In this Quarterly Report on Form 10-Q "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.

On September 14, 2009, The AES Corporation filed a Current Report on Form 8-K ("September 2009 Form 8-K") to recast previously filed financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 ("2008 Form 10-K") to reflect the effect of changes to the Company's reportable segments and the adoption of the presentation and disclosure provisions of new accounting guidance for noncontrolling interests, which required retrospective presentation and became effective for the Company on January 1, 2009. The revisions to the 2008 Form 10-K were limited to the Company's Business Overview, Selected Financial Data, Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes contained in Items 1, 6, 7 and 8. All other information in the 2008 Form 10-K remained unchanged.

The condensed consolidated financial statements included in Item 1. - Financial Statements of this Form 10-Q and the discussions contained herein should be read in conjunction with our 2008 Form 10-K and the September 2009 Form 8-K.

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 Item 1A. - 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.

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.

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.

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 variable operating 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 current market price of electricity and the marginal costs of production that are not passed through to the off taker. Growth in our Generation business is largely tied to securing new power purchase agreements ("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 operating results of our Utilities businesses are sensitive to changes in economic growth and weather conditions in the areas in which they operate. In addition to these drivers as explained below, the Company also has exposure to currency exchange rate fluctuations.

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 costs to purchase fuel used to produce that electricity. Long-term contracts are intended to reduce the exposure to volatility associated with fuel prices in the market 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. 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 predictability of operating results and cash flow vary by business based on the extent to which a facility's generation capacity and fuel requirements are contracted and the negotiated terms of these agreements.

When fuel costs increase, many of our businesses are able to pass these costs on to their customers. Generation businesses with long-term contracts in place do this by including fuel pass-through or fuel indexing arrangements in their contracts. Utilities businesses can pass costs on to their customers through increases in current or future tariff rates. Therefore, in a rising fuel cost environment, the increased fuel costs for these businesses often result in an increase in revenue to the extent these costs can be passed through (though not necessarily on a one-for-one basis). Conversely, in a declining fuel cost environment, the decreased fuel costs can result in a decrease in revenue. Increases or decreases in revenue at these businesses that have the ability to pass through costs to the customer have a corresponding impact on cost of sales, to the extent the costs can be passed through, resulting in a limited impact on gross margin, if any. Although these circumstances may not have a large impact on gross margin, they can significantly affect gross margin as a percentage of revenue. As a result, gross margin as a percentage of revenue is a less relevant measure when evaluating our operating performance.

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 reduce 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 associated with 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." Continued commodity and power price volatility could impact our financial metrics to the extent this volatility is not hedged. For example, as further discussed in Item 3. - Quantitative and Qualitative Disclosure About Market Risk
- Commodity Price Risk, we estimate that a 10% decline in power prices at our U.S. operations alone would result in an estimated reduction in gross margin of $2 million.

Due to our global presence, the Company has significant exposure to foreign currency fluctuations. The exposure is primarily associated with the impact of the translation of our foreign subsidiaries operating results from their local currency to U.S. dollars that is required for the preparation of our consolidated financial statements. Additionally, there is risk of transaction exposure when an entity enters into transactions, including debt agreements, in currencies other than their functional currency. These risks are further described in the 2008 Form 10-K, Item 1A. - Risk Factors, "Our financial position and results of operations may fluctuate significantly due to fluctuations in currency exchange rates experienced at our foreign operations." To date in 2009, changes in foreign currency exchange rates have had a significant impact on our operating results. In the third quarter of 2009, our gross margin increased $46 million compared to the same period last year. The increase included the unfavorable impact of $79 million due to changes in foreign currency exchange rates. In the first nine months of 2009, our gross margin declined $295 million compared to the same period last year, of which $316 million was due to unfavorable changes in foreign currency exchange rates. If the current foreign currency exchange rate volatility continues, our gross margin and other financial metrics could be adversely affected.

Another key driver of our results is our ability to bring new businesses into commercial operations successfully. We currently have an aggregate of 2,727 MW of projects under construction in nine 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 deadlines. Delays or the inability to complete projects and commence commercial operations 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 in which we conduct business, we are subject to extensive and complex governmental regulations such as regulations governing the generation and distribution of electricity, and environmental regulations which affect most aspects of our business. Regulations differ on a country by country basis (and even at the state and local municipality 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 in the condensed consolidated financial statements, see Note 8 - Contingencies and Commitments - Environmental, included in Item 1. - Financial Statements of this Form 10-Q and our 2008 Form 10-K, Item 1. - Business - Regulatory Matters - Environmental and Land Use Regulations and Item 1A. - Risk Factors - Risks Associated with Government Regulation and Laws.

