aes procure to pay policy -...

AES Procure to Pay Policy

Policy Owners: Global Supply Chain and

Corporate Center Accounting Team Effective Date: January 1

st, 2016

CONFIDENTIAL AES Internal Distribution

Policy Name: AES Procure To Pay Policy Policy No: 000120.04

Department Names: Global Supply Chain; Corporate Center Accounting Team

Effective date: January 1st, 2016

Approved Date: December 3rd, 2015

Approved By: Andres Gluski and Fabian Souza

Document Change Control Log

Effective Date

Version Number Nature of Revision

Revised Section(s)/ Page(s)

Revised By (Name and

Title)

Approved By (Name and

Title) See section 3

1 Establishment of Policy ALL Paul Lansdell, Dir Global Financial Policy and Controls

Andres Gluski, COO and Victoria Harker, CFO

May 1, 2010

2 Revision to rules for approval of purchase requisitions outside ERP system

Page 7 Paul Lansdell, Dir Global Financial Policy and Controls

Andres Gluski, COO and Victoria Harker, CFO

July 1, 2012

3 Updates to reflect changes in organization and reporting structure

Various pages

Ranjit Pawar, Director, Global Financial Policy and Controls

Mary Wood, VP and Corporate Controller

Sept 20 2013

4 Incorporate PR approval limits into P2P policy. Expenditure policy will no longer include PR approval limits

Various Pages

Doug Duval, VP, Global Supply Chain

Sharon Virag, VP and Corporate Controller ; Doug Duval, VP, Global Suppy Chain

April 20, 2015

5 Updates to reflect changes on invoice processing as a consequence of using ReadSoft («OCR tool») Clarification on Service Receipt process to avoid Accruals using such process

Pages 16 and 17 Page 14

January 1, 2016

6 Updates to reflect «PR to PO» and «PO to GR» 5x5 processes, future state recommendations

Various Pages

Humberto Lemus, Managing Director Global Supply Chain Evaristo Leonardi, VP Global Operations Support

Bernerd DaSantos, COO Fabian Souza, VP, Controller







Table of Contents

1. Introduction ............................................................................ 5

2. Definitions .............................................................................. 5

3. Scope and objective............................................................... 8

4. Other applicable policies ....................................................... 9

5. Segregation of duties ............................................................. 9

6. Core procurement .................................................................. 9

6.1 Purchase requisitions ............................................................................ 10 General .............................................................................................................. 10 Purchase Requisition for goods ......................................................................... 11 Purchase Requisition for services ...................................................................... 12 Approvals .......................................................................................................... 12

6.2 Source determination ............................................................................ 12 General .............................................................................................................. 12 Competitive bidding ........................................................................................... 13

6.3 Request for proposal (RFP) / quotation (RFQ) .................................... 13 6.4 Awarding ................................................................................................. 13 6.5 Purchasing documents.......................................................................... 15

Contracts ........................................................................................................... 15 Outline agreements ........................................................................................... 15 Purchase order .................................................................................................. 15 Intercompany purchases.................................................................................... 16 Purchases approvals and supporting documentation ......................................... 17 Compliance process .......................................................................................... 17 Non-Disclosure agreements (NDA) .................................................................... 17

6.6 Savings reporting and calculation ........................................................ 18

7. Special procurement ............................................................ 18

7.1 Sole and single source .......................................................................... 18 Sole source........................................................................................................ 18 Single source purchases.................................................................................... 19

7.2 Emergency purchases ........................................................................... 19 Requestor procedures ....................................................................................... 20 Emergency PR approval .................................................................................... 21 Emergency PO approval .................................................................................... 21

8. Non Sourceable procurement ............................................. 21

9. Open PO maintenance ......................................................... 22

10. Goods and services receipt................................................. 22

10.1 Goods receipts ....................................................................................... 22







10.2 Service receipts ...................................................................................... 23

11. Returns to suppliers ............................................................ 23

12. Invoice processing ............................................................... 24

12.1 PO invoices ............................................................................................. 24 12.2 Non-PO invoices .................................................................................... 25

13. Goods Received / Invoice Received (GR/IR) account ........ 26

14. Down payments .................................................................... 27

15. Payments .............................................................................. 27

15.1 Preferred payment term ......................................................................... 28

15.2 Payment vouchers ................................................................................. 28

15.3 Manual checks preparation ................................................................... 29 15.4 Clearing and cancellation of checks .................................................... 29 15.5 Electronic Funds Transfer (EFT) ........................................................... 30

15.6 Physical security of cash disbursement equipment and materials ... 30

16. Contacts ................................................................................ 31







1. Introduction This document establishes operational policies for completing the end-to-end Procure To Pay Process. Generation fuels and Energy are excluded from this Policy. This Policy contains topics related to Finance that are under their responsibility and governance, such as sections 12, 13 and 15. This Policy is based on the following procurement processes1:

Sourcing Process Description

Core procurement General procure to pay process

Special procurement Procurement under emergency, sole source and single source scenarios. Specific reasons for waiving the core procurement procedures must be clearly documented

Non-sourceable procurement

Procurement process for low value transactions and non-sourceable spend categories

2. Definitions

Term Definition

AES Taxonomy AES standard structure for describing major spend categories.

Buyer Employee responsible for facilitating the supplier identification and selection process in response to an internal purchasing request.

Controller The Accountant with primary responsibility for the accounting functions of a SBU.

1 Procurement processes in Brazil include Centralized, Decentralized, Specific and Special

categories.







