In this Quarterly Report on Form 10-Q, the terms "AES," "the Company," "us," or "we" refer to The AES Corporation and all of its subsidiaries and affiliates, collectively. The term "The AES Corporation" or "the Parent Company" refers only to the parent, publicly-held holding company, The AES Corporation, excluding its subsidiaries and affiliates.

Forward-Looking Information

The following discussion may contain forward-looking statements regarding us, our business, prospects and our results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in the "Risk Factors" section of our 2007 Form 10-K filed on March 17, 2008. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise interested parties of the risks and factors that may affect our business.

The interim financial statements filed on this Form 10-Q and the discussions contained herein should be read in conjunction with our 2007 Form 10-K, which includes audited consolidated financial statements for our three fiscal years ended December 31, 2007.

Restatement of Consolidated Financial Statements

The Company restated its consolidated financial statements as of and for the years ended December 31, 2005 and 2006 along with the condensed consolidated financial statements for each of the three months ended March 31, 2007, June 30, 2007 and September 30, 2007 in its 2007 Form 10-K filed with the SEC on March 17, 2008. The restatement was primarily a result of the Company's material weakness remediation efforts related to accounting for contracts. The impact of the adjustments related to contract accounting resulted in an increase of approximately $7 million to income from continuing operations and net income for the three months ended September 30, 2007 and an increase of $8 million and a decrease of $8 million to income from continuing operations and net loss, respectively, for the nine months ended September 30, 2007.

In addition to the adjustments related to contract accounting, the Company identified a number of smaller non-cash adjustments to its prior period financial statements ("Other Adjustments"), none of which was material, individually or in the aggregate, to the Company's financial statements. The impact of the Other Adjustments resulted in a decrease of approximately $6 million to income from continuing operations and net income for the three months ended September 30, 2007 and an increase of $1 million and a decrease of $1 million to income from continuing operations and net loss, respectively, for the nine months ended September 30, 2007. The restatement adjustments had no material impact on net cash flows.

The total impact of all of the restatement adjustments was an increase of $1 million to income from continuing operations and net income for the three months ended September 30, 2007 and an increase of $9 million and a decrease of $9 million to income from continuing operations and net loss, respectively, for the nine months ended September 30, 2007. Please refer to the Company's 2007 Form 10-K for additional discussion on the restatement adjustments discussed above.

                                         Three Months Ended                           Nine Months Ended
                                         September 30, 2007                           September 30, 2007
                                      (in millions, except per                     (in millions, except per
                                           share amounts)                               share amounts)
                                  As                                           As
                              Originally       Restatement                 Originally       Restatement
                                 Filed         Adjustments    Restated        Filed         Adjustments    Restated
Revenues:
  Regulated                    $     1,742      $        (1 )  $  1,741     $     5,056      $       (11 )  $  5,045
  Non-Regulated                      1,729               14       1,743           4,868                2       4,870

       Total revenues                3,471               13       3,484           9,924               (9 )     9,915

Cost of Sales:
  Regulated                         (1,153 )             (4 )    (1,157 )        (3,360 )             25      (3,335 )
  Non-Regulated                     (1,478 )             (2 )    (1,480 )        (3,980 )              -      (3,980 )

       Total cost of sales          (2,631 )             (6 )    (2,637 )        (7,340 )             25      (7,315 )

  Gross margin                         840                7         847           2,584               16       2,600

  General and
  administrative expenses              (93 )              -         (93 )          (264 )              3        (261 )
  Interest expense                    (448 )             (5 )      (453 )        (1,281 )             (8 )    (1,289 )
  Interest income                      122                -         122             363               (4 )       359
  Other expense                        (25 )              1         (24 )           (90 )             11         (79 )
  Other income                          25                1          26             324                -         324
  Gain on sale of
  investments                            -                -           -              10                -          10
  Impairment expense                   (38 )              -         (38 )           (38 )              -         (38 )
  Foreign currency
  transaction gains on net
  monetary position                      2                7           9              (2 )             13          11
  Other non-operating
  expense                                -                -           -             (45 )              -         (45 )

