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 2008 Form 10-K filed on February 26, 2009. 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 2008 Form 10-K.

Overview of Our Business

We are a global power company. 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. The Utilities line of business also includes our integrated utilities that both distribute and generate electricity. Each of our primary lines of business generates approximately half of our revenues.

We are also continuing to expand our wind generation business and are pursuing additional renewable projects in solar and climate solutions. These initiatives are not material contributors to our operating results, but we believe that they may become material in the future. For additional information regarding our Business, see Item 1: Business in our 2008 Form 10-K.

Our Company is organized along our two lines of businesses in three regions:
(1) Latin America & Africa; (2) North America and AES Wind Generation; and
(3) Europe, Middle East & Asia (collectively "EMEA"), each managed by a regional president. AES Wind Generation is managed as part of our North America region while climate solutions projects are managed in the region in which they are located. With certain exceptions, the Company manages development efforts centrally through a development group. The Company recently realigned its accounting segments to reflect the structure described above. See Footnote 15 in the 2008 Form 10-K for a discussion of these segments.

Key Drivers of Our Results of Operations. Our Generation and Utilities 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, reliability and efficiency, management of fixed and operational costs, management of working capital including collection of receivables,

and the extent to which our plants have hedged their exposure to currency and commodities such as fuel. For our Generation businesses which sell power under short-term contracts or in the spot market, the most crucial factors are the market price of electricity and the marginal cost of production. Growth in our Generation business is largely tied to securing new PPAs 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 including collection of receivables, 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 affects our Generation business is our ability to enter into long-term contracts for the sale of electricity and the purchase of fuel used to produce that electricity. These contracts are intended to reduce the volatility associated with fuel prices and the price of electricity by fixing the revenues and costs for these businesses. The majority of the electricity produced by our Generation businesses is sold under long-term contracts, or PPAs, to wholesale customers. Approximately 73% of the revenues from our Generation businesses during the first half of 2009 were derived from plants that operate under PPAs of three years or longer for 75% or more of their output capacity. In turn, most of these businesses enter 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. While these long-term contractual agreements reduce exposure to volatility in the market price for electricity and fuel, the amount of earnings and cash flow predictability varies by business based on the extent to which facility's generation capacity and fuel requirements are contracted and the negotiated terms of these agreements.

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 increases in fuel costs for these businesses often result in increases in revenue (though not necessarily on a one-for-one basis). Conversely, in a declining fuel cost environment, decreases in fuel costs can result in decreases in revenue. While these circumstances may not have a large impact on gross margin, they can significantly affect gross margin as a percentage of revenue.

Diversification also helps us to mitigate some operational risks. Our portfolio employs a broad range of fuels, including coal, gas, fuel oil and renewable sources such as hydroelectric power, wind and solar, which reduces the risks associated with dependence on any one fuel source. Our presence in mature markets helps reduce the volatility associated with our businesses in faster-growing emerging markets. In addition, as noted above, our Generation portfolio is largely contracted, which reduces the risk related to the market prices of electricity and fuel. We also attempt to limit risk by hedging certain currency and commodity risk, and by matching the currency of most of our subsidiary debt to the revenue of the business that issued that debt. However, we only hedge a portion of our currency and commodity risks, and our businesses are still subject to these risks, as further described in the 2008 Form 10-K, Item 1A - Risk Factors, "We may not be adequately hedged against our exposure to changes in commodity prices or interest rates" and "Our financial position and results of operations may fluctuate significantly due to fluctuations in currency exchange rates experienced at our foreign operations."

Another key driver of our results is our ability to bring new businesses into commercial operations successfully. We currently have an aggregate of 3,156 MW of projects under construction in 10 countries. Our prospects for increases in operating results and cash flows are dependant upon successful completion of these projects on time and within budget. However, as disclosed in the 2008 Form 10-K, Item 1A - Risk Factors, "Our business is subject to substantial development uncertainties," construction is subject to a number of risks, including risks associated with siting, financing and permitting, and our ability to meet construction milestones. Delays or inability to complete projects can result in increased costs, impairment of assets and other challenges involving partners and counterparties to our construction agreements, PPAs, and other agreements.