Term Definition

Delivery Order Document to request services or goods considering the original commercial and technical conditions established in an Outline Agreement. Purchase Order NCT document type, Release Orders and Schedule Agreements are considered examples of Delivery Order.

Emergency Purchase Emergency purchases are made to meet a critical, unforeseen business requirement for goods and / or services.

Enterprise Resource Planning (ERP) System

Multi-module application software that helps a company manage some of its important business activities. SAP, Oracle, and similar financial systems are considered examples of ERP systems.

Global Supply Chain The AES organization responsible for providing Supply Chain management activity guidelines and supporting the acquisition of goods and services throughout AES.

Inventory Demand Planner Employee, within the Supply Chain Department, responsible for the development of requirement forecast for goods in the scope of the AES Non Fuel Inventory Policy.

Master Data Database in the ERP that contains the records / SKUs of all goods, services and suppliers catalogued in the system. This Policy will make reference to the Materials, Services and Suppliers Master databases.

Materials Requirement Planning (MRP) Planning, scheduling, and inventory control system in the ERP with the objective to guarantee material availability.

Optical Character Recognition (OCR) tool “Optical Character Recognition” tool which interprets an image and turns it into an encoded text. Readsoft is an example of an OCR tool. Such tool scans, reads and posts invoice data to the ERP.







Term Definition

Outline Agreement Agreement between a purchasing organization and a supplier regarding the supply of goods or the performance of services within a certain period, fixed price, and according to predefined terms and conditions. Oracle Blanket Orders are also an example of Outline Agreements.

Procurement Department The department or group of individuals performing the purchasing function at a SBU, including the placement of purchase orders with suppliers.

Procurement Manager The individual with primary responsibility for the purchasing function at a SBU.

Purchase Order (PO) Official document to formalize purchases to suppliers.

Purchase Requisition (PR) A request to the Procurement Department to procure a certain quantity of a good or a service so that it is available at a certain point in time.

Purchase Requisition (PR) for Outline Agreement

A request to the Procurement Department to generate an Outline Agreement in the ERP. In SAP, will be managed using a different document type than standard PRs.

Purchasing Group Code in the ERP to group similar purchases, e.g.: goods, services, emergencies, etc.

Request for Information (RFI) A RFI is a generic document and does not detail requirements. Instead, it focuses on obtaining information about a supplier’s capability. An RFI can be used to facilitate the budgeting process or to shortlist suppliers to participate in RFPs and RFQs.

Request for Proposal (RFP) A RFP is used to provide suppliers with information regarding AES’ requirements. Suppliers will return a proposal addressing those requirements.







Term Definition

Request for Quotation (RFQ) A RFQ is used to obtain pricing, delivery information, and terms from suppliers within a bidding process. Typically RFQs will be used when specifications are clear and defined.

Requestor The end user that creates a Purchase Requisition.

Reservation Official document in the ERP to request goods associated to a SKU.

Service Code Unique code in the Master Data of the ERP, for a specific service.

Single Source Supplier selected despite having additional alternatives in the market.

Sole Source Supplier considered an exclusive source of procurement.

Stock Keeping Unit (SKU) Unique code in the Master Data of the ERP, for a specific good.

Supply Chain Manager The individual with primary responsibility for supply chain function at a SBU

Total Cost of Ownership Total cost of a purchase decision, including direct, indirect and all other costs drivers that may affect the purchase decision.

3. Scope and objective AES Corporate (Arlington) and all consolidated US and non-US based reporting units are required to fully comply with this Policy. Equity based investments, for which Corporate performs management activities, are also subject to this Policy (where applicable). This Policy pursues the establishment of management standards for the acquisition of goods and services ensuring that employees comply with the responsibility of safeguarding the integrity of the AES Procure To Pay process, that includes sourcing planning, promote fairness and free competition, to achieve maximum benefit for AES, evaluating cost, quality, delivery time, guarantees, safety, environmental and other drivers that affects the acquisition process.







Additional requirements, over and above the requirements contained in this Policy may be established by individual Strategic Business Units or SBUs. Note that exceptions may apply where SAP is not being used.

4. Other applicable policies Technical Accounting Policies and Operational Policies are required to be followed for their applicable processes. Technical Accounting Policies and Operational Policies relevant to the Procure-to-Pay process include: AES Property, Plant & Equipment Accounting Policy AES Expenditure Approval Policy AES Non Fuel Inventory Policy AES Master Data Administration Policy (pending approval) AES Code of Business Conduct & Ethics

5. Segregation of duties The Businesses must implement the following segregation of duties:

The Purchase Requisition approval function will be appropriately segregated from creating Purchase Requisitions.

The person who creates a Purchase Requisition will not approve a Purchase Order and/or Outline Agreement in the same acquisition process.

Employees with access to process payments (Accounts Payable, Treasury, and Procurement) will be restricted from creating Purchase Requisitions.

Employees will be restricted from creating Purchase Requisitions and Purchase Orders in the same acquisition process.

Employees with access to create Purchase Orders or to process payments will not make changes to the Suppliers Master Data

6. Core procurement Core procurement is the general Sourcing / Procurement process of acquiring all the goods and / or services necessary for the Businesses. To perform the Sourcing / Procurement process, Procurement Department should be included in all stages of acquisition, including planning / budgeting. This will enable Procurement to take full advantage of their knowledge and expertise of purchasing techniques and strategies, while supporting other functions and processes affected by the procurement activity.







For visibility purposes, oriented to Global Category Management and suppliers portfolio development, all future purchases expected or budgeted for more than USD 1M (one million), under the management of the Procurement Department, must be entered by the Businesses in the Pipeline tool of Global Supply Chain. To perform spend analysis the Business will use Purchasing Groups in the ERP to distinguish goods, services and other purchases classifications. Coal, energy, and any other purchasing type not under Supply Chain management, will be managed through separate Purchasing Groups.