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

Key Drivers of Results in the Third Quarter

For the third quarter of 2009, the Company increased its gross margin, net income attributable to The AES Corporation and net cash provided by operating activities. Our results of operations were impacted by factors including:

• the unfavorable impact of foreign currency translation losses on our international business operations;

• lower fuel prices, which led to lower electricity prices and had a negative impact at our generation plants in New York, but benefited gross margin at our generation plants in Chile; and

• improved operating performance and working capital management at certain of our businesses in Latin America and Asia.

To address and mitigate the challenges faced by the Company this quarter, we were able to partially offset the impact of unfavorable factors on revenue and gross margin through fuel and geographic diversification, operational improvements at certain businesses and asset recoveries. An example of where lower spot electricity prices benefited the Company took place at our generation business operating in the central Chilean market. A decrease in contract and spot market rates contributed to lower revenue. However, gross margin improved as we were able to fulfill our obligations under electricity contracts with purchased energy rather than producing energy from less efficient plants in our portfolio.

During the quarter we also experienced a significant increase in net cash provided by operating activities compared to the third quarter of 2008. Much of the increase was attributable to the Company's working capital management, which includes among other things, the timing of inventory procurement and usage; collection of accounts receivable and payments to vendors. In the third quarter, working capital management efforts included the recovery of a municipal receivable that had previously been written off at one of our utility businesses in Brazil. The recovery of the receivable was also reflected in gross margin; absent this recovery, gross margin for the Company would have decreased for the quarter.

Although management will continue to seek ways to mitigate the impact of adverse factors on its operations, we expect certain of the unfavorable factors described above may continue to present challenges to maintaining our operating results. Therefore we can provide no assurances regarding management's ability to mitigate the effect of these adverse factors, or that the quarterly increase in gross margin, net income attributable to The AES Corporation and net cash flow from operating activities as experienced in the quarter ended September 30, 2009 will continue in future periods.

The following briefly describes the key fluctuations in our reported revenues, gross margin, net income attributable to The AES Corporation and net cash provided by operating activities for the three and nine months ended September 30, 2009 compared to 2008 and should be read in conjunction with our Consolidated Results of Operations and Segment Analysis discussion within our Management's Discussion and Analysis.

                                               Three Months Ended September 30,                                 Nine Months Ended September 30,
                                        2009                2008               % Change                  2009               2008              % Change
                                          ($'s in millions, except per share amounts)                     ($'s in millions, except per share amounts)
Revenue                            $         3,838     $        4,319                    -11 %      $       10,711     $       12,526                   -14 %
Gross margin                       $         1,008     $          962                      5 %      $        2,738     $        3,033                   -10 %
Net income attributable to The
AES Corporation                    $           185     $          145                     28 %      $          706     $        1,281                   -45 %
Net cash provided by operating
activities                         $         1,028     $          803                     28 %      $        1,899     $        1,587                    20 %

Our third quarter financial results include the following highlights:

Three months ended September 30, 2009:

Revenue decreased $481 million, or 11%, to $3.8 billion for the three months ended September 30, 2009 compared with the same period in 2008. Key drivers of the decrease included:

• the unfavorable impact of foreign currency of $367 million, largely driven by the Brazilian Real;

• decreases in volume at Uruguaiana in Brazil, as a result of a renegotiation of its power sales agreements in 2009 to reduce the energy volume sold, in New York and Hungary and lower dispatch in Northern Ireland due to unfavorable gas prices compared to coal;

• the impact of lower spot and contract prices at our generation business in Chile;

• the unfavorable impact of mark-to-market derivative adjustments on certain commodity contracts in North America and Chile; and

• partially offset by an increase in tariff rates in Brazil primarily reflecting the recovery of energy purchases that were passed through to our customers at our utilities businesses in Latin America.

Gross margin increased $46 million, or 5%, to $1.0 billion for the three months ended September 30, 2009 compared with the same period in 2008. Key drivers of the increase included:

• improved operating performance at our generation businesses in Chile and the Philippines;

• bad debt recoveries in Brazil;

• partially offset by the unfavorable impact of foreign currency of $79 million; and

• lower volume in New York due to lower spot market rates.

Net income attributable to The AES Corporation increased $40 million, or 28%, to $185 million for the three months ended September 30, 2009 compared with the same period in 2008. The increase was primarily attributable to the following:

• improvements in gross margin for the quarter as described above;

• a decrease in foreign currency transaction losses on net monetary positions as a result of strengthening of the Euro, British Pound, Philippine Peso and Chilean Peso;

• partially offset by an increase in income tax expense as a result of higher net income; and

• an increase in net income attributable to noncontrolling interests primarily as a result of increased earnings at certain of our businesses in Brazil and Chile.