Our gross margin is also impacted by the fact that in each country where we conduct business, we are subject to extensive and complex governmental regulations which affect most aspects of our business, such as

regulations governing the generation and distribution of electricity, and environmental regulations. Regulations differ on a country by country basis (and even at the state and local levels) and are based upon the type of business we operate in a particular country, and affect many aspects of our operations and development projects. Our ability to negotiate tariffs, enter into long-term contracts, pass through capital expenditures and otherwise navigate these regulations can have an impact on our revenues, costs, and gross margin. While not currently material to our operations, environmental and land use regulations, including proposed regulation of carbon emissions, could substantially increase our capital expenditures or other compliance costs, which could in turn have a material adverse affect on our business and results of operations. For a further discussion of the Regulatory Environment, see Note 8 - Contingencies and Commitments - Environmental, included in Item 1 of this Form 10-Q and our 2008 Form 10-K: Item 1: Business - Regulatory Matters - Environmental and Land Use Regulations; Item 1A: Risk Factors - Risks Associated with Government Regulation and Laws.

Other factors that can affect our financial results include gains/losses from the sale of businesses, incurrence and release of legal/regulatory/tax reserves, and impairments.

Key Drivers of Results in the Second Quarter

As described further below, during the quarter ended June 30, 2009, our results of operations, including the key metrics set forth below, were impacted by factors including:

• Foreign currency losses on our international business operations;

• Spot market prices

• Fluctuations in fuel and other commodity prices, including the impact of derivative transactions; and

• Decreases in demand (as measured by volume) at certain of our businesses.

During the first six months of 2009, we have been able to address these challenges through its fuel and geographic diversification, operational improvements at certain businesses, improvements in the management of working capital, and cost reductions including development expense. During the second quarter, we also incurred a lower effective tax rate primarily from a tax benefit recorded upon the release of a valuation allowance at a U.S. and Brazilian subsidiary, we recognized a significant gain from the termination of a management agreement and we settled a legal claim of a European affiliate.

However, as a result of the macroeconomic challenges described above (and other factors described below), our gross margin has declined by 18% for the three months ended June 30, 2009 and 16% for the six months ended June 30, 2009. Management believes that the challenges described above may continue for some period of time, and will continue to seek ways to mitigate the effects of the global recession. However, there can be no assurance regarding our ability to do so in future periods. For example, during the second quarter of 2009, low natural gas prices caused a reduction in electricity prices which have placed pressure on certain North American coal-fired plants. At the same time, our gas-fired plants in countries such as Chile have benefited from low gas prices, which have helped that business expand margins and volume. The ability of these gas-fired plants to continue this performance (and mitigate the challenges described above) depends on access to fuel, continued plant availability, weather and other factors which may not recur in future periods. For further discussion of the impact of the global recession on our business, please see "Management's Discussion and Analysis - Key Trends and Uncertainties - Global Recession" in this Form 10-Q.

                                          Three Months Ended June 30,                                    Six Months Ended June 30,
                                 2009                 2008               % Change              2009                 2008               % Change
                                  ($'s in millions, except per share amounts)                   ($'s in millions, except per share amounts)
Revenue                      $      3,495         $      4,126                  -15 %      $      6,873         $      8,207                  -16 %
Gross margin                 $        847         $      1,029                  -18 %      $      1,730         $      2,071                  -16 %
Gross margin as a % of
revenue                                24 %                 25 %                                     25 %                 25 %
Net income attributable
to The AES Corporation       $        303         $        903                  -66 %      $        521         $      1,136                  -54 %
Net cash provided by
operating activities         $        495         $        314                   58 %      $        871         $        784                   11 %

Our second quarter financial results include the following highlights:

Revenue

Revenue decreased $631 million, or 15%, to $3.5 billion for the three months ended June 30, 2009 compared with the same period in 2008. The unfavorable impact of foreign currency of $520 million, largely driven by the Brazilian Real, the impact of lower energy prices at our generation business in Chile and a decrease in wholesale prices in North America contributed to an overall decrease in revenue for the quarter.