  INCOME FROM CONTINUING
  OPERATIONS BEFORE INCOME
  TAXES, EQUITY IN
  EARNINGS OF AFFILIATES
  AND MINORITY INTEREST                385               11         396           1,561               31       1,592
  Income tax expense                  (146 )            (10 )      (156 )          (601 )             (5 )      (606 )
  Net equity in earnings
  of affiliates                         15                -          15              56                1          57
  Minority interest
  expense                             (163 )              -        (163 )          (534 )            (18 )      (552 )

  INCOME FROM CONTINUING
  OPERATIONS                            91                1          92             482                9         491
  Income from operations
  of discontinued
  businesses, net of
  income tax                             -                -           -              71                -          71
  Gain (loss) from
  disposal of discontinued
  businesses, net of
  income tax                            12                -          12            (665 )              -        (665 )

  NET INCOME (LOSS)            $       103      $         1    $    104     $      (112 )    $         9    $   (103 )

  BASIC EARNINGS (LOSS)
  PER SHARE:
       Income from
       continuing
       operations, net of
       tax                     $      0.14      $         -    $   0.14     $      0.72      $      0.02    $   0.74
       Discontinued
       operations, net of
       tax                            0.01             0.01        0.02           (0.89 )              -       (0.89 )

       BASIC EARNINGS
       (LOSS) PER SHARE        $      0.15      $      0.01    $   0.16     $     (0.17 )    $      0.02    $  (0.15 )

  DILUTED EARNINGS (LOSS)
  PER SHARE:
       Income from
       continuing
       operations, net of
       tax                     $      0.14      $         -    $   0.14     $      0.71      $      0.02    $   0.73
       Discontinued
       operations, net of
       tax                            0.01                -        0.01           (0.88 )              -       (0.88 )

       DILUTED EARNINGS
       (LOSS) PER SHARE        $      0.15      $         -    $   0.15     $     (0.17 )    $      0.02    $  (0.15 )

AES is a global power company. We own a portfolio of electricity generation and distribution businesses with generation capacity totaling approximately 43,000 MW and distribution networks serving more than 11 million people. Our global footprint includes operations in 29 countries on five continents with 83% of our revenue for the third quarter of 2008 generated outside the United States.

We operate two primary lines of business. The first is our Generation business, where we own and/or operate power plants to generate and sell power to wholesale customers such as utilities and other intermediaries. The second is our Utilities business, where we own and/or operate utilities to distribute, transmit and sell electricity to end-user customers in the residential, commercial, industrial and governmental sectors within a defined service area. Each of our primary lines of business generates approximately half of our revenues. We are also developing an Alternative Energy business. Alternative Energy includes strategic initiatives such as wind and solar generation and climate solutions, such as the production of emissions credits.

Generation. We currently own or operate 124 Generation facilities in 27 countries on five continents. We also have 15 new Generation facilities under construction, totaling more than 3,000 MW. Our Generation businesses use a wide range of technologies and fuel types including coal, combined-cycle gas turbines, hydroelectric power and biomass.

The majority of the electricity produced by our Generation businesses is sold under long-term contracts, or power purchase agreements, to wholesale customers. These businesses often reduce their exposure to fuel supply risks by entering into long-term fuel supply contracts or fuel tolling contracts where the customer assumes full responsibility for purchasing and supplying the fuel to the power plant. These long-term contractual agreements result in relatively predictable cash flow and earnings and reduce exposure to volatility in the market price for electricity and fuel; however, the amount of earnings and cash flow predictability varies from business to business based on the degree to which its exposure is limited by the contracts that it has negotiated.

The balance of our Generation businesses sells power through competitive markets under short-term contracts or directly in the spot market. As a result, the cash flows and earnings associated with these businesses are more sensitive to fluctuations in the market price for electricity, natural gas, coal and other fuels. However, for a number of these facilities, including our plants in New York, which include a fleet of low-cost coal fired plants, we have hedged the majority of our exposure to fuel, energy and emissions pricing for the next few years.