6.1 Purchase requisitions

General A Purchase Requisition (PR) is required to start the acquisition process to purchase all goods and services, with the following exceptions: - Spot transactions below USD 5,000 (or lower threshold as established by a

Business) Notice: recurring transactions, sourcing with the potential to be converted into Outline Agreements, split transactions to reduce cost, or items related to stock items and / or fixed assets do not apply to this exception;

- Delivery Orders - Non Sourceable Purchase Orders detailed in section 8 of this Policy Purchase Requisitions must be submitted in the ERP system according to the entire need and period for which there is a requirement and will not be partitioned to remain in a lower approval tier as defined in the approval process workflow at local Business level. To promote competition in the acquisitions process, Requestors across all SBUs will prepare Purchases Requisitions with fair anticipation, according to complexity and recurrence of the need and considering the Purchase Requisition to Purchase Order cycle time defined by the SBU’s Supply Chain Department in their Service Level Agreement (SLA), and with the necessary technical information to allow Procurement to create their sourcing plans and negotiation strategy. Purchase Requisitions will contain, at a minimum:

A clear and precise specification, scope, or statement of work

A complete description of the goods and / or services required

Risk assessment, if applicable

Service code and / or goods SKU, if applicable

AES Taxonomy







Quantities to be purchased

Unit of measure

Budget available for the purchase (GL account, Cost Center, Internal Order, Project, etc)

Required delivery or performance schedules that are realistic and specific

GL coding details and other financial and accounting details as required Purchase Requisition Approvers are responsible to ensure that all needed information is completed and will not approve Purchases Requisitions which do not contain sufficient information or lack proper documentation to permit the initiation of a procurement action or which otherwise do not conform to regulatory requirements. Procurement will return - in the ERP - to the Requestor all Purchases Requisitions not compliant with the requirements established in this Policy, indicating the deficiencies of the PR that must be fulfilled by the Requestor. For purchases managed by Procurement Department that should have a PR to PO process but must be requested on Internet, where the Corporate Credit Card is needed to be used, the Requestor will submit the Purchase Requisition before the online purchase is made. These types of purchases will fully comply with this Policy and PR to PO process.

Purchase Requisition for goods Before submitting a Purchase Requisition for goods, the Requestor must review if the good has a SKU code in the ERP. Requirements for goods with a SKU in the ERP are communicated to Procurement submitting a Reservation in the ERP following the guidance of the Non Fuel Inventory Policy. Inventory Demand Planners will use the Material Requirement Planning (MRP) program of the ERP to manage the Reservations in the system. The MRP will automatically generate a Provisional Order to fulfil goods requirement. The Inventory Demand Planner will be responsible for monitoring and analyzing the MRP, and for reviewing and consolidating Provisional Orders and converting them into Purchase Requisitions to Procurement, according to the criteria used for goods replenishment. Requestors must create Reservations in the ERP system for all goods with a SKU, and not manually create Purchase Requisitions. For emergency SKU purchases, Requestors must follow the procedure described on section 7.2 of this Policy.







Purchase Requisitions manually created by a Requestor will be processed by Procurement only if the goods do not have a SKU and / or are not part of the scope of the AES Non Fuel Inventory Policy. If the Requestor needs to incorporate a new code or SKU to the Material Master, it must follow the guidelines of the AES Master Data Administration Policy.

Purchase Requisition for services When submitting a Purchase Requisition for services, the Requestor must review if the service has a code in the Master Data of the ERP to be used in the Purchase Requisition. If the service does not have a code in the ERP, the Requestor will follow the guidelines of the AES Master Data Administration Policy, including criteria for coded / non-coded services. Procurement will be responsible to validate the adequacy between the nature of the service and the service code included in the Purchase Requisition.

Approvals All Purchase Requisitions in an ERP system will follow an automated approval process2 defined in ERP release strategy according to levels of authority within the Business. Approvers will be AES employees responsible for the cost centers and, for CapEx Purchase Requisitions, managers responsible for the investment budget.

When needed, Approvers will delegate their approval authority within the ERP system to another AES employee following the SBU’s Authority Delegation policy.

6.2 Source determination

General When contemplating a purchase, consideration is to be given, where appropriate, to whether there are any existing Contracts with suppliers at a regional, local or global level or if there have been similar transactions made in AES. Local Procurement Managers are responsible for the proper source determination, prioritizing the utilization of Contracts that should be associated with Outline Agreements to reflect in the ERP the price, quantities, terms and expiration of the agreement.

2 Approval process in Brazil SBU is defined by the SBU Expenses and Investments Policy

(Aprovacao de gastos e investimentos Policy, AESCTR0005).







