AESAES Corporation

There currently is no U.S. federal legislation imposing mandatory GHG emission reductions (including for CO2) that affects our electric power generation facilities; however, in 2015, the EPA promulgated a rule establishing New Source Performance Standards for CO2 emissions for newly constructed and modified/reconstructed fossil-fueled electric utility steam generating units larger than 25 MW and in 2018 proposed revisions to the rule. On May 9, 2024, the EPA published the final NSPS requiring carbon capture and sequestration for new and reconstructed baseload stationary combustion turbines, among other requirements. The EPA did not finalize revisions to the NSPS for newly constructed or reconstructed coal-fired electric utility steam generating units as proposed in 2018. In 2019, the EPA promulgated the Affordable Clean Energy (ACE) Rule which would have replaced the EPA's 2015 Clean Power Plan Rule ("CPP"). However, on January 19, 2021, the D.C. Circuit vacated and remanded the ACE Rule. Subsequently, 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, holding 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 issued a partial mandate, holding pending challenges to the ACE Rule in abeyance. On May 9, 2024, the EPA published the final rule regulating GHGs from existing EGUs pursuant to Section 111(d) of the Clean Air Act and effective on July 8, 2024. Existing EGUs are those that were constructed prior to January 8, 2014. Depending on various EGU-specific factors, the bases of emissions guidelines for natural gas-fired units include the use of uniform fuels and routine methods of operation and maintenance and the bases of emissions guidelines for coal-fired units include 40% natural gas co-firing or carbon capture and sequestration with 90% capture of CO2 depending on the date that coal operations cease. Specific standards for performance for EGUs will be established through a State Plan (or a Federal Plan if the state of Indiana were to not submit an approvable plan). The May 2024 rule is subject to legal challenges. On October 16, 2024, the U.S. Supreme Court denied emergency stay applications. The impact of the results of further proceedings and potential future greenhouse gas emissions regulations remains uncertain, but it could be material.

The Company accounts for tax credits that it will retain or transfer under ASC 740—Income Taxes, as a reduction in income tax expense by either including the expected amount of the tax credit to be claimed or the cash to be received when transferred, respectively, in the calculation of its annual effective tax rate throughout the year the renewables project is placed in service. The Company applies the flow-through method to account for its investment tax credits. The estimated tax credits are updated on a quarterly basis, with the year-end calculation including only the tax credits that are associated with projects placed in service, comprising credits claimed or transferred during the year. In assessing realizability for credits to be transferred, the Company includes cash it anticipates receiving in establishing any valuation allowance and establishes a valuation allowance equal to its best estimate of any discount on the transfer. During In many cases, ITCs are generated at partnerships which are non-tax paying entities for U.S. federal income tax purposes. These entities cannot utilize tax credits, but rather allocate credits to their partners, who report their share of the year ended December 31, 2024, partnership credits on their individual tax returns. Once a project is placed in service, any portion of the Company executed agreements tax credit to transfer ITCs directly to third parties for $555 million. Of this amount, $309 million and $26 million was be transferred which is allocated to AES and a noncontrolling interest holder is recorded as an income tax benefit in 2024 and 2023, respectively, and $220 million was allocated to noncontrolling a noncash deemed contribution within Noncontrolling interests and treated as a contribution from noncontrolling interest holders. The Company received cash proceeds from these tax credit transfers or Redeemable stock of $480 million during the year ended December 31, 2024, and recorded a receivable in Other current assets subsidiaries on the Consolidated Balance Sheets for as this represents an increase in the remaining $75 million, which is partners’ capital account. To the extent any of the expected transfer proceeds are contractually obligated to be received in March 2025. distributed to the noncontrolling interest holder, the Company records a corresponding noncash deemed distribution within Noncontrolling interests or Redeemable stock of subsidiaries. The receipt of cash from the transfer of tax credits credits, inclusive of the portion allocated to noncontrolling interest holders, is treated as an operating cash inflow on the Consolidated Statements of Cash Flows.

The Trump Administration has threatened or imposed tariffs on a wide range of countries and sectors. products. On February 10, 2025, President Trump signed Executive Orders modifying existing tariffs under Section 232 tariffs of the Trade Expansion Act of 1962 ("Section 232") on steel and aluminum imports to expand their scope of applicability and imposing impose 25% tariffs on both products. The President raised these rates to 50% effective June 4, 2025. 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.

On May 12, 2021, the Mexican Federal Attorney for Environmental Protection (the “Authority”) “Agency”) initiated an environmental audit at the TEP Termoeléctrica del Peñoles thermal generating facility. generation facility (“TEP”). On January 20, 2023, TEP was notified of the resolution issued by the Authority, Agency, which alleges breaches of air emission regulations, including the failure to submit reports. The resolution imposes a fine of $27,615,140 pesos (approximately $1.3 million). $1.5 million), as well as a series of corrective measures. On March 3, 2023, the facility filed a nullity judgment to challenge such resolution, which has been admitted by the local judge with an injunction granted against execution of the proposed fine during the course of the underlying proceedings. However, the local tax authority rejected receiving the bond that is required to guarantee the injunction, and as a result, on September 18, 2023, TEP filed a complaint seeking to compel the tax authority to accept the bond and recognize the validity lawsuit in an administrative court—The Specialized Chamber of the injunction. The Specialized Federal Administrative Justice Tribunal (“Chamber”)—challenging the legality of the Agency’s resolution and fine. On May 30, 2025, the Chamber has not issued a response final administrative ruling denying TEP’s lawsuit. On July 1, 2025, TEP appealed to the complaint, despite Federal District Court. TEP’s appeal challenges the fact that constitutionality of the Company Agency’s regulations (demanda de amparo) and requests a stay of enforcement of the Chamber’s final administrative ruling. The appeal has taken several legal actions to try to expedite been duly admitted and the proceedings. Federal District Court’s decision on the injunction request is pending. The Company believes that it has meritorious defenses to the claims asserted against it and will defend itself vigorously in these proceedings; however, there can be no assurances that it will be successful in its efforts.