Utilities. Our Utilities businesses distribute power to more than 11 million people in seven countries on five continents. Our Utilities business consists primarily of 14 companies owned and/or operated under management agreements, all of which operate in a defined service area. These businesses operate under a variety of structures ranging from pure distribution businesses to fully integrated utilities which generate, transmit and distribute power.

Alternative Energy. Although operations of our Alternative Energy businesses are not currently large enough to be considered a separate segment, we expect this high growth sector to be a material contributor to our revenue and gross margin in the future. As demand for more sustainable and environmentally friendly sources of energy grows, we continue to invest in Alternative Energy with a current focus on increasing our wind power capacity and building our climate solutions business for greenhouse gas ("GHG") reduction. AES entered the wind business in 2005 and today we have 12 wind generation facilities with more than 1,000 MW of wind projects in operation. In addition, we are developing initiatives in other countries that are approved for GHG projects under the Kyoto Protocol and marketing the credits created. AES is well established in 19 such countries.

Segments. Our Generation and Utilities businesses are organized within four defined geographic regions: (1) Latin America, (2) North America,
(3) Europe & Africa, and (4) Asia and the Middle East

("Asia"). Three regions, Latin America, North America and Europe & Africa, are engaged in both Generation and Utility businesses. Our Asia region operates only Generation businesses. Accordingly, these businesses and regions account for seven operating segments. "Corporate and Other" includes corporate overhead costs which are not directly associated with the operations of our seven primary operating segments, interest income and expense, other intercompany charges such as management fees and self-insurance premiums which are fully eliminated in consolidation, and revenue, development costs and operational costs related to our Alternative Energy business, which is currently not material to our operations.

Key Drivers of Our Results of Operations. Our Utilities and Generation businesses are distinguished by the nature of their customers, operational differences, cost structure, regulatory environment, and risk exposure. As a result, each line of business has slightly different drivers which affect operating results. Performance drivers for our Generation businesses include, among other things, plant availability and reliability, management of fixed and operational costs, and the extent to which our plants have hedged their exposure to fuel cost volatility. For our Generation businesses which sell power under short-term contracts or in the spot market, the most crucial factors are is the market price of electricity and the plant's ability to generate electricity at a cost below that price. Growth in our Generation business is largely tied to securing new power purchase agreements, expanding capacity in our existing facilities, and building new power plants. Performance drivers for our Utilities businesses include, but are not limited to, reliability of service, negotiation of tariff adjustments, compliance with extensive regulatory requirements, management of working capital, and in developing countries, reduction of commercial and technical losses. The results of operations of our Utilities businesses are sensitive to changes in economic growth and weather conditions in the areas in which they operate.

One of the key factors which affect both our revenue and costs of sales is change in the cost of fuel. When fuel costs increase, many of our Generation businesses with long-term contracts and our Utilities businesses are able to pass these costs on to the customer through fuel pass-through or fuel indexing arrangements in their contracts or through increases in tariff rates. Therefore, in a rising fuel cost environment as was the case in 2007 and much of 2008, increases in fuel costs for these businesses often resulted in increases in revenue (though not necessarily on a one-for-one basis). While these circumstances may not have a large impact on gross margin, they can significantly affect gross margin as a percentage of revenue. Other factors that can affect gross margin include our ability to expand the number of facilities we own and in our existing plants, our ability to sign up new customers and/or purchasing parties, collect receivables from existing customers and operate our plants more efficiently.

Credit Crisis and the Macroeconomic Environment

In the second half of 2007, conditions in the credit markets began to deteriorate in the United States and abroad. In the third quarter of 2008, this crisis and associated market conditions worsened dramatically, with unprecedented market volatility, widening credit spreads, volatile currencies, illiquidity, and increased counterparty credit risk.