Competitive bidding If there is no Contract or Outline Agreement, Procurement will perform a sourcing process to obtain the required commercial proposals to maximize the most economically beneficial outcome for AES and ensure adequate participation from suppliers. The number of quotations to be requested will be according to the following parameters (or lower threshold as established by a Business):

Purchases below USD 25,000: At least one quotation

Purchases between USD 25,000 - 100,000: A minimum of three quotations

Purchases above USD 100,000: A bidding process (Request For Proposal / Quotation) with at least three proposals

6.3 Request for proposal (RFP) / quotation (RFQ) Procurement will perform requests for: supplier information (RFIs); quotations (RFQs); or proposals (RFPs); (collectively referred to as RFXs), which may lead to the most convenient purchase by AES. In special cases (e.g. Corporate), upon discussion with a Department requiring goods or services, Procurement may elect to have that Department perform its own RFX due to certain circumstances related to the availability of Procurement personnel. Such cases will be discussed with Procurement with sufficient time, and will be approved by the SBU Supply Chain Manager. In these circumstances, it will be required by the Department to follow the guidelines included in this Policy (PR to PO, Compliance process if applicable, among others) All RFX for offshore non-domiciled suppliers, subject to local withholding tax, will incorporate language establishing that AES or its affiliates does not accept gross up pricing. Finance will collaborate with Procurement Department to identify Tax Treaty/Free Trade Agreements and will provide proof of retention templates that can be given to non-domiciled suppliers for their local tax credit purposes. Separate technical and economic proposals will be requested to suppliers in the RFX.

6.4 Awarding For each RFX process, technical and commercial evaluation criteria and weight must be agreed before the evaluation of the proposals from the suppliers. The evaluation of offers will be made considering all approved technical proposals, and all factors that may impact the process (Total Cost of Ownership); price, delivery time, taxes, maintenance, operational costs, warranties, final disposal costs, etc.







All evaluations and negotiations must be documented in order to ensure full transparency and fairness. The purchase will be always awarded to the highest scored proposal, as a result of the technical and economic evaluation. If for any reason the Requestor decides to award the bidding to a different source, the Business will follow the procedure for Single Source procurement in section 7.1 of this Policy. For services, the trend will be towards the consolidation of suppliers established with ample coverage capacity at the regional and/or global level and a work force trained, equipped and specialized so that long-term contracts can gradually be signed at an SBU level. Procurement will work in cooperation with Operations and Maintenance leaders in order to increase the use of alternative suppliers (e.g. non OEM), as much as possible, according to insurance guidelines, criticality, financial convenience, risk assessments and asset management considerations. All alternatives should be considered for major equipment before sourcing new parts from OEMs, including life recovery techniques for parts. All medium or / and high risk services suppliers must be introduced to the safety and occupational health management system of the Business in order to be considered in bidding and contacting processes. When selecting a supplier, Procurement will make sure that:

The supplier is registered in the Master Data of the ERP

The supplier has received the Safety and Occupational Health Terms and Conditions for contracting companies and is safety pre-qualified

The supplier complies with corporate Compliance requirements in order to proceed with the contracting, if applicable

The supplier has provided proof of any guarantees required for the process, especially to certify experience, financial support and establishment of bonds

The supplier is in the capacity of execution or provision of the services to be contracted, and

The supplier has confirmed not having any conflicts of interest, be in arrears with or have claims against any of the AES Businesses







6.5 Purchasing documents

Contracts Contracts should be signed by an authorized officer of the AES entity that is entering into the contract3. The SBU Procurement Department should work with the SBU Legal Department to ensure that Contracts include all applicable language. Contracts related to deliverables should include milestones that will trigger payments to the supplier. Those milestones should be reflected in Outline Agreements, Delivery Orders and Purchase Orders. In the ERP, Contracts will be processed as an Outline Agreement, after the submission of a Purchase Requisition for Outline Agreement by the Requestor.

Outline agreements Outline Agreements are documents in the ERP that reflect a Contract or an Agreement between the Business and a supplier, specifying the price maintained over a specific period of time. Outline Agreements are submitted by Procurement and approved in the ERP following the same approval hierarchy as a regular Purchase Order. Once approved, the Business will generate Delivery Orders to request a delivery or execution of the goods / services to the supplier. The Outline Agreements will be used by the Business in order to: Increase efficiency by creating Delivery Orders for high recurrence transactions; PRs

are not required and the Delivery Order will not require further approvals Control and monitor purchases under a legal contract or commercial agreement Increase control of the purchase by creating an Outline Agreement based on the full

statement of work, scope, goods requirements and on the entire period for which there is a requirement

Ensure the use of goods SKU and / or service codification in the ERP

Purchase order

A Purchase Order in the ERP is the only document to formalize purchases from

suppliers. The Procurement Department is responsible for creating and maintaining

3 For contract execution, US SBU will follow the US SBU Contract Execution Policy (Treasury-

005).







Purchase Orders in response to an approved Purchase Requisition or a Requisition from

the MRP.

The Purchase Order will be prepared to include at least the following information:

A brief statement, in non-technical language, of the nature and purpose of the procurement

Supplier's name, address, point of contact and phone number

Ship to address/shipping terms

Billing address

Work order/job order/account number

Payment terms

Mode of shipment (ship via) and incoterms named place, if applicable

Delivery/completion date, if applicable

Item number, if applicable

Complete description of items or services identifying all applicable technical requirements, if applicable

Quantity, unit of measure, unit price and total for each item

Authorized signature(s) and/ or electronic approval

Any locally required labor, taxes, safety, environmental, compliance or legal clauses

Purchase Orders, excluding Delivery Orders, are to be based on the full statement of work, scope, and goods requirements, and on the entire period for which there is a requirement and will not be split to remain in a lower approval level.

Purchase Orders will reflect clear quantities and unit prices, whenever is possible. For

goods purchases, the Buyer will ensure that value of any additional cost necessary to

deliver the goods at the final AES warehouse are included in the Purchase Order and

will be part of the cost of the SKU.

Procurement Department can modify a Purchase Order to correct any errors that do not

change the nature of the purchase, but will not make any addition to existing Purchase

Orders (e.g. further Purchase Requisition line items)

Intercompany purchases

Intercompany Purchase Orders will follow the same process as that of a regular PO, with

the exception of those cases when a previous authorization is needed (e.g. Board of

Director’s authorization) These authorizations must be provided before the submission of

the Intercompany Purchase Order in the ERP.