Revenue decreased $1.3 billion, or 16%, to $6.9 billion for the six months ended June 30, 2008 compared with the same period in 2008 primarily due to the unfavorable impact of foreign currency of $1.1 billion, largely driven by the Brazilian Real, and generation rates and volume in Latin America partially offset by the contribution of our new business in Asia.

Gross Margin

Gross margin decreased $182 million, or 18%, to $847 million for the three months ended June 30, 2009 compared with the same period in 2008 primarily due to the unfavorable impact of foreign currency of $101 million and mark-to-market derivative adjustments of certain commodity contracts partially offset by improved operations at our Latin America generation businesses and the impact of new businesses in Asia.

Gross margin decreased $341 million, or 16%, to $1.7 billion for the six months ended June 30, 2009 compared with the same period in 2008 primarily due to the unfavorable impact of foreign currency of $238 million and mark-to-market derivative adjustments of certain commodity contracts and the lack of contribution from the Kazakhstan businesses sold in May 2008 partially offset by improved operations in Latin America and Asia.

The Company's gross margin may continue to be significantly impacted by global macroeconomic conditions such as the volatility in currency exchange rates and commodity prices for fuel and other resources that we use in our business and reduced demand.

Gross margin as a percentage of revenue for the three and six months ended June 30, 2009 compared with the same period in 2008 remained relatively flat at 24% and 25%, respectively. Please refer to Segment Analysis for further discussion of gross margin as a percentage of revenue for each of our reportable segments.

Net Income Attributable to The AES Corporation

Net income attributable to The AES Corporation decreased $600 million or 66% to $303 million for the three months ended June 30, 2009 compared with the same period in 2008. The decrease was primarily attributable to the following events that occurred in 2008. In 2008, the Company recognized a net gain of $908 million from the sale of two wholly-owned subsidiaries in Kazakhstan, AES Ekibastuz ("Ekibastuz") and Maikuben West LLP ("Maikuben") which occurred in May 2008, which was partially offset by $144 million additional tax expense on the repatriation of a portion of the sale proceeds. Additionally in 2008, the Company recognized net pre-tax gains on mark-to-market derivative adjustments of $89 million, but also incurred expenses of $55 million related to a corporate debt refinancing. These items were partially offset in 2009 by the recognition of an additional gain on the Kazakhstan sale upon the termination of the management agreement of $98.5 million and the favorable impact of foreign currency largely from transaction gains in Chile and the Philippines.

Net income attributable to The AES Corporation decreased $615 million or 54% to $521 million for the six months ended June 30, 2009 compared with the same period in 2008. This decrease was primarily attributable to the 2008 events described above. In addition, in 2008 impairment charges were recognized in Africa, Asia and Latin America as further described in Impairment expenses. These items were partially offset by a performance incentive bonus recognized in 2009 of $80 million for management services provided to the Kazakhstan

businesses following their sale in May 2008; and the $98.5 million gain from the termination of the management agreement described above.

In 2008, the $908 million gain recognized on the sale of our two Northern Kazakhstan businesses had a significant impact on net income attributable to The AES Corporation. However, while the Company engages in the sale of assets and businesses from time to time, the gain or loss recognized in any such sale will depend on a number of factors related to the asset or business that may be sold. Therefore the Company does not expect that the increase in net income attributable to The AES Corporation which occurred between 2007 and 2008, will continue in future periods nor does it expect that the decline in net income between 2008 and 2009 will continue in future periods.

Net Cash Provided By Operating Activities

Net cash provided by operating activities increased $181 million, or 58% to $495 million for the three months ended June 30, 2009 compared to the same period in 2008 despite the decrease in net income of $629 million to $531 million for the three months ended June 30, 2009. As previously described, the Company recognized a gain of $908 million associated with the sale of Ekibastuz and Maikuben in 2008. This resulted in significant income recognized without a corresponding increase in operating cash flows. These proceeds are reflected as net cash provided by investing activities. The increase in net cash provided by operating activities was primarily due to improved working capital management, which resulted in an improvement in cash provided by operating activities of $156 million at our Latin America Generation businesses, $89 million at Corporate and other, $47 million at our Europe Generation businesses, of which $80 million was the receipt of the 2008 performance incentive bonus for the management of Ekibastuz and Maikuben recognized in the first quarter of 2009, and $27 million at our Africa Generation businesses. These increases were offset by decreases of $86 million at our Latin America Utilities businesses, primarily due to lower cash earnings and increased employer pension contributions, and $62 million at our Asia Generation businesses due to higher working capital requirements.