Net cash provided by operating activities increased $225 million, or 28% to $1 billion for the three months ended September 30, 2009 compared to the same period in 2008 primarily due to the following:

• an increase of $114 million at our Latin American Generation businesses due to improved working capital;

• an increase of $85 million at IPALCO, which is the holding company for IPL in North America primarily due to improved working capital;

• an increase of $84 million at our Asia Generation businesses due to improved operating performance;

• a $62 million recovery of a municipal receivable at Eletropaulo; and

• partially offset by a decrease of $80 million at our North America Generation businesses, primarily due to reduced operating results.

Nine months ended September 30, 2009:

Revenue decreased $1.8 billion, or 14%, to $10.7 billion for the nine months ended September 30, 2009 compared with the same period in 2008. The key drivers of the decrease included:

• the unfavorable impact of foreign currency of $1.5 billion, largely driven by the Brazilian Real;

• decreases in volume at Uruguaiana due to the renegotiation of its power sales agreements in 2009 to reduce the energy volume sold, in New York and Hungary and lower dispatch in Northern Ireland due to unfavorable gas prices compared to coal;

• the impact of lower spot and contract energy prices at our generation business in Chile; and

• partially offset by an increase in tariff rates in Latin America primarily reflecting the recovery of energy purchases that were passed through to our customers at our utilities businesses.

Gross margin decreased $295 million, or 10%, to $2.7 billion for the nine months ended September 30, 2009 compared with the same period in 2008. Key drivers of the net decrease included:

• unfavorable impact of foreign currency of $316 million, largely driven by the Brazilian Real;

• the unfavorable impact of mark-to-market derivative adjustments on certain commodity contracts in North America and Chile;

• lower volume in New York due to lower spot market rates;

• partially offset by improved operating performance at our generation businesses in Chile and the Philippines; and

• bad debt recoveries and a reduction in bad debt expense in Brazil.

Net income attributable to The AES Corporation decreased $575 million, or 45%, to $706 million for the nine months ended September 30, 2009 compared with the same period in 2008. This net decrease was primarily attributable to the following:

• a gain recognized in 2008 from the sale of two wholly-owned subsidiaries in Northern Kazakhstan partially offset by a performance incentive bonus recognized in 2009 for management services provided to these subsidiaries and a termination of the management agreement in 2009;

• the reduction in gross margin in 2009 as described above;

• an increase in net income attributable to noncontrolling interests due to higher earnings at our businesses in Chile, Pakistan, the Philippines and Sonel in Cameroon;

• partially offset by a reduction in foreign currency transaction losses on net monetary position as a result of reduced losses at our businesses in Chile and the Philippines;

• a reduction in interest expense due primarily to lower interest rates and debt balances in Brazil and favorable foreign currency translation;

• lower impairment charges in 2009 compared to 2008; and

• lower income tax expenses as a result of lower consolidated net income in 2009.

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. In 2009, the Company recognized a performance incentive bonus of $80 million in the first quarter for management services provided to these sold businesses, reflected as other income. Additionally, in the second quarter of 2009, the Company recognized an additional gain on the sale of the businesses of $98.5 million upon the termination of the management agreement. 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. The Company does not expect that the decline in net income between 2008 and 2009 will continue in future periods.

Net cash provided by operating activities for the nine months ended September 30, 2009 increased $312 million, or 20%, to $1.9 billion compared with $1.6 billion for the same period in 2008. This increase was primarily due to improvements in working capital and a decrease in net regulatory assets. Please refer to Cash Flows - Operating Activities for further discussion.

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 2,500 MW construction program on time and within budget. During the second quarter, the Company stopped construction on its Campiche Plant, as further described in Key Trends and Uncertainties - Operational Challenges below.

• Maximizing the use of cash, including establishment of low-cost development options, reducing debt, stock repurchases and increasing cash balances.

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

                                                               AES
                                                         Equity Interest
            Project        Location   Fuel   Gross MW   (Percent, Rounded)
            Amman East     Jordan     Gas         380                   37 %
            Guacolda (1)   Chile      Coal        152                   35 %
            Huanghua (2)   China      Wind       49.5                   49 %

(1) Guacolda is an equity method investment indirectly held by AES through Gener. The AES equity interest reflects the 29% noncontrolling interests in Gener.

(2) Huanghua is an equity method investment of AES.

This year we have completed construction of six projects totaling approximately 800 MW. In addition to the projects named above, the 80 MW Kilroot peaker expansion in Northern Ireland, 16 MW of Innovent wind projects in France and the 130 MW Santa Lidia diesel facilities in Chile all entered commercial operation during 2009.

Key Trends and Uncertainties

Operational Challenges

Our operations continue to face many risks as previously discussed in the Company's 2008 Form 10-K, Item 1A. - Risk Factors. We continue to monitor our . . .