Purchases approvals and supporting documentation Outline Agreements and Purchases Orders will be approved in the ERP by Supply Chain organization4. Each Business will establish a hierarchy in the SBU Supply Chain organization of approval levels according to the amount of the transaction. Procurement will maintain a digital file with the necessary documentation to prove the transparence of the acquisition process, such as quotation requests, quotations received, quotation evaluation, awarding of goods and / or services and the respective contracting, if applicable. The supporting documentation must contain, at least: Purchase requisition, duly authorized according to the hierarchy level Request for Quotations or Terms of Reference of the goods and / or services to be

procured, with all technical data, which could be technical evaluations of engineers, drawings, specifications, inspection requirements and lists of special equipment required, and commercial evaluations, among others

Awarding evaluation document including all received proposals and awarding criteria Final evaluation of proposals by Procurement Compliance documents, if applicable for the Business Purchase Order, duly authorized according to the hierarchy level Modifications to Purchase Orders and Addenda to signed Contracts (if applicable) The approved Outline Agreement / Purchase Order with all supporting documentation should be retained for a period as required by local legislation or taxation authorities.

Compliance process The AES Ethics and Compliance Department administers a process to ensure that business transactions with third parties receive appropriate due diligence review and include appropriate language to address any compliance risks. Supply Chain will fully comply with Ethics and Compliance guidelines.

Non-Disclosure agreements (NDA) If the procurement process with a supplier may contain confidential information from AES or its affiliates, the Buyer will include a Non-Disclosure Agreement (NDA) as part of the process.

4 Approval process in Brazil SBU is defined by the SBU Expenses and Investments Policy

(Aprovacao de gastos e investimentos Policy, AESCTR0005)







6.6 Savings reporting and calculation Supply Chain should calculate savings and benefits following the formulas and guidance from Global Supply Chain. Businesses will consider savings against budget, and benefits against a baseline or negotiation, withholding tax and working capital benefits. All savings and benefits supporting documentation will be validated and signed off by the Supply Chain Manager on a monthly basis. Savings against budget will be communicated to Finance in order to record the savings. Requestor will be responsible to coordinate the availability of the savings reported to Finance. If wanted to re-use the savings in a different project or purchase, the Business must follow the funds approval procedure.

7. Special procurement

7.1 Sole and single source

Sole source In order to expedite the operational activities and avoid unnecessary recurrent processes, the Procurement Department will maintain, per Business, a list of pre-approved Sole Source suppliers for specific goods and services where considered an exclusive source of procurement (e.g. Authorized Distributors, Copyright manufacturers, etc) or there is a long term agreement (e.g. LTSAs, OPSAs) This list will be approved by the SBU Supply Chain Manager and reviewed at least once a year to make sure that source alternatives do not exist in the market. The following are examples of reasons to consider a Sole Source supplier:

Long term agreements: Business has entered into exclusivity agreements with supplier in terms of materials and/or services for a specific period of time

Natural monopoly: In the market, there is only one company that produces, distributes or provides the service

Compatibility: The service or material must be of a specific brand, due to compatibility issues

Patent or Trademark: The product is a replacement part of a specific brand or is a piece that is unique in its class

Project continuity: The product or service is necessary for the maintenance or continuity of a project

Unique design: The product must comply with design specifications that can only be offered by one supplier







Technical risk: The supplier has a certification in the country and/or in the world because of its capacity and knowledge in matters of the technology that fulfills the need

Strategic decision: There is a strategic relationship with the supplier due to reasons of associations, alliances, relationship of just-in-time delivery

Authorized distributor: The company is the only one legally authorized to provide the service in the country

All single Sole Purchase Orders will be processed using a specific Purchasing Group5 in the ERP.

Single source purchases A Single Source refers to supplier selected despite having additional alternatives in the market. AES discourages end-users from preparing Requisitions that limit the solicitation to one supplier; therefore, AES will require specific justifications to be included in the Purchase Order when being created. To proceed with a Purchase Order submission in the ERP, the Requestor will include in the Purchase Requisition a written justification (e.g. memorandum, email) with Requestor’s Manager approval. All single Source Purchase Orders will be processed using a specific Purchasing Group in the ERP.

7.2 Emergency purchases Emergency purchases should be relatively rare and the facts related to the emergency must be documented in order to support this classification. AES has defined only the following as emergency cases:

When the health or safety of an employee are involved

There is immediate danger of loss or damage to AES Business

Some phase of critical operations may experience an interruption if immediate action is not taken

The environment or AES site surroundings may be damaged Failure to anticipate purchasing needs is not considered an emergency situation.

5 In Brazil SBU, the Business will use document types instead of Purchasing Groups to identify

Emergencies, Single and Sole Source processes







Emergency Purchases still require a Purchase Requisition and Purchase Order once the emergency has been addressed. To formalize the PR to PO process, the Businesses will use a special Purchasing Group. For Emergency Purchases that involves a SKU, the Requestor will be authorized to submit a Purchase Requisition, using the Emergency Purchasing Group of the ERP.

Requestor procedures Normal working hours: All emergency purchases occurring during normal working hours are processed through Procurement as follows:

1. The requestor department will notify Procurement immediately, with as much information as possible about the emergency purchase required, so that the purchasing action can be initiated immediately

2. Simultaneously, a Purchasing Requisition with the Emergency Purchasing Group is prepared by the end user and approved in accordance with SBU approval strategy

3. Procurement or using department contacts as many suppliers as necessary to arrange the emergency purchase. If there is not enough time to get authorization, the purchase can be completed by telephone, and the Purchase Order completed after the fact and delivered to the supplier

4. The Buyer or a member from the using department requests expedited delivery. The person making the Requisition may be required to pick up the emergency purchase from the supplier if timely delivery is not available.