Beginning in the second half of 2007, the Company began a series of debt-related initiatives, including the refinancing of approximately $2.0 billion of recourse debt in transactions executed in the fourth quarter of 2007 and the second quarter of 2008. As a result of these transactions, The AES Corporation has no remaining maturities due in 2008 and has reduced the 2009 maturities for its recourse debt from $467 million as of June 30, 2007 to $154 million as of September 30, 2008. The AES Corporation also eliminated and/or modified many of the restrictive covenants in its debt agreements, including in its 8.75% Second Priority Senior Secured Notes due 2013 and its senior secured credit facility. The amendments made the financial covenants less restrictive and made certain other changes, such as expanding the Company's ability to repurchase its own common stock. For further information regarding these covenant changes, see the Capital Resources and Liquidity-Parent Company Liquidity section of Management's Discussion & Analysis. In addition, the Company

successfully replaced Lehman Commercial Paper with another bank as a lender under its senior secured credit facility.

Because of the factors described above, management currently believes that it can meet its liquidity requirements through a combination of existing cash balances, cash provided by operating activities, financings, and, if needed, borrowings under its secured and unsecured facilities. Although there can be no assurance due to the challenging times currently faced by financial institutions, management believes that the participating banks under its facilities will be able to meet their funding commitments.

The Company is also subject to credit risk, which includes risk related to the ability of counterparties (such as parties to our power purchase agreements, fuel supply agreements, our hedging agreements, and other contractual arrangements) to meet their contractual payment obligations or the potential nonperformance of counterparties to deliver contracted commodities or services at the contracted price. While counterparty credit risk has increased in the current crisis and there can be no assurances regarding the future, to date the Company has not suffered any material effects related to its counterparties.

However, in the event that the credit crisis deteriorates further, or is protracted, or results in deteriorating macroeconomic conditions, including a global recession, there could be a material adverse impact on the Company. The Company could be affected if such events or other events occur such that participating lenders under its secured and unsecured facilities fail to meet their commitments, or the Company is unable to access the capital markets on favorable terms or at all, is unable to raise funds through the sale of assets, or is otherwise unable to finance or refinance its activities, or if capital market disruptions result in increased borrowing costs (including with respect to interest payments on the Company's variable rate debt).

Certain subsidiaries of the Company have defined benefit pension plans. The Company periodically evaluates the value of the pension plan assets to ensure that they will be sufficient to fund the respective pension obligations. The Company's exposure is mitigated due to the fact that the asset allocations in our largest plans are more heavily weighted to investments in fixed income securities that have not been as severely impacted by the recent equity market declines. Nevertheless, given the declines in worldwide asset values, it is possible that the value of these pension plan assets has declined, which could result in an increase in pension expense and funding requirements in future periods, which may be material. The next remeasurement of the plans' assets and liabilities will occur on December 31, 2008 and therefore we can not estimate the potential amount of increases in future pension expense or funding requirements at this time.

The Company could also be adversely affected if general economic or political conditions in the markets where the Company operates deteriorate, resulting in a reduction in cash flow from operations, a reduction in the value of currencies in these markets relative to the dollar (which could cause currency losses), an increase in the price of commodities used in our operations and construction.

If any of the foregoing events occur, such events (or a combination thereof) could have a material impact on the Company, its results of operations, liquidity, financial covenants, and/or its credit rating.

Furthermore, management continuously reviews its pipeline, regardless of the economic environment. In the event that management determines that, because of macroeconomic challenges or other factors, certain projects in the pipeline cannot be financed, will not provide the returns originally anticipated, or are otherwise unfeasible, or that other uses of capital such as debt repayment or stock repurchases offer a better return on the Company's capital, or that the funds should be used for working capital, the Company may determine that it will not pursue certain projects in its pipeline. The Company may also pursue other options with respect to its pipeline, such as the addition of partners who can contribute capital, share project risk and/or provide strategic expertise. There can be no assurance regarding the outcome of any such decisions on the Company, its results of operations or its financial condition.

