Financial performance is the foundation for all we are able to accomplish as a company. As a Fortune 200 global leader in our industry, we strive to attract capital, talented people and business partners. Our focus on financial excellence and our ability to implement sustainable investment structures has enabled us to manage our risks effectively for more than 30 years.
We manage our financial performance in line with our corporate strategy, which is set by our CEO and Executive Leadership Team and approved by our Board of Directors. Strategic priorities guide our economic activity and are designed to ensure the company’s economic sustainability.
Our Strategic Business Units (SBUs) are responsible for the execution of our strategy and the financial results in their markets. Our financial results are a result of our operational excellence, safety programs, risk management approach and ethical and effective conduct by our people at all of our businesses.
In accordance with our strategic priorities, we:
- Operate our portfolio of generation and utility businesses to create value for our stakeholders;
- Drive our operating businesses to generate capital for deployment into growth investments, debt repayment and shareholder dividends;
- Focus growth investments on platform expansions in markets where we have a competitive advantage and exit markets where we do not; and
- Enhance the stability of cash flow and earnings from our businesses through contractual, regulatory and hedging activities.
Our Financial Excellence material issues include economic performance and investment return on capital allocation.
Economic Performance and Investment Return on Capital Allocation
Disciplined allocation of our capital is an essential element of our strategy. We use our available cash for three specific purposes:
- Funding growth investments in markets where we can leverage an existing platform;
- Strengthening our balance sheet; and
- And returning cash to our shareholders through dividends and share repurchases.
Our overarching goal is to achieve total shareholder returns greater than our peers. We are making progress on our plan to enhance long-term economic performance by narrowing our geographic and operational focus in places where we have a competitive advantage. We believe making investments that produce solid financial returns, while managing environmental and social aspects for all stakeholders, is essential to our long-term sustainable financial performance.
Refer to our Investor section for additional information about our economic performance and investment return on capital allocation.
Financial Risk Management
Anticipating, identifying and managing risk is an essential element of our governance and financial management functions. We believe that risk management and sustainability work together: Managing risk properly enhances sustainability.
Each of our operating businesses serves as the first line of risk management. We manage risk at the Strategic Business Unit and corporate levels, first by minimizing exposure and debt in its initial contracts, and then by aggregating all existing risk under the Risk Management Team, which reviews, balances and manages risks across the entire portfolio.
Our Chief Risk Officer (CRO), who reports to the Chief Financial Officer, oversees our risk management programs and processes. As head of the Risk Management Team, the CRO is responsible for integrating and aligning risk management principles and activities; communicating risk intelligence to the Board and executive leadership; establishing and maintaining adherence to risk thresholds; monitoring emerging risks across the enterprise; and driving a culture of risk awareness and discipline throughout the company.
The Risk Management Team works with each of the SBU Risk Management Committees (RMC) to develop consistent risk management programs across our business and corporate functions. Businesses report monthly to the RMCs and the RMCs report regularly to the Risk Oversight Committee (ROC) to provide data on current risk factors, progress on benchmarks and updates on implementation of ongoing risk strategies. The ROC serves as an advisor to the Executive Leadership Team and other AES senior management. This advisory role focuses on the development of Enterprise Risk Management Strategies and risk monitoring.
Financial Metrics and Tools
To ensure continuous improvement, specific tools used to measure risk include:
- Risk Diagnostic Survey: Continuous surveys of risk exposures that rate identified risks and compile them into business-specific and aggregate “heat maps.” This visual tool focuses attention on risks needing active mitigation strategies, as well as on potential emerging risks.
- Risk Ownership Matrix: Provides clear lines of ownership, monitoring and reporting for risk factors.
AES Key Risk Metrics:
- Market Sensitivities: By measuring market sensitivities, AES monitors market indicators — such as oil, natural gas and coal pricing for commodities as well as foreign currency and interest rates — for potential increases in risk.
- Scenario Analysis: AES uses quantitative analysis to evaluate ad hoc cases and their impact to the company under potential macro-economic scenarios.
- Sovereign Risk: AES measures the risk that central banks might alter their foreign-exchange regulations, potentially reducing the value. This serves as an early warning instrument for making portfolio management decisions.
- Portfolio Exposure Guidelines: By monitoring the amount of risk that it possesses in each part of its business, AES can adjust its overall portfolio to manage exposure to market risk. Portfolio management, investment strategy and mitigation actions are key levers for managing in-market risk exposure.