Evenings, weekends and holidays: When Procurement support is unavailable, process emergency purchases as follows:

1. The responsible member of the using department takes whatever steps are necessary to procure needed goods or services to relieve the emergency. These should include only those goods or services needed during the evening, weekend or holiday

2. When the goods are delivered or services performed, the responsible member physically acknowledges receipt and separates the accompanying physical documents (for example Bill of Lading, Packing Slip, etc.)

3. On the first working day following the emergency, the responsible member: a. Prepares a Purchase Requisition using the Emergency Purchase Group b. Attaches the supplier’s invoice or packing slip verifying receipt of all items

indicated on the invoice or packing slip c. Send all information to Procurement to process the PO and to the Warehouse to

make the good receipt, if applicable d. Process the service receipt, if applicable







Emergency PR approval All emergency PRs will be done in the ERP using the Emergency Purchase Group and approved as defined by each SBU.

Emergency PO approval Emergency Purchase Order will be created by the Procurement Department using the Emergency Purchasing Group, and the approval workflow of the document will be defined by the Businesses considering at least one Executive approval (e.g. COO) The Requestor should send to Procurement a memorandum including specific reasons for waiving the standard purchasing procedure. The Emergency memorandum will be approved by the Executive (e.g. COO) and will be part of the supporting documentation of the Purchase Order.

8. Non Sourceable procurement Categories considered as Non Sourceable by the Procurement Department will be processed in the ERP without a Purchase Order. The categories that a Business may elect to process without a PO are: Bank fees Benefits to employees, HR related. The commercial transaction between AES and a supplier for HR / benefit purposes will have a PO in the ERP (e.g. computers sales to employees) Board of Directors fees and expenses Collateral / margin call payments Commodity settlements Confidential employee transactions Customer refunds Damage claims Donations and contributions Dues and memberships Education costs, excluding training Employee reimbursements Filing fees Financing Fines Insurance premiums Interviewee reimbursements Legal settlements (non-attorney fees)







Newspaper ads Patent office fees Penalties Permits Postage Rebates Registrations Regulatory required payments Relocation Royalties Seminars, excluding training Subscriptions Tax payments Transactions specifically exempted by the Board of Directors (e.g. financing transactions) Transmission & production expenses Travel (e.g. airline tickets) Treasury-managed fees and transactions Utilities ( e.g. electric bills )

9. Open PO maintenance The Procurement Department will close, once per quarter, any open or undelivered PO line after one year (or lower as defined by the Business) from delivery date. Procurement Department will send a communication to suppliers after closing a non-delivered PO. Closed POs will not be reopened.

10. Goods and services receipt

10.1 Goods receipts The receiving department or a designated individual(s) is responsible for ensuring that goods are received in accordance with the approved Purchase Orders. All goods receipts should be referenced to the relevant AES Purchase Order. All receipt reversals should reference the original entry and be processed timely and accurately. Consult the AES Non Fuel Inventory Policy regarding any applicable procedures for goods receipts.







10.2 Service receipts In an ERP system, service receipts will be recorded through service Entry Sheets6. The service receipt should be recorded only after the Service Receiver (person for whom the service was completed) or their designee has confirmed that the services were provided in accordance with the approved Purchase Orders or Contract, which means that the amount of services received is ready to be processed for payment and no additional control is needed until the “three way match” as part of the Invoice Processing. Thus, any estimations (due to uncertainty about the extent or quantity of the service provided) have to be handled through the Accruals Process rather than performing a service receipt. Prior to the month-end close, the Service Receiver must ensure that all the approved services have been entered into the system. As a result of the service receipt, the ERP will generate an Entry Sheet that will be sent automatically to the supplier, in order to complete the Accounts Payable process. All receipt reversals should reference the original entry and be processed timely and accurately.

11. Returns to suppliers

Goods may be returned to the supplier for a variety of reasons e.g. incorrect deliveries,

out of specification goods, exceeded tolerances or items shipped without an authorized

PO.

A goods receipt correction must be posted in the system and a credit/debit memo should

be obtained based on local business practices. The Buyer is responsible for notifying the

supplier and obtaining confirmation that the supplier will accept the returns of the goods,

and for communicating with AP to ensure credit memos are received by AES or debit

memo is issued to the supplier accordingly for the returned goods.

Credit memos received should be referenced by AP against the original supplier invoice

received for the returned goods, and original PO.

Consult the AES Non Fuel Inventory Policy regarding any applicable procedures for returns to suppliers.

6 Not applicable for Corporate, Arlington office.







12. Invoice processing Suppliers will be directed to send PO-related invoices to the appropriate Account Payable (AP) Department, unless there is a requirement for the invoices to be sent elsewhere. For example, in some countries there is a legal requirement for the invoice to be provided with the materials when delivered. Another example is where supplier invoices are paid from a central location for several Businesses that do not all have access to the same ERP system. In such situations the department receiving the invoice will be responsible for delivering it to AP promptly, taking into consideration local policy and circumstances. Non-PO invoices should be directed only to AP. Invoices are processed for payment within the Accounts Payable (AP) Department and only individuals with proper security roles can access the system to process invoice documents. The AP Department is responsible for verifying that supplier invoices meet the minimum requirements before recording in the system. Invoices must contain the AES PO reference number and Entry Sheet number (if applicable), and any details required by local law or regulations. Invoices must be addressed to the correct entity’s name; otherwise they will not be paid. When the invoice does not satisfy these requirements, or is inaccurate, the AP Department will return the invoice to the supplier and contact the supplier to request an invoice that meets the basic requirements. Before keying the invoice in the system, AP should review the sales tax amount included in supplier invoices to ensure the tax is computed accurately before invoice processing. AP should also identify and record any additional tax that is required to be paid, for example, use tax in the US. In an ERP system, where possible, there will be an automated control that prevents the posting of a duplicate invoice. The duplication check will be based on a match of all of the following: company code, supplier, and invoice number. At the option of the Business, this duplication check may also consider the invoice date.