During the third quarter, the Company continued to capitalize on its growth strategy through the expansion into new ventures in alternative energy and continued development of existing projects. The Company continued to expand and manage its portfolio through the following initiatives:

º •
º In July 2008, AES acquired a 49% interest in Guohua Hulunbeier Wind Farm, a 49.5 MW wind farm in China. The Company also reached a separate agreement with Guohua to move to phase II of our jointly-owned Huanghua wind project to expand the facility, doubling the capacity to 99 MW. AES has a 49% interest in the Huanghua Project.

º •
º In July 2008, the Company achieved early successful testing of simple cycle operation for the Amman East facility in Jordan, a 370 MW natural gas-fired project expected to achieve full combined-cycle operation in the first half of 2009.

º •
º In July 2008, the Company reached an agreement to sell its 70% interest in Jiaozuo, a 250 MW coal-fired generation plant in China. The sale is subject to governmental approvals which are expected in the fourth quarter of 2008.

º •
º In August 2008, the Company increased its ownership in Itabo, located in the Dominican Republic, from 45% to 50%. Itabo is made up of five generation plants that run on coal and gas with a total capacity of 472 MW gross.

º •
º In August 2008, the Company started commercial operations of the 170 MW Buffalo Gap 3 wind farm in Abilene, Texas, bringing the total wind generation capacity of the Buffalo Gap wind farm to 524 MW.

º •
º In September 2008, Greenhouse Gas Services LLC, the Company's joint venture with General Electric, announced an agreement with Google to co-develop projects to reduce greenhouse gas ("GHG") emissions and produce GHG credits. The first project will capture methane gas in North Carolina.

In October 2008, Gener, the Company's generation business in Chile, obtained $1 billion in non-recourse financing to support the development of Angamos, a 518 MW gross coal-fired generation facility in Chile (the "Angamos Project"). The Angamos Project consists of two coal-fired units using advanced technology to mitigate emissions, and will reduce dependence on Argentine natural gas, which has become unavailable in recent years. Construction began on the project in April 2008 and is expected to begin commercial operation in 2011.

On November 6, 2008, a wholly-owned subsidiary of the Company, Inversiones Cachagua Limitada, sold a 9.55% ownership in AES Gener in a private transaction for approximately $175 million. The sale reduces the Company's ownership percentage of AES Gener from 80% to approximately 70.56%. The Company expects to recognize a pre-tax loss of approximately $25 million from this transaction in the fourth quarter of 2008.

Third Quarter and Year to Date Performance Highlights

                                  Three Months Ended                     Nine Months Ended
                                    September 30,                          September 30,
                           2008         2007        % Change      2008         2007       % Change
                                     (Restated)                             (Restated)
                             ($'s in millions, except per          ($'s in millions, except per
                                    share amounts)                        share amounts)
Revenue                   $ 4,345    $     3,484           25 % $ 12,595    $     9,915          27 %
Gross margin              $   958    $       847           13 % $  3,033    $     2,600          17 %
Gross margin as a % of
revenue                        22 %           24 %                    24 %           26 %
Net cash provided by
operating activities      $   784    $       758            3 % $  1,575    $     1,872         (16 )%
Diluted earnings per
share from continuing
operations                $  0.22    $      0.14           57 % $   1.87    $      0.73         156 %

Revenue increased 25% to $4.3 billion for the three months ended September 30, 2008 and 27% to $12.6 billion for the nine months ended September 30, 2008 when compared with the same period in 2007 primarily due to higher rates across all regions, the favorable impact of foreign currency translation and higher volume in Latin America.

Gross margin

Gross margin increased 13% to $958 million for the three months ended September 30, 2008 when compared with the same period in 2007 primarily due to higher rates and volume in Latin America and the favorable impact of foreign currency translation, partially offset by higher fixed costs and a mark-to-market derivative loss on a coal supply contract in Hawaii.

Gross margin increased 17% to $3.0 billion for the nine months ended September 30, 2008 when compared with the same period in 2007 primarily due to higher volume in Latin America, the favorable impact of foreign currency translation, higher rates at our generation businesses in the Dominican Republic and Argentina and a net mark-to-market derivative gain on a coal supply contract . . .