPA, potential future disruptions to the renewable energy supply chain and their effect on AES’ U.S. renewable energy project development and construction activities remain uncertain. AES will continue to monitor developments and take prudent steps towards maintaining a robust supply chain for our renewable energy projects. To that end, we have contracted and imported in the U.S. the solar panels that are necessary to complete our U.S. backlog projects scheduled to finish construction and become operational in 2025 and 2026. Additionally, we have secured and imported in the U.S. the majority of the batteries needed for our energy storage projects scheduled to be completed in 2025 and we have contracted with U.S. or Korean- manufacturers for sufficient volume of batteries for our storage projects scheduled to be completed in 2026. For our U.S. wind projects scheduled to be completed in 2025 and 2026, we have contracted with U.S. and non-Chinese manufacturers to meet our supply needs.

Additionally, as part of our supply chain strategy, we are well advanced in securing U.S. domestically manufactured modules to support our U.S. solar growth from 2026 to 2028, with a contractual option to extend deliveries to 2030.

Operational Sensitivity to Dry Hydrological Conditions — Our hydroelectric generation facilities are sensitive to changes in the weather, particularly the level of water inflows into generation facilities. Dry hydrological conditions in Panama, Colombia, and Chile can present challenges for our businesses in these markets. Low inflows can result in low reservoir levels, reduced generation output, and subsequently possible increased prices for electricity. If our hydroelectric generation facilities cannot generate sufficient energy to meet contractual arrangements, we may need to purchase energy to fulfill our obligations, which could have an adverse impact on AES. As mitigation, AES has invested in thermal, wind, and solar generation assets, which have a complementary profile to hydroelectric plants. These plants are expected to have increased generation in low hydrology scenarios, offsetting possible impacts described from hydro assets.

According to the National Oceanic and Atmospheric Administration ("NOAA"), La Niña Conditions are currently observed. La Niña conditions are expected to persist through February-April 2025, with a transition to ENSO-neutral conditions expected during March-May 2025.

In Panama, La Niña phenomenon typically results in more precipitation than historical average conditions, however local system impacts may vary due to other factors. Higher hydrology may result in energy surpluses after covering the contracted hydro positions, available to be sold in the spot market.

In Colombia, La Niña is typically characterized by more rainfall, possibly leading to a decrease in spot prices. However, during La Niña, impacts vary and the basin where Chivor is located may experience more volatility in rainfall than the rest of the system. Inflows at our Chivor hydroelectric plant were below historical averages in the fourth quarter of 2024. Should dry conditions persist, Chivor may be exposed to higher spot prices.

In Chile, the primary driver for AES’ hydro assets is snowpack volumes. If La Niña persists beyond April, it could divert the frontal weather systems to the south of Chile, reducing rainfall in the central area, and possibly reducing the snowpack formation. Lower snowpack, together with reduced rainfall in the system, could increase both spot prices and energy purchase volumes required to meet contracted positions.

The exact behavior pattern and strength of La Niña is unknown and therefore the impacts could vary from those described above, and may include impacts to our businesses beyond hydrology, including with respect to power generation from other renewable sources of energy and demand. Even if rainfall and water inflows return to historical averages, in some cases market prices and generation above or below the average could persist until reservoir levels are fully recovered. Further, investments made in thermal, wind, and solar power generation may benefit from uncontracted spot sales at higher market prices. Impacts may be material to our results of operations.

Macroeconomic and Political

The macroeconomic and political environments in some countries where our subsidiaries conduct business have changed during 2024. This could result in significant impacts to tax laws and environmental and energy policies. Additionally, we operate in multiple countries and as such are subject to volatility in exchange rates at the subsidiary level. See Item 7A.—Quantitative and Qualitative Disclosures About Market Risk for further information.

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

Our U.S. renewables business has a backlog of approximately 8.4 GW and 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 investors at the time of its creation, which for projects utilizing the investment tax credit begins in the quarter the project is placed in service. For projects utilizing the production tax credit, this value is recognized over 10 years as the facility produces energy.

The IRA also allows us to directly transfer investment tax credits to unrelated tax credit buyers. We account for the transfer proceeds as tax benefit throughout the year the renewables project is placed in service.

In 2024, we realized $1,313 million of earnings from Tax Attributes, comprised of $1,293 million from the Renewables SBU and $20 million from the Utilities SBU. In 2025, we expect an increase in Tax Attributes earned throughout the year by our U.S. renewables business in line with the growth in that business.

The implementation of the IRA requires substantial guidance and interpretive rules from the U.S. Department of Treasury and other government agencies. Some of the guidance and rulemaking enacted under the Biden Administration could be changed or modified by the Trump Administration, creating uncertainty with respect to implementation of the IRA. Also, the Trump Administration has issued Executive Orders that pause certain funding allocated to projects under the Infrastructure Investment and Jobs Act (IIJA) and the IRA during a 90-day review process. As they currently stand, these Executive Orders do not impact the tax credits under the IRA.