12.1 PO invoices All PO related invoices are required to go through a “three-way match” for services and goods. This matching process is automated in the ERP. In an ERP system, for goods and services following the goods / services receipts process, a "three-way matching" process between the Purchase Order, supplier invoice







and a goods receipt and / or service entry sheet is required before payment for goods or services are initiated. Tolerances must be defined by a monetary limit and percentage and relate to price (PO price vs. invoice price). The system should be configured for setting the price tolerance so that the Purchase Order and invoice can deviate within 5%, but not to exceed USD 1,000. The Business can use its discretion to apply limits of less than 5% or less than USD 1,000. The quantity of goods / services invoiced should be equal to or less than the quantity recorded as a receipt. If the invoice matches PO quantity and price, and the goods received quantity, the invoice is posted and scheduled for payment, based on the invoice payment terms. If the

tolerances described above are exceeded, the invoice will be blocked for payment and sent to the Buyer or creator of the Purchase Order for review and to solve the discrepancy. In an ERP with ReadSoft as an OCR tool, a workflow will be sent to the Buyer or creator of the Purchase Order with the discrepancy that must be solved. A review of blocked invoices needs to be carried out on a timely basis. A follow up with suppliers and/or Buyer or creator of the Purchase Order should be done on a regular basis to resolve any discrepancies that still may exist. Discrepancies should be resolved on a timely basis, ideally within the same accounting cycle, not to exceed 30 days. PO invoice cancellations need to be processed in the system on a timely basis to avoid payment on cancelled or erroneous invoices. Invoice cancellations are also a type of document reversal.

12.2 Non-PO invoices Invoices for Non-PO purchases will be reviewed and approved by the department receiving the goods / services prior to payments being issued. The approval levels for Non-PO invoices cannot exceed those for purchase requisitions. In an ERP with ReadSoft as an OCR tool, the approval levels will be configured in the system and should be validated by Supply Chain. Non-PO invoices are only permitted if the expense is under USD 5,000 (section 6.1 Spot transactions below USD 5,000) and / or for categories detailed in section 8 of this Policy. AP should require that employees comply with the guidelines set forth in this Policy. Invoices should include the total amount of the Non-PO purchase, and will not be partitioned to remain in a lower approval tier as defined in the approval process workflow at the local Business level.







In an ERP without ReadSoft as an OCR tool, if the invoice is complete, an individual in AP will park the transaction and another individual in AP upon review will post the transaction and the invoice will be scheduled for payment based on the due date. In an ERP with ReadSoft as an OCR tool, if the invoice is complete, an individual in AP will post the transaction through ReadSoft and such transaction will be automatically blocked for payment, until another individual in AP; upon review unblocks it. Review should be performed on a timely basis within the same month. Thus the invoice will be scheduled for payment based on the due date. AP is responsible for releasing payments. Segregation of duties will be maintained between approving and processing the payment file. Payment should not be issued until goods or services are received, with the exception of properly approved prepayments.

13. Goods Received / Invoice Received (GR/IR) account

The Business is required to record accruals for expenses incurred but not yet paid.

Accounting will follow up with department heads to determine if there are any significant

goods or services received that have not been entered as a receipt (PO based), or that

have not been invoiced (Non-PO based). See the separate Accounting policy on

Accruals and Contingencies for further details.

The AP Department will be responsible for the Goods Received / Invoice Received

(GR/IR) review. The GR/IR account should be reviewed by General Accounting with

follow-up on any issues that are not resolved timely (within 60 days).

The general ledger to AP subsidiary ledger reconciliation should be performed and

reviewed for quarter-ends at a minimum, by individuals designated by the Business

Controller.

In the ERP there should not be manual postings to reconciliation accounts. Master data

for reconciliation accounts should be set for automatic post only. General ledger

accounts that relate to a subsidiary ledger (e.g. AP) should be set up as reconciliation

accounts to prevent direct postings.

The Business Controller or his designee should review the AP ledger at least monthly.

The review should include a review of detailed AP balances analyzed by supplier, long

outstanding balances and debit balances in AP, and a follow up of these items with the

Purchasing Organization or the supplier (e.g. ensuring credits from the supplier when

appropriate).







14. Down payments This Policy is based on not making advance payment to suppliers. However, there are certain situations were a down payment to a supplier may be required in order to obtain goods or services. Advance payments must be associated to an approved Purchase Order and cannot be made if there is no certainty about the initial date of execution, construction and reception of the goods and services. In advance payments associated to contracts in force longer than one year, only the percentage associated to the annual amount can be paid in advance; that is, taking as the basis the value of the Order (Purchase Order) for the current year.