While net income decreased $536 million to $1,032 million for the six months ended June 30, 2009, net cash provided by operating activities increased $87 million, or 11%, to $871 million compared with $784 million for the same period in 2008. This increase was primarily due to improved working capital at our subsidiaries. For further discussion, see Consolidated Cash Flows - Operating Activities.

Management's Priorities

Management continues to focus on the following priorities:

- Maintaining sufficient liquidity as further described in "Liquidity and Capital Resources" described below.

- Improvement of operations in the existing portfolio.

- Completion of more than 3,000 MW construction program on time and within budget. During the quarter, the Company stopped construction on its Campiche Plant, as further described in "Operational Challenges" below.

- Integration of new projects. During the quarter the following projects commenced commercial operations:

                                                                   AES
                                                             Equity Interest
        Project           Location       Fuel    Gross MW   (Percent, Rounded)
        Santa Lidia    Chile            Diesel        130                   71 %
        Kilroot OCGT   United Kingdom    Gas           80                   99 %
        InnoVent (1)   France            Wind          12                   40 %

(1) InnoVent is an equity method investment of AES.

- Investing excess cash to its highest and best use, including establishment of low-cost development options, reduction of debt, stock repurchases and expanding cash balances.

Key Trends and Uncertainties

Global Recession

The current global economic slowdown has caused unprecedented market illiquidity, widening credit spreads, volatile currencies, illiquidity, and increased counterparty credit risk. Despite these challenges, 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 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 deliver contracted commodities or services at the contracted price or to satisfy their financial or other contractual obligations. While counterparty credit risk has increased in the current crisis and there can be no assurances regarding the future, the Company has not suffered any material effects related to its counterparties for the quarter ended June 30, 2009.

The global economic slowdown could also result in a decline in the value of our assets including the businesses we operate, equity investments and projects under development, which could result in impairments that could be material to our operations. For example, during the fourth quarter of 2008, and in response to the financial market crisis, the Company reviewed and prioritized the projects in its development pipeline and consequently recognized an impairment charge of approximately $75 million ($34 million, net of noncontrolling interests and income taxes). The Company did not realize material impairment charges during the first or second quarters of 2009. However in the future, we may be required to adjust to fair value and record an impairment of certain of our assets if any of the following events occur: a significant adverse change in business climate or legal factors, an adverse action or assessment by a regulator, sale of assets at below book value, unanticipated competition, a loss of key personnel or our acquisitions do not perform as expected. The likelihood of the occurrence of these events may increase as a result of the credit crisis and deteriorating global macroeconomic conditions.

A decline in asset value could also result in a material increase in our obligations. For instance, certain subsidiaries 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 their respective pension obligations. Given the declines in worldwide asset values, we are expecting an increase in pension expense and funding requirements in future periods, which may be material.

In addition, volatility in foreign currency exchange rates has had an impact on the Company's financial results. For example, in the second quarter of 2009, our gross margin declined by $182 million compared to the same period last year, of which $238 million was due to foreign currency translation losses. If the current volatility in foreign currencies continues, our gross margin and other financial metrics could be adversely affected. It is also possible that commodity or power price volatility could impact our financial metrics. For

example, as further discussed in Item 3. Quantitative and Qualitative Disclosures About Market Risk - Commodity Price Risk, we estimate that a 10% decline in power prices related to our U.S. operations alone would result in an estimated reduction in gross margin of $5 million. Foreign operations may also be impacted by volatility in currency and commodity prices.

To date, other than the impacts described above, the global economic slowdown has not significantly impacted the Company. However, in the event that the credit crisis and macroeconomic conditions deteriorate further, or continue for a prolonged period, there could be a material adverse impact on the Company. The Company could be materially 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). The Company could also be adversely affected if the foregoing effects are exacerbated or general economic or political conditions in the markets where the Company operates deteriorate, resulting in a reduction in cash flow from operations, a . . .