It remains uncertain whether Congress will modify or repeal the IRA in connection with the budget reconciliation process or otherwise. While we have taken significant measures to protect against the impact of changes to the IRA, including by implementing a program to ensure our backlog of U.S. renewables projects satisfy IRS safe harbor requirements for qualifying for the ITCs and PTCs, the impacts from any modifications or repeal of the IRA may be material to our results of operations.

Global Tax— The macroeconomic and political environments in the U.S. and in some countries where our subsidiaries conduct business have changed in recent years. This could result in significant impacts to future tax law. In the U.S., the IRA includes a 15% corporate alternative minimum tax (CAMT) based on adjusted financial statement income. In September 2024, the IRS released proposed regulations on the 15% CAMT. The impact to the Company during 2024 is not material.

The Netherlands, Bulgaria, and Vietnam adopted legislation to implement Pillar 2 effective as of January 1, 2024. We will continue to monitor the issuance of draft legislation in other non-EU countries where the Company operates that are considering Pillar 2 amendments and new interpretive guidance. The impact to the Company during 2024 is not 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 allow for recovering of operations and maintenance costs through the regulatory process, which may have timing impacts on recovery.

Interest Rates— In the U.S. and other markets in which we operate, there has been a rise in interest rates during 2021 through 2023, and interest rates are expected to remain volatile in the near term. As discussed in Item 7A.—Quantitative and Qualitative Disclosures about Market Risk, although most of our existing corporate and subsidiary debt is at fixed rates, an increase in interest rates can have several impacts on our business. For any existing debt under floating rate structures and any future debt refinancings, rising interest rates will increase future financing costs. In most cases in which we have floating rate debt, our revenues serving this debt are indexed to inflation which helps mitigate the impact of rising rates. For future debt refinancings, AES actively manages a hedging program to reduce uncertainty and exposure to future interest rates. For new business, higher interest rates increase the financing costs for new projects under development and which have not yet secured financing.

AES typically seeks to incorporate expected financing costs into our new PPA pricing such that we maintain our target investment returns, but higher financing costs may negatively impact our returns or the competitiveness of some of our development projects. Additionally, we typically seek to enter into interest rate hedges shortly after signing PPAs to mitigate the risk of rising interest rates prior to securing long-term financing.

Argentina — On July 8, 2024, the Argentine government enacted Law 27,742 or Ley Bases, translated in English as Law of Bases and Starting Points for the Freedom of the Argentine People. Ley Bases declares a public emergency in administrative, economic, financial, and energy matters for a term of one year, grants delegated powers to the President, and contains a broad reform of the State in order to deregulate the economy, including measures such as labor reform, the implementation of the Incentive Regime for Large Investments, and the modification of several non-income tax measures. The law also opens avenues for privatization of state-owned energy companies.

In addition, the Ministry of Energy published Resolution 150/2024 on July 10, 2024 that repeals certain regulations from previous years that imply excessive involvement of the National State and CAMMESA in the operation and functioning of the wholesale electricity market.

On January 28th, 2025, the Energy Secretariat of the Ministry of Economy of the Nation issued Resolution 21/2025, initiating a series of reforms in the Wholesale Electricity Market (MEM) aimed at ensuring a more efficient, competitive, and sustainable electrical system. The transition will be gradual, ensuring that the energy supply remains secure and costs for consumers do not increase. The key elements of this reform process include (a) decentralization of fuel management, allowing thermal generators to manage their own fuel supplies; (b) promotion of free bilateral contracts in the market between generators, large users, and distributors, replacing the current contract regulations; (c) the national government's commitment to honor existing generation and fuel contracts until their completion. If necessary, competitive tenders will be conducted for new infrastructure. These changes aim to gradually normalize the operation of the MEM, eliminate unnecessary restrictions, and create economic incentives that encourage the addition of new generation capacity under competitive conditions.

These changes may have a profound impact on the sector, influencing our operations and financial results. It is not yet possible to predict the impact of these regulations on our consolidated results of operations, cash flows, and financial condition.

Puerto Rico — 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.

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 Ilumina’s non-recourse debt of $22 million continues to be in technical default and is classified as current as of December 31, 2024. The non-recourse debt at AES Puerto Rico is also in payment default.

In 2022, mediation commenced to resolve the PREPA Title III case. PREPA's plan confirmation mediation was extended to March 24, 2025, and the decision is still pending.

Considering the information available as of the date hereof, management believes the carrying amount of our long-lived assets at AES Puerto Rico of $80 million is recoverable as of December 31, 2024.