15. Payments Payments should have a supporting invoice, unless some exemptions as taxes, donations, lease agreement, etc. For every payment run, AP should generate a report that displays all invoices released for payment. The task of releasing previously blocked invoices for payment should be limited to supervisory accounting staff to perform. The Business Controller or delegate should identify unblocked invoices released for payment using the Release Invoices for Payment Report and ensure that unblocked invoices are supported by required authorized approval or other supporting documentation before processing payment. The Business Controller or AP Supervisor needs to review the payment exception list for accuracy. Errors are to be corrected on a timely basis prior to the actual payment run. In the ERP, during the payment run process the method of payment is specified for each payment. A check or Automated Clearing House (ACH)/ wire transfer will be prepared by the AP Staff for each payment. ACH/ wire transfers will be used in the following instances: - the payment amount exceeds the maximum allowed for checks at the business; - a wire transfer is requested by the supplier or is required in order to ensure timely

payment; - payments to a supplier in another country; - the business elects to use ACH as its preferred payment method.







System access rights should be established such that an individual can perform only one of the following: - initiate and edit a payment run; - approves and generates the final (actual) payment run. The monthly bank reconciliation will identify discrepancies in payment amounts. Where available, positive pay systems should be implemented.

15.1 Preferred payment term AES’ preferred payment term is at least 30 days -or more as defined by the Businesses- after the date of receipt of the invoice. This general guideline will apply for Businesses unless restricted by local regulations or other commercial conditions in benefit of the Business.

15.2 Payment vouchers a) Non-SAP system: When payment is due, a Payment Voucher (PV) will be prepared

by the AP Staff who will attach all relevant supporting documentation; supplier invoice, PO, PR, payroll record, petty cash voucher, tax return, dividend computation, remittance advice, etc.

Invoices included in the same payment proposal list that are payable to one supplier may be consolidated in one PV. When making payments, all debit transactions must be taken into account to net against the invoice(s). Payment shall be based on the invoice amount less the debit memo amount. The debit memo must be attached to the corresponding invoice to account for the deduction to the amount payable. Where the invoice to which the return of goods applies has already been paid, the debit memo shall be applied to the next payment cycle. AP staff shall file invoices with the corresponding debit memos for future reference.

b) SAP: After the payment run, the system generates a payment list. The signatory should review the PV and the supporting documentation prior to signing the check. (This does not apply to automated signatures.) Immediately after the PV’s have been reviewed and approved by the AP Supervisor, and any necessary second signatures obtained (as per section 203 of the AES Manual of Financial Policies), the AP Supervisor or staff will mail signed checks directly to the payee.







15.3 Manual checks preparation ‘Manual checks’ are any checks that are not system generated. A member of the AP staff is responsible for preparing manual checks and for safeguarding the checkbook. All checks shall be pre-numbered and sequentially issued. Checks shall not be made payable to “cash”, “bearer” or left blank. All checks written shall be recorded in a payment register either manually or in the financial system. The payment register shall serve as a monitoring or control device for the sequential issuance of authorized check payments. The AP staff will provide supporting documentation to the check signatory when requesting a signature on the check. The Business Controller or designee shall obtain a listing of all manual checks. The listing should be reviewed for unusual payments to suppliers and non-sequential check numbers, and should be compared to the manual check register, check stubs or evidence of cancelled checks, and any discrepancies should be investigated.

15.4 Clearing and cancellation of checks Checks and/or Automated Clearing House (ACH)/wire confirmations will be matched to cancelled voucher packages and maintained in electronic or hard copy format, in a secure location, for the appropriate period as required by applicable laws and regulations. Cancelled / void checks shall be properly voided, for example by stamping the word "Cancelled" on the face of the check. This shall also be indicated in the applicable check register, to maintain continuity, and shall then be filed in numerical order with other checks returned by the bank, where applicable. All undeliverable payments will be returned to the AP Department. The Business Controller or designee should review all returned checks prior to voiding payments accordingly reversed against invoices and subsequent re-issuance of payments. Unpresented checks which have already expired as identified through the monthly bank reconciliation process should also be reviewed by the Business Controller prior to voiding, booking payment reversal entries and subsequent re-issuance where appropriate. The Business Controller should establish a process that ensures compliance with relevant escheatment laws.







On a monthly or more frequent basis, AP shall also compare the check register (in SAP, code FCHN) to payment list S_P99_41000099 or equivalent to monitor the completeness of the check run including used, voided, cancelled or renumbered checks.

15.5 Electronic Funds Transfer (EFT) The AP Manager/ Staff shall ensure that the following controls exist around Electronic Funds Transfers:

Existence of written agreements with the bank as to the technical and security protocols that will be followed for transmission of payment files.

Validation of payee bank details

Individual payments are verified against appropriately approved supporting documentation

Segregation of duties: individuals with access rights to update banking information should not be able to process payments

Segregation of duties: individuals authorized to forward transfer requests to the bank should not be able to create the transfer request in the first place

For business units with standing order instructions issued to the bank for periodic recurring payments, the AP staff needs to review all standing orders monthly to ensure supplier payments are terminated once the underlying supplier contract or service agreement expires.

15.6 Physical security of cash disbursement equipment and materials

Unreleased / unused checks shall be kept under lock and key with access restricted only to AP and Treasury management and staff, as applicable. All checks, check logs, signature plates and check signing equipment will be stored in a secured area. Access will be granted only to authorized individuals with cash disbursement responsibilities. Access to on-line banking software will be limited to authorized personnel. Passwords will be used to gain access to the system and will be changed on a monthly basis for each user. Password sharing is strictly prohibited. The Business Controller should assign responsibility for periodically accounting for and investigating missing checks, if any.







16. Contacts Any questions or comments on this Policy should be emailed to Global Supply Chain and / or Corporate Center Accounting.

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